Welcome to “Start-Up Insights”! In this series of specialist blog articles, Digitale Gründung informs you about current trends and forecasts on the start-up market.

Together, we will take a look at the current mood in the start-up scene and shed light on factors that influence the success of founders. We inform you about the effects of the current economic situation, technological innovations or other influencing factors on the start-up market.

In this series, we will include both the investors’ and founders’ perspectives to give you a comprehensive insight into the dynamic world of start-ups.

Part I

Start-up investments in decline: causes and effects on the start-up landscape

The start-up market is facing a noticeable challenge: the decline in investment. In this article, we examine the causes and the profound impact of this trend on the start-up landscape. From a former boom phase to a phase of investment restraint – the change in investor sentiment has affected both large and up-and-coming start-ups.

There are many reasons for this decline, ranging from economic uncertainties to changing investor priorities. This development has a significant impact on founders, who are now faced with new challenges when it comes to raising capital for their innovative ideas. Despite the current decline, we are confident that the start-up landscape can continue to adapt and be successful.

Statistical insights: the investment volume between 2019-2023

In 2022, the investment volume in start-ups fell by around 43% compared to the previous year. During the coronavirus crisis, there was an investment backlog in 2020, which was made up for with a huge investment sum of over 17 billion euros in 2021. Last year, the investment volume in the German start-up scene normalised at a total investment value of EUR 9.9 billion, which is still higher than in the pre-crisis year.

What is the current situation on the investment market?

The global economy is moving towards a phase of recession, while central banks are stepping up their efforts to curb rising inflation by raising key interest rates.

The emerging developments have a direct impact on financing opportunities for start-ups. While risky investments have been attractive in recent years due to the low-interest phase, the picture is now changing. As interest rates rise, more conservative investments are becoming increasingly attractive as lenders seek to protect their capital from potential turbulence.

In addition, the risk of investing in start-ups has increased due to the current economic situation, leading to a negative adjustment in company valuations. This in turn has an impact on mergers and acquisitions within the start-up landscape.

Which start-ups are suffering the most from the current investment situation?

In the past, investors mainly invested in companies with strong growth, whereas they are currently looking more at the return figures, i.e. the return that the invested capital generates over a certain period of time.

There has been a decline in financing and valuations, particularly for late-stage start-ups. Late-stage start-ups are start-ups that are already in a later spin-off phase and are dependent on certain financial resources, have to follow fixed business plans and fulfill financing plans. So if a company has so far concentrated mainly on growth, it is possible that the requirements will change with the change in investor sentiment and the actual return will come to the fore. As a result, financing targets may not be met and investors may bail out.

The current decline in investment is having a serious impact on unicorn start-ups, which are companies with a valuation of over one billion US dollars. These start-ups are heavily reliant on external financing to support their rapid growth. The decline in investments makes it more difficult for them to raise the capital they need and can lead to a correction in their valuations. This leads to liquidity bottlenecks, increased competitive pressure and possible delays in exits or IPOs. They must adapt their business strategy to overcome these challenges and achieve long-term success.

What additional sources of funding will there be for start-ups in the future?

The global economic challenges are not having the same impact in all countries. This is particularly evident in the war in Ukraine. While the situation of German investors does not differ significantly from that in other European countries, there are major differences when compared outside Europe.

Due to the relative weakness of the euro, takeovers by investors from the Gulf States, the USA or China may increase. European and German start-ups appear more cost-effective in this international comparison, which makes the acquisition of smaller companies more attractive.