After recent record years, the business climate on the German venture capital market is cooling significantly. Although investors are acting more cautiously in light of the changed market environment, there is still "plenty of free capital" in the market, according to one analysis of the KfW. The Development Bank assumes that investors are increasing due diligence, i.e., the thorough examination of companies before making a potential investment. The evaluation criteria for startups have also shifted, according to a survey conducted by KfW Research, the German Venture Capital Association, and Deutsche Börse Venture Network: The cash burn rate, the business model, and capital requirements have become significantly more important in investment decisions. Instead of growth prospects, the focus is increasingly on the profitability and robustness of startups. Investors are clearly worried that they won't see their money again anytime soon.
Solid business models help through the cooler business climate
Despite a more tense situation, deal flow in the German VC environment continues at full speed. According to KfW, the first half of 2022 was the third strongest in history for the German VC market. Investor satisfaction with the quality of their investments also remains above average. The development bank nevertheless recommends that startups adapt their business models and financial planning to the new conditions. Longer-term planning and a focus on sound business practices are likely to help startups secure their future financing needs in the coming period.
