In the first half of 2023, investments in the start-up scene plummeted. This raises concerns about a wave of bankruptcies. Established startups are also having problems.
Startups collect less and less money. And Berlin is losing importance in the scene Getty Images /© Roberto Conte
The roof terrace advertised in the invitation with a view over the harbor had to remain closed: a summer storm raged around the Hamburg office tower of the large law firm Taylor Wessing – almost symbolic for the topic of the lecture to wealthy investors and venture capitalists.
A few days ago, the lawyers provided information on how startups become weatherproof and raise money when there are no longer any classic rounds of financing for them. “Financing alternatives in the crisis” presented top lawyer Jens Wolf: Convertible loans and special risk loans are such expensive and complex instruments to keep startups alive.
These emergency instruments are becoming more and more necessary – and founders and financiers rarely talk about them publicly. Because the startup bubble from 2021/22 has finally burst. Externally, the scene spreads optimism, but internally there is a fear that the crisis could lead to a larger wave of bankruptcies.
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The sum that investors put into young German growth companies fell by a whopping 49 percent in the first half of 2023 compared to the previous year. At a good three billion euros, the value is back to the level of the half-years before the pandemic. However, more startups have to share the money – so there is less left for the individual company. Larger follow-up rounds for those startups that burned up the plentiful flowing money in the euphoria phase are therefore hardly foreseeable.
These are the results of the “Startup Monitor”, which the EY consultancy regularly publishes. The experts see a “significant setback for the German start-up scene” in the widely acclaimed study. “It is clear that the major geopolitical risks, high inflationary pressure, high interest rates and weak economic development have led to a difficult financing environment in the start-up ecosystem in this country,” explained EY partner Thomas Prüver.
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What sounds so abstract has serious consequences in practice. At least since the start of the Ukraine war, the euphoria in the scene has given way to disillusionment. Rising interest rates and the rapidly falling share prices of unprofitable young companies such as About You and Auto 1 are causing venture capitalists to shy away from large new investments – especially in startups that have been on the market for a long time without being profitable.
“We sometimes have to approach 300 investors to find a willing donor,” he said Julian Riedlbauer, Head of Germany at JP Bullhound, a consultancy specializing in raising startup capital, the location. It is particularly difficult for companies that work on complex technologies or for unprofitable web shops.
Berlin is losing importance in the start-up scene
Because of the rising interest rates, there is a general reorientation on the capital market from growth to profitability. Even well-known companies such as the e-scooter provider Tier have therefore cut jobs and stopped expanding abroad in order to limit losses. The motto is to get by with the money collected during the boom as long as possible until the crisis is over – at best until an IPO or the entry of a corporation or financial investor.
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However, not all companies succeed in the project of modesty. The Fast delivery service Flink for example, needed 150 million euros from existing investors like Rewe in the spring to be able to continue – despite a tough austerity program. In such rounds, the old investors often have to live with the fact that the new lenders can get in on more favorable terms. So you get larger shares in the company or you can be assured that you will be paid preferentially. The founders themselves also have to do without a lot of money.
These so-called downrounds in the scene were until recently considered potentially deadly for a startup, also because of the negative publicity, but are becoming increasingly difficult to avoid the longer the crisis lasts. “Downrounds no longer have the effect that you can already say goodbye to a company,” put the lawyer Wolf into perspective.
Nevertheless, the founders avoid devaluation rounds wherever they can. Accordingly, investment rounds with sums in the hundreds of millions are currently rare: According to the EY study, there were only five such mega financings in the past half year. This is only a third of the number in the same period last year.
How long the money squeeze will last is still uncertain. Although EY sees a first weak upswing month-on-month, the times of euphoria are unlikely to return any time soon. Key figures in the German ecosystem, such as the co-founder of the investment firm Project A, Florian Heinemann, are now assuming that the boom years of 2020/21 will go down in start-up history as an upward trend. Heinemann expects investments to stabilize at the current level.
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And there is still something to be done if the business area seems promising. The two largest financing rounds in the first half of the year, each with 215 million euros, went to companies that equip private households with solar energy: 1Komma5° from Hamburg and Enpal from Berlin. The Munich rocket developer Isar Aerospace followed in third place.
This geographical distribution shows that the scene in Germany is becoming more diverse. The previous start-up stronghold Berlin is losing the most support from investors in the current downturn. Although the totals are also declining in Munich, Hamburg and NRW, they are less so: these locations are catching up relatively speaking. Expert Prüver sees an advantage in this: “It will be exciting to see whether this development continues. Last but not least, the strength of the German start-up scene is that there are several hotspots that have different qualities and focuses.”
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Investments in energy remain stable
For example, the mobility investments of the half-year are heavily concentrated on Munich with its proximity to BMW and Mercedes Benz. Berlin, on the other hand, is a leader in areas such as FinTechs and eCommerce, which is getting a little more money again after a sharp slump at the beginning of the crisis. However, this also shows the statistical effect of the high funding for Flink, which was probably born out of necessity.
Overall, the strongest area remains – despite significant losses – software. Investments in energy and sustainable business models are relatively stable.
However, it is not easy for investors in the fashionable green and social area either: all too often the beautiful sustainability visions from the presentations of the startups shattered when taking a closer look at the business model, complained a London investor specializing in such startups at the Hamburg meeting. Financing rounds do not always fail because of investors’ need for security.