German start-up ecosystem is developing positively

This is the conclusion of a study that has observed several developments in the start-up scene. One of them is unlikely to please the German government.

According to the "Venture Capital Market Study 2021", the German start-up market is developing positively on several levels. The study was conducted by Dirk Honold from Nuremberg Institute of Technology, Ventury Analytics GmbH and auditing firm PwC. It found that the average transaction volume of the start-ups surveyed per financing round rose from €5.2 million in 2020 to €5.8 million in 2021.

"We are seeing a positive development in the venture capital ecosystem, from which start-ups in Germany in particular are benefiting," says Enrico Reiche, Director at PwC. "Among other things, the average transaction volume is increasing, while the expected internal rate of return (IRR) is falling and the contractual provisions of the investment documentation are usually more founder-friendly." For the study, the authors surveyed start-ups with a total investment volume of more than two billion euros per year and more than 360 deals financed annually.

However, the increased transaction volume is not the only result of the study. It also revealed that investors are often willing to negotiate when it comes to valuation, investment volume and the structure of employee participation. This has given founding teams more leeway.

The study also showed that more than 60 percent of the investors surveyed now take ESG criteria into account in their investment process. The letter E stands for Environment, the S for Corporate Social Responsibility and the G for Governance. Of the remaining respondents, more than 60 percent plan to take such criteria into account in the future. However, almost 80 percent of the study participants do not yet use a standardized screening process for environmental, social and governance issues. Start-ups do not think much of the German government's Future Fund, which is primarily intended to support start-ups in the growth phase. Over 70 percent of participants believe that the Future Fund will only have a minor impact on the start-up ecosystem. You can read which parts of the coalition agreement of the traffic light coalition are relevant for start-ups in this current article on Startbase.