After a blockbuster year of funding in 2021, venture capital investments in German tech startups cooled off in the second half of this year — as the worsening effects of war, inflation and rising interest rates took hold.
In 2022, the total value of investments in German startups fell by 46% year on year, to $11.9bn. The number of funding rounds fell too: dropping 29% from 1,606 to 1,137 deals, according to Dealroom data to the end of November analysed by early-stage VC Morphais. The overall level of funding is still higher than the $6.5bn recorded in 2020.
While later-stage funding has taken the deepest plunge, early-stage financing (pre-seed to Series A) has remained relatively stable. And a burst of new VC funds, particularly small funds under $50m, were raised.
Later-stage financing plummets
Financing rounds of more than $250m have seen the sharpest decline in Germany, both in terms of the number of deals and the volume of investment, according to Morphais VC’s analysis.
2021 saw 14 deals worth $250m or more, and that dropped to six deals this year.
Investment volume (the amount of money raised by a fund) also fell by 78%, from nearly $10bn in 2021 to $2.2 billion in 2022 for the top deals.
Rounds between $100m and $250m also declined in terms of the number of deals. From January to November, 19 deals of this size were closed, compared to 33 in the same period last year.
It’s a situation that has played out across Europe this year — investors backing companies at the later stages have seen a fall in public stock prices and are looking more sceptically at later-stage private valuations.
Another aspect is that US funds have historically propped up a lot of later-stage investments in German startups — but with the tightening of the financing market in the US, many funds that were previously investing heavily in German startups have pulled back.
Early-stage funding remains stable
Funding has proved resilient at the earliest stages in Germany, in terms of the number of deals and the amount invested. The trend is reflected in wider Europe too: in terms of investment volume, 2022 has been the best year yet for early-stage funding on the continent, per Dealroom data.
Investors say that early-stage funding has remained strong Europe-wide, because it makes more sense to back fledgling companies that will mature and exit when economic conditions improve.
According to Morphais’s analysis, the number of pre-seed and seed deals declined in Germany this year, yet the number of deals at Series A and Series B increased.
The amount of cash invested into pre-seed startups this year also fell in 2022. $51m was invested into pre-seed startups last year — a drop of 37% from 2021’s total of $80m.
Investment volume at seed was basically flat compared to last year. At Series A it increased by 13%, and at Series B by 12%.
Eva-Valérie Gfrerer, CEO and founder of Morphais, says it’s the best time for investors to plug money into early-stage startups.
“In the past, negative interest rates led to effortless fundraising and record valuations. In 2022, with rising capital costs we observe a valuation reset leading to more attractive entry valuations for investors,” she explains.
Also, with the free-flow of capital at an end, early-stage companies now need to focus on sustainable growth and profitability. This gives investors an opportunity to back companies with more efficient financial planning. “This new environment is very healthy for the market in general and more promising in terms of returns in the long run,” says Gfrerer.
A boom in new VC funds
VCs may have invested less this year than in 2021, but they’ve still got plenty of cash in the bank, as the number of new VC funds and the total fund volume have increased over the last few years.
This year, 58 new funds were raised by VCs (both from existing managers as well as from emerging managers) in Germany — which is double the number of funds raised in 2020.
Gfrerer says that the reason for the increased number of funds this year is due to “the strong [boom] years before.”
Many of the funds closed in 2022 benefited from a favourable market environment in the previous years: “for example, loosened monetary policies to avert an economic disaster in the midst of a pandemic and negative real interest rates, all leading to a low-cost of capital,” says Gfrerer.
Fund volume has also been gradually increasing: rising from $4.3bn in 2019 to $17.8bn in 2021. This year, the trend slightly dipped, with fund volume decreasing to $14.7bn.
In total, German VCs scooped up $14.7bn between January and November. And small funds — under $50m — in particular have been profiting.
In 2022, there’s been a 16% increase in investment in small funds compared to last year: rising from $182m to $211m.
Germany’s top deals in 2022
Celonis and WeFox topped the charts in terms of amount raised this year, having both picked up $400m in Series D financing.
Below is a list of the top ten financing rounds this year. Note that none of these companies have female cofounders:
Celonis — $400m Series D extension
Wefox — $400m Series D
OneFootball — $300m Series D
Trade Republic — €250m Series C extension
Forto — $250m Series D
Taxfix — $220m Series D
Hy2gen AG — €200m (unknown)
1Komma5° — €200m Series A
Personio — $270m Series E
Coachhub — $200m Series C
Miriam Partington is Sifted’s DACH correspondent. She also covers future of work, coauthors Sifted’s Startup Life newsletter and tweets from @mparts_
