German VC market: Business sentiment continues to recover

• Situation indicator rises slightly as business confidence keeps improving
• Fundraising climate has hardly changed: expectations are much better than situation assessments
• Frosty exit climate is slowly thawing

Business sentiment in the German venture capital market continued to improve in the late summer of 2023. The sentiment indicator of the early-stage segment rose by 2.4 points to -19.6 balance points, trending slightly higher than in the previous quarter. Situation assessments rose by +7.3 points to -32.4 balance points, slightly converging on expectations, which continue to be significantly more optimistic while slipping by 2.5 points to -6.8 balance points. The development in the third quarter gives cause for hope that the optimism gradually translates into an improved business situation in the German VC market. But because of the high overhang of expectations, the risk of setbacks remains high.

Other important market factors have also given rise to a degree of optimism about the coming months. This applies to fundraising, exits and investment appetite in equal measure. At -59.8 balance points, the fundraising situation remains just above its previous low, while fundraising expectations stood at -17.8 balance points, indicating continued hope for significant improvement. Exit expectations sat at -15.1 balance points (+27.3 points) in the third quarter, significantly diverging from current situation assessments, which stood at -57.8 balance points. Driven by more optimistic expectations, the frosty exit climate appears to be slowly thawing.

Sentiment improved particularly with regard to exit opportunities via secondaries. It appears that market conditions are now configured in a way that potential sellers and buyers of existing start-up participations are more likely to come together. Investors have favourable opportunities to invest in attractive start-ups, and they are currently very satisfied with the level of entry valuations for new commitments. However, this does not currently translate into higher investment activity. The reason for this is obviously not lack of demand. After all, the deal flow indicators are above their long-term averages.

“The mood in the German VC market remains on a path of recovery, even if it improved only slightly in the late summer”,

said Fritzi Köhler-Geib, Chief Economist of KfW.

“You might call it a period of thaw, if near the freezing point. This is because current sentiment remains very subdued despite improvements. Expectations, however, are brighter despite a minor drop. The more optimistic expectations should actually give cause for hope that business confidence will continue to improve. However, the war in the Middle East and the risk of economic fallout in the event of an escalation are likely weighing on sentiment. German investors have little exposure in Israel, but a further troublespot worsens economic uncertainty nonetheless and will at least partly offset possible positive effects such as the pause in central banks’ interest rate increases.”

Ulrike Hinrichs, Managing Director of the German Private Equity and Venture Capital Association (BVK), commented:

“Optimism is slowly returning. At the moment, however, there is a lack of inspiring triggers to transform the gradual recovery into a sentiment upswing and, eventually, into growing investment. As for overall economic performance, everyone has their eyes on interest rate policy and economic signals. With a view to the German VC market, we expect the market launch of the Growth Fund to provide impetus that will surely improve the fundraising environment. We hope the Financing for the Future Act will provide a real boost, but only if it is adopted as proposed in the government’s draft. Critical elements are the elimination of turnover tax on management fees and improvements to employee equity participations. Investors and start-ups expect the coalition partners not to backpedal on this.”

KfW produces the German Venture Capital Barometer in cooperation with the German Private Equity and Venture Capital Association (BVK) and the Deutsche Börse Venture Network exclusively for the Handelsblatt business daily. Detailed analyses with data tables and graphs illustrating the development of the business climate in the venture capital and later-stage segments can be retrieved at www.kfw.de/gpeb.