The investment ecosystem in 2023: Startup funding & VC trends

In these challenging times, startups not only have to contend with a more unpredictable, shock-prone world, but an investment ecosystem characterized by shrinking deal counts and lower investments. In this blog post, we’ll take a closer look at the difficulties facing startups. Who were the winners and losers of 2022? What trends have emerged this year so far? And what should startups expect from the rest of 2023?

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The challenges for startups

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Startups are operating in an unprecedented environment. The war in Ukraine has led directly to rising energy costs while both inflation and interest rates remain high. Moreover, the effects of the climate crisis are more tangible than ever before.

​As well as directly impacting companies large and small, global crises are having a marked impact on the investment ecosystem in Germany and Europe more widely. In 2022, we saw how these crises led to a shrinking size and number of investments for mid- and late-stage startups. In 2023, even startups looking for early-stage investment from VC funds are encountering significantly more caution from investors.

​Startups at all stages are facing:

​- Postponed funding rounds

- Shrinking deal counts

- Lower investment volumes

- Higher competition on deals

- A tough climate for negotiation

​So what trends have emerged so far this year, and how will the rest of the year play out?

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Seven trends shaping the startup investment ecosystem in 2023

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1. Mid- and late-stage investments will continue to remain low

There was a significant cool-down in the second half of 2022 with VC funding in Germany experiencing a fall from $21 billion in deals in 2021 to $12.1 billion in 2022. But the biggest impact was on startups in later growth stages, with financing rounds above $250 million seeing a drop of over 50% from the previous year.

​In 2023, we have only seen this trend continue, both in the number and size of deals. It remains difficult to procure late-stage funding in Germany (see this graph from Sifted).

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2. Startups seeking early-stage funding also face tougher times in 2023

The VC market for early-stage financing remained relatively stable in Germany in 2022. 

​By contrast, in 2023 we expect to see more of an impact on seed funding too. For Europe as a whole, the first quarter of 2023 was the quietest in terms of VC funding in 6 years. According to some estimates, VC funding as a whole fell 66% compared to the Q1 in 2022.

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3. The devaluations will continue

​In Germany, 2022 saw former Fintech flagship Klarna lay off 700 employees before going through a devaluation in July from $45.5 billion to $6.7 billion dollars. For deals made after the invasion of Ukraine in February 2022, 34% have since seen a drop in the initial valuation and a further 25% have been modified so that terms were more investor friendly.

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4. Technology sector will continue to show resilience

​In times of crisis, it is unsurprising to see a focus shifting towards technological solutions. In 2022, Germany saw a 10% increase in deep-tech investments compared to 2020. Blockchain and metaverse technologies were the highest funded segments in 2022, and ICT continues to make up a healthy 30% of startups.

​Despite the year-on-year decline in VC funding in 2022, (around -43% according to Dealroom), Germany shows no sign of losing focus on tech. It unveiled a €1 billion deep-tech and climate tech fund (DTCF) earlier this year. We expect to see high-performing tech segments which increased gains in 2022 like gaming, (+334%) and crypto/blockchain (+440%) continue to flourish in the second half of this year.

​Deep tech, blockchain, and the metaverse still represent very high-opportunity sectors for investment this year.

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5. Impact investments leading the way

​2022 saw the number of climate tech companies grow by 14%, in line with increased investment in the sector.

​The strong focus on impact investment continues to shape 2023, with investors turning to startups that are tackling key issues and addressing long-term societal problems. Coupled with rising awareness of climate change, rising energy costs are resulting in what Florian Heinemann of Project A Ventures described as “a massive tailwind for clean tech”.

​In the first quarter of 2023, energy was the best funded sector in Germany, thanks in part to a €215m investment in Berlin solar startup Enpal. There has already been substantial investment in cross-sector ESG initiatives, including German platform Integritynext for ESG risk management (€100 million EQT Growth).

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6. Plenty of money in the global market in 2023

​According to Crunchbase, despite the slowdown, investors held a record amount of $580 billion at the end of 2022. 2022 also saw the creation of several funds (over 58 new VC funds in total, especially smaller funds of under $50 million). These included HV Capital (€430m first continuation fund), Visionaries Club (€400m, split into three funds) and Project A Ventures (€375m). They may be spending capital at a slower pace but it will need to be deployed at some point.

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7. Investors continue to be cautious: an opportunity for startups to show their stripes

​2022 saw venture capital firms shift their focus to look more at the substance of the startups they work with. According to Jenny Dreier, an investor at EQT Ventures, VCs are a long way from where they were in 2021 where they saw “top-line growth [as] imperative for start-ups”. More than ever before, startups need to “prove [to VCs] that they can combine revenue growth with sustainable unit economics.”

​In 2023, VCs will be much more likely to take their time and make better, data-informed decisions. Startups will need to adapt to this new investment ecosystem – but this is exactly what they’re good at: being flexible enough to adjust to new circumstances.

​The result: we’re optimistic that, even in a challenging environment, startups with a strong business model will be as relevant and attractive to investors as they ever were.

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How can startups raise capital in a time of crisis?

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​Working with corporate venture capital can help to solve some of the issues facing startups in the investment landscape.

​Wayra is Telefónica’s open innovation hub connecting Telefónica with tech disruptors around the world. With a focus on scaling up startups, Wayra works to scout, scale, and accelerate businesses at seed funding stage and beyond.

​We’re well-positioned to respond to current state of the investment ecosystem in Germany and Europe:

​- A long-term focus: with an emphasis on sustainable growth and profitability, Wayra gives investors the opportunity to back companies with efficient financial planning, reflecting trends for investors seeking returns in the longer run.

- Technical expertise: as the preferred strategic partner of Telefónica, Wayra is dedicated to funding technology development in AI, IoT, and Industry 4.0, and helping to enable the development of 5G and Edge Computing Use Cases in a 5G lab in Munich.

- Revenue streams: As part of its Startup Acceleration program, Wayra helps customers with a market-ready product and first revenue to win Telefónica as a client, and resell their products and solutions to Telefónica and their 350m global customers.

​Investment (in DACH, Benelux, Israel, and Nordics): with a broad portfolio of seed (€350K) to growth (+€25M) investments and a trusted investor network, our offering presents tech companies with routes to capital which they can find lacking in the wider VC market.

​By offering startups new revenue opportunities, a community of like-minded entrepreneurs and experts, and investment, Wayra is helping startups navigate a challenging landscape as their reliable partner to shape the future of telecommunications.

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Images by Sandra Seitamaa