After record-breaking years, the business climate in the German venture capital market is cooling significantly. Although funders are acting more cautiously in light of the changing market environment, there are still “abundant free capital” in the market, according to an analysis by KfW. The development bank assumes that investors will strengthen due diligence, i.e., the thorough examination of companies before a potential investment. The evaluation criteria for startups have also shifted, according to a survey by KfW Research, the Bundesverband Beteiligungskapital, and Deutsche Börse Venture Network: cash burn rate, business model, and capital requirements have gained significantly in importance for investment decisions. Instead of growth prospects, profitability and robustness of startups are moving more into focus. Financiers are apparently driven by the concern about not seeing their money returned quickly.
Solid business models help through cooler market climate
Despite a more tense situation, the dealflow in the German VC environment continues at full capacity. According to KfW, the first half of 2022 was historically the third-strongest of the German VC market. Investor satisfaction with the quality of their investments remains above average. However, the development bank recommends that startups adapt their business models and financial planning to the new conditions. A more long-term perspective and a focus on solid business practices will likely help startups in the coming time to ensure their future financing needs.
