KfW Research: VC sentiment has emerged from its slump

• Situation assessments and expectations are picking up
• Exit climate has improved moderately from a low base
• Satisfaction with entry valuations is down

Venture capital (VC) sentiment improved in the first quarter of 2024, almost offsetting the downturn recorded in the final quarter of last year. The sentiment indicator measured by KfW Research, the German Private Equity and Venture Capital Association and Deutsche Börse for the early-stage segment of the German venture capital market – the German Venture Capital Barometer – rose by 6.7 points to what remains a very subdued -20.5 balance points.

Both subcomponents – current situation assessments and business expectations – improved at a similar rate. The indicator for the current business situation rose by 6.5 points to -32.4 balance points, while the indicator for business expectations climbed 6.9 points to -8.5 balance points.

Investor sentiment around fundraising and exits rose moderately in the first quarter. The improved mood around exits was driven purely by expectations, as situation assessments actually deteriorated slightly and are now lower than they have been since the financial crisis of 2009. This was primarily the result of assessments of the current situation in trade sales, which dropped sharply. The IPO climate, however, brightened. After rising in the previous quarter, assessments of investment appetite fell again slightly. This was due to the sharp drop in situation assessments, while expectations improved again slightly. That means investment expectations are more optimistic than ever compared with situation assessments. If this overhang of expectations translates into significant growth in investment activity, start-ups will be able to access VC much more easily again in the course of the year. And it appears that rising entry valuations are raising the pressure on providers of capital to invest.

Investor sentiment around entry valuations for new commitments has fallen steeply. The expectations component is negative again for the first time in two years, if only just barely. However, the deteriorating pricing climate has not yet led to improved sentiment around valuation adjustments. Portfolios may still be grappling with down rounds as a result of the boom year of 2021 and with insolvencies caused by the lack of follow-up financings.

Dr Fritzi Köhler-Geib, Chief Economist of KfW, commented on the results of the current German Private Equity Barometer as follows:

“The mood among investors lightened again at the start of 2024. It remains lacklustre, but we see encouraging signs that it will continue trending upwards. Thus, the emerging dissatisfaction of investors with entry prices indicates that start-ups can demand better valuations again and a certain amount of pressure is therefore building to gradually use the still abundantly available dry powder. It also appears that hope for interest rate reductions in the course of the year is lifting the mood. After all, falling interest rates are making VC a more attractive asset class for investors again, thereby making fundraising easier, which became increasingly more difficult in the past years.”

Ulrike Hinrichs, Managing Director of the German Private Equity and Venture Capital Association (BVK), remarked about the new figures:

“The sentiment rebound is advancing slowly but steadily. Should there be no further bad economic news, and should the expected interest rate turnaround indeed arrive, market sentiment should continue to improve. And this will then also translate into growing investment. Funds are well-resourced and on the lookout for attractive start-ups. If entry valuations increase again, this year is likely to be a favourable time for investors to stop being so cautious and invest more.”

Note: 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 (DBVN) exclusively for the Handelsblatt business daily. For detailed analyses with data tables and graphs on the development of the business climate in the venture capital and later stage segments go to www.kfw.de/gpeb .