DACH venture and growth deals peak in crisis

Venture capital and growth deals increased in volume in 2020, with 471 deals completed, surpassing 2019's previous record of 420, according to Unquote Data. However, the aggregate value of deals fell between 2019 and 2020: venture and growth deals totalled €6.9bn in 2020, versus €8.7bn in 2019.

Benjamin Ullrich, partner at law firm Schnittker Möllmann Partners (SMP), says the number of deals has risen not due to the pandemic, but in spite of it, and that deal volume is likely to continue to rise, albeit with a potential slowdown in fundraising if the economy continues to feel long-term impacts from the crisis. He also highlights why certain parts of the venture ecosystem were not as adversely affected by the crisis. "If you are at an early stage as a growth company or startup, you are less dependent on revenues anyway; you might have a minimum viable product already but are relying on external capital," he says. "So if your revenues fall away, you might have less of an issue. It's different with companies like FlixBus and GetYourGuide, which were generating a lot of cash but chose not to be profitable in order to grow."

In fact, 2020 has seen the frequency of capital raising increase for some early-stage companies, with later-stage players also looking to invest, says Oliver Holle, co-founder and managing partner at Speedinvest. "There is a lot of dry powder from seed investors like us, but also from growth players moving downstream. The big theme of 2020 was pre-emptive rounds, with a lot of series-A and series-B players going into deals for companies that they think will emerge soon." Holle cites Speedinvest portfolio companies Primer and Schüttflix, both of which raised rounds in 2020, as examples of this development.

Steady dealflow
Unlike buyout activity, growth and venture capital deals did not experience a sharp decline between Q1 and Q2 2020; in fact, according to Unquote Data, Q1 2020 saw 135 deals totalling almost €2bn, versus 143 deals totalling €1.5bn in Q2.

Although dealflow remained steady, last year saw only eight venture and growth investments valued at more than €100m, compared with 15 such deals in 2019. SMP's Ullrich says: "We need to differentiate between sectors, but overall, this is not a time when we would expect to see all-time-high valuations or rounds. Although, areas that are doing very well include consumer packaged goods, anything related to shifting services online, food, and especially anything plant based."

"The anticipation back in March 2020 was that the immediate reaction would be along the lines of what we saw in the financial crisis and in the burst of the dotcom bubble," says Hendrik Brandis, co-founder and partner at Earlybird Venture Capital. "I expected the markets to slow down much more quickly and significantly. But what surprised me was the high resilience with which the venture market responded – we have not seen a significant slowdown, nor a significant drop in early-stage valuations."

Holle observes that early-stage valuations have in fact increased. "Looking at the top quartile of the most expensive seed rounds, the momentum of acceleration has been bigger than average. Rounds for hot deals at seed and pre-seed level are getting bigger, which drives valuations."

IPOs and high-value trade sales were scarce in 2020. However, in November 2020, investors including Cherry Ventures, Vorwerk Ventures, Tiger Global and Saarbruecker 21 sold their stakes in drinks delivery business Flaschenpost to Dr Oetker in a deal that valued the company at €1bn.

SMP's Ullrich expects to see similarly high-value exits in 2021. "But who can pay those valuations is limited," he notes. "Big automotive companies, technology companies such as SAP, or biotech and pharma companies could buy VC-backed companies, but businesses are limited in terms of the number of potential buyers if they are that expensive, which is why we will see more IPOs."

Longer holding periods have become a feature of the private equity and venture capital markets alike, many market participants told Unquote – with the trend expected to continue in the coming years alongside increasing valuations. Says Brandis: "Private funding opportunities are so significant that a liquidity need is not a reason to go public anymore – it's sometimes easier to raise capital as a private placement. As a result, companies are kept private much longer, then go public in a really big way."

Fundraising holds its own
Private equity fundraising was hit in 2020 as logistical challenges and LP uncertainty delayed many fundraising processes; however, DACH-based venture capital fundraising held its own against these challenges. Venture capital fundraising figures for 2019 and 2020 are almost identical, according to Unquote Data: venture capital firms held 23 first and final closes totalling €3.1bn in 2020, compared with 23 first and final closes totalling €3bn in 2019.

Helder Schnittker, a partner at SMP, says the DACH venture capital market remains appealing to investors. He highlights the role that US entities play in the DACH venture and growth ecosystem. "The European market is seeing a pull towards US LPs. US investors are opening offices here and US funds are investing in European startups," he says. "LPs in DACH funds are showing more of an interest in the European VC market, mainly as many European startups have produced products that have done well under these conditions; the digital transformation has accelerated during the coronavirus pandemic, and many startups have increased in value and have been on the radar of US investors."

Nevertheless, challenges might arise once the market emerges from the crisis, particularly for VCs that have experienced more difficulties in their portfolios. "Crisis has always driven the polarisation in the market," says Brandis. "Some firms have proven that they are resilient to the fund performance level. But for those who are newer or had challenges – and this can be due to their portfolio structure – fundraising might be more difficult."

Fabian Euhus, also a partner at SMP, says venture funds that might have come to market in 2020, normally expecting to receive a significant amount of corporate backing, have struggled. "Many corporates felt that it was not the time for them to invest in venture, given their own internal problems. This affected corporate venture funds, funds that were investing in niche products with a technical view, or corporates that don't have a fund yet but want to go into this area."

However, many venture players have already been able to capitalise on trends to emerge from 2020 in their fundraising efforts. Healthtech and telemedicine have been focal points for many VC investors this year. Even before the crisis hit, in January 2020, Heal Capital and 415 Capital launched healthtech-focused funds. Dieter von Holtzbrinck Ventures also launched a specialised fund in August 2020.

Speedinvest's Holle expects the market to see significant progress in healthtech seed investments this year: "A lot of seed investments in healthtech will break out next year. European healthtech exits have been underwhelming so far, but there is a wave of companies shooting for much bigger prizes."

Bouncing back
Looking to the upcoming 12 months, Brandis expects the pandemic to slow by Q3 2021, although he hopes that this could already happen by Q2. "That will induce a bounce-back of activity and general confidence, and the negative impacts will be overcompensated for a period of time, since a lot of activity that was being held back can then unfold. In H2 2021, we might even see some overheated activity, once it becomes clear that things are becoming fundamentally better – but I hope it won't lead to crazy valuations."

Schnittker remains optimistic for venture and growth deals this year. "My expectation is that 2021 will be a good year for VC and for fundraising, I think we will see more new funds on the impact side." He also highlights larger exits as a feature of the market to come this year, as well as in 2022 and 2023.

For seed investors, a resurgence of larger rounds this year once market confidence returns could present interesting exit opportunities, says Holle: "I believe we will see more mega-rounds in Europe; we are more used to them than we were, say, three years ago. We will also see more secondaries – for seed funds like us that have worked with companies for up to seven years, it's a good way to create liquidity."

Brandis says both IPOs and trade sales will remain interesting exit prospects for later-stage companies, although trade sales could become challenging for corporates that have experienced difficulties in 2020. "There is a pressing need for companies to acquire good technology assets to drive digitalisation. Finding a company that can absorb these businesses is extending holding periods. There is a need to widen the scope for selling the asset internationally – and the broader and more international you get, the more mature the startup needs to be."

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