Düsseldorf Although the start-up scene is currently in a crisis after years of unrestrained growth, numerous venture capitalists are launching new investment funds. For example, the internationally active company Headline announced three funds for early-stage investments on Thursday.
Headline wants to invest 320 million euros in start-ups in Europe. 400 Million euros are available for new US investments, 166 million euros for Brazil. Headline has never raised so much money for start-up investments before.
The situation seems paradoxical. On the one hand, large start-ups across Europe are currently laying off employees because they are in danger of running out of money. On the other hand, investors are always announcing new million-dollar investments for start-up companies.
Current figures from the analysis company Pitchbook for the USA prove this trend: in 2021, US venture capital companies invested around 139 billion dollars. In the first half of 2022 alone, it was already almost 122 billion dollars.
But instead of investing in existing and growth-planning companies, the investors are mainly looking for completely new companies with their early-stage funds. And the new pots of money are more comprehensive than ever. The semi-state high-tech start-up fund has been able to fill its fund “HTGF IV” with 400 million euros, the predecessor only collected 320 million.
Earlybird from Berlin and Munich has raised 350 million euros for its seventh “Digital West Fund”, twice as much as its predecessor. Project A also managed to double, the fourth fund of the Berliners is now 360 million euros.
However, more money is not always synonymous with better. “A lot of investment firms are raising as much money as they can get. Of course, this is wrong,“ says Christian Leybold, co-founder of the venture capital firm Headline. According to its own statement, the company has therefore recently even cancelled interested parties for the US fund after the internally set ceiling had been reached.
Less is more: in case of doubt, funds must reject investors
The background: the funds do not only grow when more people want to invest more and see returns for every penny. Venture capital firms first plan how many start-ups they want to include in the portfolio. The following applies: the more companies, the lower the risk. But that also means more administrative effort. Typically, venture capitalists scatter their money in a fund over 25 start-ups.
Because the shares in young companies became more expensive during the boom, venture capitalists recently had to collect more money. But what to do with the capital when prices are down again? And will the desire to invest continue even with funds that are only now starting to raise money?
Whether it’s Headline, Earlybird and Project A: the investment managers are still calm. After the share prices of many tech companies have fallen sharply since December, start-ups are also rated lower. But, according to the scene, the effects of early-stage financing are still relatively small.
Most of these start-ups will go public in five to ten years at the earliest – then the mood on the markets should have returned to normal. Insiders estimate that valuations at young companies are currently estimated to be ten to 20 percent lower than last year.
Security comes first: investors want to put money back
“We will put a larger share of our capital back for reinvestment,” says Hendrik Brandis, co-founder of the venture capital firm Earlybird. Recently, start-up investors have often distributed 40 percent of a fund to their portfolio companies. The rest was reserved to be added to the most promising of these companies later.
Florian Heinemann is planning the same for Project A: “We will invest in 30 start-ups as planned, maybe a little more,” he says. Above all, more money should be available for “the winners”.
On the one hand, German early-stage investors want to become somewhat more independent of follow-on investors. Your business is always based on the assumption that other donors will step in at later stages and make much larger sums available. The larger the reserves, the longer start-ups can develop with the capital of their existing investors alone.
On the other hand, own capital is important for replenishing if the ownership interest in a start-up is to be held. Because in the case of follow-up investments by other funds, the participation and thus also the share of the proceeds will otherwise shrink when a start-up finally goes public or is resold.
Investing more slowly: new funds will last longer
Leybold, Brandis and Heinemann also assume that the funds now launched will invest their money over a longer period of time be considered their predecessors. One indicator of this trend is market figures from the venture capital firm Morpheus. According to this, the number of financing rounds for German start-ups fell by more than 13 percent from January to May 2022. 92 percent of all financing rounds were the first or second financing round of the respective company.
At the same time, there are indications that the number of start-ups will decrease again and there will be fewer investment opportunities. For January to May, Morpheus recorded a 16 percent decline in newly registered start-ups compared to the previous year.
“We invested the previous fund over a good two and a half years, now we will probably go to three to three and a half years,” says Florian Heinemann. This, in turn, has advantages and disadvantages. The earlier the investments are made, the longer the portfolio companies have time to generate the expected return.
However, those who are more patient are more independent of market fluctuations, emphasizes headline investor Leybold. Funds that had distributed all their capital over the past 18 months were now more affected by the slide in valuations than those investors who acted more continuously.
Investors rely on frugal founders
In the search for new technologies and digital business models, investors want to pay more attention in the future to the fact that companies can also do business with less money. “Before capital-intensive companies or business models with a thin margin we would certainly be even more reluctant now than last year,“ says Earlybird partner Brandis.
His company has invested in the rocket start-up Isar Aerospace, that will take many millions of euros before the first sales become possible. Brandis reports that he would certainly have to discuss this with his colleagues for longer now.
“In times of crisis, companies that initially focus on product development are successful,” says Christian Leybold. Anyone who can prove that their product is in demand and their business model is economical will then also receive money for expansion. In recent months, on the other hand, companies have had so much capital that they could try both at the same time.
Headline has collected almost all of the money for the Europa Fund this year. Fundraising for the US fund took place from April to June, that is, already in crisis mode.
Leybold has identified two groups of investors in its current investor search. Those who want to maintain a certain ratio between investments on the stock market and start-ups would now also have to reduce their venture capital investments after the price decline on the stock exchanges. However, others are now particularly interested in start-ups, says Leybold: “Anyone who believes in technology as a value-added driver, but recently thought prices were crazy, says: “Now even more so.’“