KfW Research: Flow of funds in the German venture capital market remains steady

• Deal volume grew at the start of the year, but number of financing rounds dropped
• AI deals were down in the first quarter, investment activity is marked by broad technology mix
• Market may flourish in the course of the year

The VC Dashboard generated by KfW Research illustrates that investment activity in the German venture capital (VC) market remained stable in the first quarter of 2024. VC deals were concluded with German start-ups for a total of approx. EUR 1.9 billion. Investment volume was up 30% on the final quarter of 2023. The growth in invested funds was due to, among other things, five megadeals with a volume of EUR 100 million or more each, and larger average deal volumes, particularly in Series A and B financings. In a longer-term comparison, the volume of deals in the first quarter reached a level that was slightly above the average deal volume of the previous year’s quarters. Since the sharp drop recorded up until the second quarter of 2022, investment activity generally consolidated with quarterly deal volumes in the range of EUR 1.5 – 2 billion.

The number of financing rounds, on the other hand, fell again, at 195 deals (-9% on the previous quarter). Small, early-stage financing rounds constitute by far the largest number of deals in the VC market. Such individual deals below EUR 1 million typically account for more than half of all deals in the German market. It was particularly in this area that the number of deals declined across the last three quarters. This may have been partly due to the restraint exercised by business angels and early-stage investors, as well as to more cautious start-up activity in 2023 and the resulting lower demand for such financing rounds.

At the beginning of 2024, investment activity was mainly sustained by factors that constitute traditional investment targets of venture capital. Thus, most deals – 17% – were closed in the field of enterprise software, which was also significantly more than average for the whole of last year. The field of Health/Life Sciences is also above the previous year’s average, with 13% of deals. After a reduced participation in financing transactions in 2022, FinTechs are seeing increasingly more investor interest since last year, raising their share in all deals in the market again to 14% at the start of 2024. Boosted by the green transformation, deals with start-ups in the field of energy continued on their growth path as well, rising to 13%.

Ever since late 2022, artificial intelligence (AI) has moved into focus in global VC markets, especially as a result of developments in the field of generative AI. The fact that even in a cooling market, German AI start-ups last year were able to attract EUR 1.3 billion, roughly the same amount as in the previous year, is testament to the market opportunities which investors currently see in AI technologies. With 38 deals, German AI start-ups realised slightly fewer financing transactions at the start of 2024 than in the previous quarter. In fact, at EUR 187 million the deal volume currently recorded was significantly lower than those of the preceding quarters. At the same time, however, it must be noted that the final quarters of the previous year saw prominent megarounds of the AI start-ups Helsing (Q3 2023) and Aleph Alpha (Q4 2023), the two largest financing rounds in the entire German VC market. Furthermore, the fact that the volume of VC deals in the overall German market picked up again in Q1 2024 despite lower investment in AI illustrates that for all the euphoria around the topic of AI, investment activity is underpinned by a broad mix of technologies.

KfW’s CEO Stefan Wintels commented on the development of the venture capital market in Germany:

“An internationally competitive VC ecosystem is a crucial building block for a successful sustainable and digital transformation in Germany. We have the minds and ideas for innovation. At the same time, however, we have an enormous need to catch up with providing the necessary capital stock. This requires a rethink because we remain a country of savers, we shy away from risk and consequently squander opportunities. After two years of decline, we see a positive trend again in the German venture capital market. A real trend reversal this year appears possible. A currently expected reduction in key interest rates would support this trend. I do not see a big bang because there is no silver bullet. Nonetheless, I am optimistic about the further development of the VC ecosystem as there are a number of political measures and initiatives aimed at supporting it. We must continue on this path with determination - step by step.”

The current KfW Venture Capital Dashboard by KfW Research can be found at Venture Capital-Market in Germany | KfW