DACH venture capital looks for a new normal

Between April and May 2020, the DACH region saw 91 venture capital deals with an aggregate value of almost €858m, giving an average value of €9.42m per deal. That is less than half the €21.45m average deal size recorded in the same period in 2019, when 36 deals worth almost €767m were completed. The fall in average deal size reflects the fact that many VCs have spent time in recent months shoring up their portfolio companies, rather than investing in large funding rounds. Nevertheless, copious amounts of dry powder and the search or entrepreneurship in the face of the crisis continue to bolster the market.

“There is a great deal of uncertainty in the venture world, but it is different from segment to segment,” says Roland Manger, a co-founder and partner at Earlybird Ventures, which announced the sale of its Turkey-based portfolio company Peak Games to Nasdaq-listed Zynga for a valuation of $1.8bn in June 2020. “Telemedicine and gaming are benefiting; some SaaS businesses that are not business-critical are not though, as a lot of companies are going through what they have and making cuts. All in all, the impact is felt, and people are assessing if things will be the way they were before and what the structural long-term consequences are.”

Although VCs in the DACH region welcome the government’s support programmes for startups struggling in the wake of the coronavirus pandemic, some questions remain. “Political mindsets have changed and public funding vehicles have become more powerful and professional,” says Wolfgang Neubert, a partner at Apex Ventures. “In the context of Covid-19, what has been done for startups is revolutionary; it’s not perfect but it’s a good step in awareness that startups should be supported by the public during difficult times.”

Embracing change
There might also be a “new normal” to come for how venture capital firms operate, with many anticipating greater flexibility in how they work and invest. Neubert says Apex has embraced the opportunities for investing remotely from its second fund, which focuses on digital health and held a first close on €13m in Q1 2020. “We have made a six-digit investment where we never met the founders personally; just via Zoom. It’s challenging but we were so convinced [by the company] that we did it. We also have startups with employees across Europe who can’t travel easily.”

“VC has pretty much got used to working remotely,” says Christian Weiß, a partner at Heal Capital, “but the question is to what extent we will work back; this is similar to the situation with digital health or telemedicine. A lot of things will remain remote. Venture capital is one of the areas where this is possible and it could be an advantage for countries where the venture capital scene is not as concentrated; for example, Germany is not like Silicon Valley, it is split between places including Berlin and Munich. We might change from in-person-only business models.”

It also remains to be seen if the pre-IPO mega-rounds seen in 2019 will return. Weiß, whose healthare- and technology-focused firm is currently on the road for its debut fund, notes that companies will be looking for investors to fill the funding gaps. “In healthtech there have been very few mega-rounds, so there is not a lot to lose in that sense,” he admits, since Heal Capital’s debut fund is focused on healthcare and technology. “We could close the gap to other companies that have reached this realm; but it will be difficult to raise pre-IPO rounds, and they have also got a little out of hand in the recent months and years. If the mega-rounds are less available, companies will look for funding; the question is who will jump into the gap. If there is a smaller Visionfund, some European players might come in, to a certain extent, but looking into IPOs might be an option again.”

Runways and risks
Neubert notes that Austria-based startups might face further challenges over national attitudes towards international investors looking to fill potential funding gaps. “What we are more concerned about is that we now have the national government wanting to prevent foreign investors coming into their industries at low price points. For infrastructure and defence, that is reasonable, but for startups, it’s shooting them in the knee. If as a startup you must apply to the Ministry when a US investor holds a 10% stake, this is very difficult, and there is a danger that this will happen in Europe due to the fear about foreign investors.”

While the market adapts, VCs see more potential pain to come as some startups begin to approach the end of their liquidity runways in the coming months. “When the situation has levelled off a bit, and we are back to normal in terms of fundraising and startups, it will be good to see who is really driven and who is here to stay,” says Weiß. “A lot of capital will have been deployed by companies and will need to be re-raised; many companies have been afraid they wouldn’t survive the next six months, so we will have to see what happens once the short-term support is over – that will be a tricky point.”

Manger anticipates that there could be more competition for the most successful assets in the medium term. “There is still a lot of money around – it’s probably too early to look for strong evidence, but there will probably be a flight to quality. Companies that can prove that they can do well in the “new normal” will attract a lot of interest and may have better trends that before.” He says that VCs will face some crucial choices. “One scenario I have in mind is this: if you have a lot of money to deploy as a fund, the question is whether you will put everything on hold for a long time, or look for some companies that have seen a neutral effect or are benefiting from the circumstances. If investors can identify those, they will be keen to go there, but there will be more competition for a smaller set of assets.”

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