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The quick recovery of Germany’s venture capital sector from a confidence slump caused by the coronavirus pandemic is providing cautious mood for optimism among start-ups. According to the results of the KfW German Venture Capital Barometer (GVCB) conducted on behalf of the Handelsblatt business daily with the German Private Equity and Venture Capital Association (BVK), the country’s start up scene is also less affected by coronavirus lockdown restrictions than initially feared.
The sentiment indicator was up 26.7 points to 17.0 balance points, with improvements also being recorded in the business situation assessments (+28.3 to 16.1) and business expectations (+25.2 points to 17.8) indicators. Data for the GVCB is collated from a quarterly survey of the 200 or so members of the BVK.
The venture capital year ended on a positive note in the country, with end-of-year business sentiment in Q4/20 surpassing the pre-coronavirus level. According to KfW Chief Economist Dr. Fritzi Köhler-Geib, planned fund and legislative changes played no small part in the change in mood. “The progress made towards future funds and with the Fund Location Act were two important mood enhancers in the final quarter which, unimpressed by the new lockdown, provided a good basis for the start of the year.”
The fundraising climate, while still below the level at the end of 2019, is now in the green zone despite the coronavirus downtrend in the first half of 2020. “The rapid sentiment rebound attests to the increased robustness and maturity of the market and makes us optimistic for 2021. The coronavirus has not dented demand for venture capital, quite the reverse is true,” said BVK Managing Director Ulrike Hinrichs.
More German start-ups received fresh capital in 2020 than in the previous year, with financing rounds up six percent to 743 – a new record – according to the Ernst & Young Start-up Barometer Germany. Investment volume however fell 15 percent to EUR 5.3 billion – partly as the result of fewer 100 million euro deals compared to 2019. Germany’s mobility sector secured more than one billion euros in investment capital, followed by the software & analytics sector (which also topped the billion euro mark).
The most financing rounds in 2020 were carried out in the software & analytics sector, being roughly on a par with previous year financing round levels. Healthcare ranked second, with investment in healthcare start-ups up 42 percent to EUR 670 million for the year.
A German Ministry of Finance draft law to encourage investment fund activity was passed by the German federal government on January 20. The Fund Location Act will see barriers dismantled in the country – in accordance with the implementation of the Directive (EU) 2019/1160 regarding cross-border undertakings for the collective investment in transferable securities – while safeguarding existing protection measures. The deadline to integrate the European rules into domestic law is August 2, 2021.
BVK Managing Director Hinrichs has welcomed the move, saying that “with this fund the German Federal Government has made an important contribution to supporting the German start-up and venture capital ecosystem.” Planned measures include VAT exemption for the management of venture capital funds, tax incentives for employee stock ownership plans and adjustments to the German Investment Code.
The most recent lockdown measures have failed to dent venture capital provider (VCs) sentiment as much as in spring of last year, with VCs and start-ups having learnt lessons from previous lockdowns to assert themselves in a challenging environment. The noticeable recovery in fundraising and deal flow indicators points to the ingenuity of start-up measures to circumvent the crisis – as well as being a solid basis for future investment for domestic and international investors.