The financing crisis among German start-ups has worsened significantly. Young companies raised six billion euros in venture capital in 2023, 39 percent less than in the previous year (9.9 billion euros), shows a study published on Tuesday by the auditing and consulting company EY. It was the second year in a row with a sharp decline. Compared to the record year of 2021, investments shrank by almost two thirds (65 percent) – back then, investors had invested 17.4 billion euros in start-ups.
EY partner Thomas Prüver pointed to high inflation, increased interest rates, the weak economy and uncertainty due to wars. “In order to obtain fresh capital even in these difficult times, good ideas alone are no longer enough for start-ups.” What is needed are solid business models and the prospect of profitability.
According to EY, Berlin start-ups again received the most venture capital in 2023, although at almost 2.4 billion euros, less than half than in the previous year. This was followed by Bavarian start-ups with around 1.7 billion euros, a good 600 million euros less than in 2022, and young companies from Baden-Württemberg, which was the only federal state to increase investments with 736 million euros. The largest cash injection (463 million euros) was also recorded there – for the Heidelberg company Aleph Alpha, which specializes in artificial intelligence.
Hardly any large cash injections for founders
The tough times for start-ups are also reflected in the financing rounds. According to EY, their number fell by 15 percent in 2023 compared to the previous year to 861 deals. In addition, there were only eight large deals worth more than 100 million euros – in 2022 there were 19. Overall, investments fell back to around the pre-Corona level of 2019. The startup association spoke of an “alarm signal, especially given the lack of mega deals.”
Start-ups rely on investors because they focus on growth before making profits. Large funds and corporations invest in young companies with venture capital in the hope that their ideas will prevail. Start-ups experienced a boom during the corona pandemic. They benefited from the fact that interest rates were low and digitalization received a boost – for example in financial transactions, online shopping or food deliveries.
But with the rise in interest rates, the crisis followed: many start-ups cut jobs, others like the Gorillas delivery service were taken over. The number of start-ups also went downhill: according to the startup association, almost 2,500 companies were created in 2023, five percent fewer than in the previous year. EY partner Prüver expects job losses in the industry to continue. Start-ups would also have to make significant savings in 2024. “This also and especially affects personnel costs.”
Long-term development of the start-up location is positive
After all: Regardless of the Corona boom, Germany has made great progress as a start-up location and has attracted a lot of money and talent from abroad. In addition to Berlin, other cities such as Munich are also gaining in importance. The number of start-ups valued at billions has increased almost fivefold to 33 since 2018, according to the startup association. These include the online bank N26, the translation service DeepL and the long-distance bus and train operator Flix.
The industry employs around 400,000 people and, with a company valuation of 172 billion euros, represents around five percent of economic output, the new chairwoman of the startup association, Verena Pausder, told the dpa in December. “In 2018 it was less than one percent.” The start-up sector has economic weight.
Start-ups depend on foreign investors
But Germany still lags behind other countries when it comes to venture capital. In this country, 85 euros per capita is invested in venture capital, in Great Britain it is 171 euros, said Pausder. The gap to the tech nation USA is even greater. For large financing rounds, local start-ups usually rely on Anglo-Saxon investors. And US investors in particular have recently been holding back on commitments in Europe, reported the venture capitalist Atomico – which is affecting start-ups in Germany.
According to EY, there were still no signs of an upward trend in start-up financing in the second half of the year, at most a stabilization at a subdued level. At just under 3 billion euros, slightly less money flowed to young companies than in the first half of the year.
EY expert Prüver is still optimistic. “Exaggerations from the boom years are now behind us; investors and founders have become more cautious and realistic.” There is some evidence to suggest that financing has bottomed out. “The start-ups that are emerging today, growing and receiving fresh money have already passed the first test and proven themselves to be resilient.”
