There’s A Ghost In The Startup House. And It’s Called Recession

One can notread it in the numbers, but in conversations with investors, it starts to manifest. The latest startup barometer by management consultant EY shows that for the first half of 2019 the total value of start-up financing in Europe has risen by 62% to  €16.9b compared to the previous year. The number of deals has also risen again, by ten percent to a total of around 2,300. But how long will the appetite of startup investors last?

Especially in Germany, the economic engine of the EU, economists are already talking about an imminent downturn, which has many causes – the trade war between China and the US, a hard Brexit, tensions between the EU and the US. This climate could also have a negative effect on the mood of investors, who are currently still letting a good deal of money jump.

Nothing good lasts forever

“The pendulum we will certainly turn in another direction, the question is only when. We are in a very good phase, but it will not last forever, “said Markus Lang, Associate Partner of Vienna VC Speedinvest, during the Business Angel Day 2019, where investors discussed current trends in the startup market. Currently, there is still a lot of money to get on the market, but: “This also leads to partially absurd valuations. We too sometimes pay these valuations,” says Lang. Especially the experienced serial entrepreneurs know how and where they can get big investments, and venture capitalists would sometimes have to pitch to them and not vice versa.

“There is more capital in the market. But the transactions that are taking place are becoming more fragmented, “observes Ralf Kunzmann, managing director of aws Gründerfonds. Austria Wirtschaftervice (a state-owned business service agency) fund, together with co-investors (e.g. from the USA, Germany or Switzerland) has invested around €220m in 32 companies.

The corporate consultant EY is also discussing the same trends in its latest study for Austria: “On the one hand, we see an increasing number of financing rounds, more and more domestic start-ups get fresh capital. On the other hand, however, we see a clear trend towards ever smaller-scale financing, “says Thomas Gabriel, Partner and Head of the Start-up Initiative at EY Austria.

Quality of startups increases

The deal flow –  the number of investment opportunities that Angels and VCs get on the table – is likely to be right across Europe. According to Markus Lang, Speedinvest sees between 6,000 and 8,000 startups a year, and then invests less than one percent. “Being a founder is currently in, and it’s becoming an increasingly important topic at universities,” says Lang. “There were times when there were more startups, but the quality has now increased,” says Doris Agneter CEO of tecnet equity. 

As the “hype really started”,  one would have seen many “mediocre” startups with little substance. Yet,  now it’s already hard to find startups with completely inexperienced team members. 

Trending Topics’ Take

• In discussions with investors, we’ve heard that it would be better to do a round of financing over the next six months, after which it could be too late.
• There are also market opinions that a recession could have a positive impact on startups and investments. Investors may see an economic downturn as an opportunity to be fully engaged in new projects.
• Especially in Europe, a lot of public money for innovation financing should be made easy in the next few years. This can be seen in France (Macron’s famous five billion euros), but also in Brussels, where there is talk of a European Future Fund in the order of  €100b, which could be launched by the new European Commission.