Because of the Russia flaw – investors are suddenly avoiding German founders

A successful German journey starts to falter: the development of a strong start-up scene. In no other major European country has the amount of capital invested in start-ups fallen so sharply in the current year as in Germany.

The cash flow has collapsed by almost half, more precisely by 43 percent to 10.3 billion euros. This is shown by a study by the London investor Atomico.

The main reason for the skepticism of American investors is the Ukraine war. "My US colleagues see that Germany is not only geographically close to Russia, but was also closely intertwined economically," says Damian Polok, head of the Berlin office at Silicon Valley Bank.

In the most important European start-up market, Great Britain, the decline was only 22 percent. French founders even collected 18 percent more money. Thanks in part to strong government funding, Paris has moved up to second place behind London in the metropolitan ranking, ahead of Berlin.

"In order not to fall further behind, we have to act," demands the managing director of the start-up association, Christoph Stresing. For example, the federal government must make pension funds accessible to venture capitalists.

"It is currently very difficult to get US investors interested in venture capital in Europe," confirms Oliver Holle, head of the European start-up financier Speedinvest. Investments in the start-up scene are also shrinking throughout Europe – albeit to a lesser extent than in Germany. The key figure is likely to fall from 103.6 billion euros in the previous year to 84.5 billion euros, which is more than twice as high as in 2019 and 2020.

This favors the interpretation that the decline in investments across Europe is not a signal of a crisis, but a correction of exaggerations in the boom year 2021. "Consolidation will hurt - but it will be a healthy adjustment," Holle expects takeovers and bankruptcies.

Especially those start-ups that received very large financing rounds in 2021 are struggling to get the high ratings. The fast delivery service Gorillas, for example, whose company valuation shot up from zero to one billion euros within just one year, is said to be about to merge with its Turkish competitor Getir - a kind of emergency sale because the Berliners could not find fresh money.

The e-scooter rental company Tier has cut 180 jobs. This is "a reaction to the current economic and financing climate," said Tier founder Lawrence Leuschner, explaining the reason for the loss of almost every fifth job. The financial service provider Solaris has cut ten percent of its jobs and, according to media reports, is considering raising fresh money - possibly at a worse rating.

Investors are particularly hesitant about such older start-ups, known as grown-ups in scene jargon. Classic exit options such as IPOs will not be available for the foreseeable future due to the poor stock market climate: In 2022 there were only two major IPOs of such companies in Europe - after 22 in the previous year.

The Future Financing Act, which Finance Minister Christian Lindner (FDP) intends to bring to the cabinet shortly to facilitate IPOs, will only bring little relief in the short term.

There could therefore be further deep cuts in start-ups in the coming year. There is a restructuring backlog: The study recorded only 1,247 announced job cuts in Europe in the past twelve months. In the rest of the world - especially the USA - there were already almost 63,000.

Despite the bad news, excellent founders can continue to hope for money from investors - especially if their business models have the prospect of rapid profitability.

Holle: "The start-up world is now sharply divided into a two-class society: A small proportion of the founders can continue to choose their investors, while the rest are struggling with falling valuations."

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