Venture capital market study 2022

VC market study 2022: Geopolitical uncertainties result in lower startup valuations and a stronger focus on decarbonization solutions

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Enrico Reiche

Enrico Reiche
Director, Transaction Consulting and Valuation,
PwC Germany
Tel: +49 1511 6781604

Investors respond to uncertainties with a stronger focus on impact investing

The record numbers the VC industry achieved in 2021 reflect an outlier year compared to previous and ongoing developments. Today, the numbers show a recalibrated market sentiment as geopolitical uncertainties and the resulting market slowdown have corrected market dynamics. Startup valuations have been corrected, VC investment growth has been affected and it has become more difficult for startups to raise capital after years of relatively simple fundraising activities in some industries. Furthermore, the macroeconomic situation has led to rising inflation rates and increased short-term interest rates which forces investors to re-evaluate their portfolio. This is reflected in higher expected yields and, consequently, falling valuations at an asset portfolio level. The uncertainties also led to investors tolerating less negotiations over deal count and volume.

On the positive side of the geopolitical situation, the crisis has pushed investors towards decarbonization, highlighting the need for impact solutions and strengthening the focus on investments in this area. In Particular, environmental solutions received more attention. Moreover, investors showed higher interest in Climate tech companies compared to other impact areas and previous investment focus areas.

In the 3rd edition of this market study, Prof Dirk Honold (Nuremberg Institute of Technology), Ventury Analytics GmbH, and PwC aim to frame the German venture capital ecosystem against the backdrop of the geopolitical situation. Based on a broad and in-depth survey of investors, this study creates a unique database for Germany, enabling benchmarking and better decision-making. It allows the readers to draw conclusions about negotiation processes and the underyling motives and aims to increase transparency across the ecosystem.

“Our study results show that we urgently need to tax incentives differently in Germany if we want to remain assertive in the competition for the best talent – the current regulations are a clear disadvantage for Germany as a business location. Fortunately some members of the German government have announced their intention to change the taxation of participation models.”

Gerhard Wacker, Deals/M&A Partner at PwC Legal Germany

The study at a glance

Investors have an increased focus on impact investments

While SaaS/software development businesses are set to remain evergreen in investors' focus, we observed a substantial shift in interest towards the Climate tech industry in 2022. The current geopolitical instabilities as well as the increasing urgency to address the climate crisis make startups in Climate tech especially attractive to investors. This increased attention is reflected in a doubled amount of investors stating to either always or often addressing this area as a focus investment area.

The taxation of incentive schemes in Germany leads to disadvantages

The war for talents will be a major deciding factor for the future success of German startups. In this context, equity-linked incentive schemes are substantially relevant to hire, bind and motivate highly qualified individuals. Based on this, most of the investors underline that, compared to other countries, the taxation of incentive schemes (Employee Stock Option Plans/Virtual Stock Option Plans, ESOPs, VSOPs) in Germany creates a disadvantage in recruiting the best talents. The implemented changes in § 19a EStG are only rarely used or unknown and did therefore not lead to substantial improvements. The results of the study underline the urgent requirement for amendments in the taxation of incentives schemes in Germany as announced by members of the Federal Government.

Investors demand higher IRRs for their startup investments

Investors rely on the Internal Rate of Return (IRR) to measure annualised returns of their portfolios and compare performances. In 2022, the expected IRR for the individual portfolio company in the early stage has increased by an average of six percent year-on-year to now 36 percent.

Higher IRR expectations can be partially derived from a significant increase in CVCs’ expected IRR for a single target portfolio company and thus closes the previously existing gap between VCs and CVCs' IRR expectations. A further reason for the increase in IRR is the slight growth of expected money multiples for exits and trade sales, ranging from 3.0x to 6.0x and hence reflecting a 0.2x average growth across all investment stages.

The implications of geopolitical uncertainties on the German VC ecosystem

Geopolitical uncertainties continue to affect the German startup and VC ecosystem. While the crisis did not have a negative impact on deals closed before February 2022, the same is not true for deals signed but not closed before this date. Of these deals, 34 % have subsequently changed and lowered initially agreed valuation, while another 25 % were modified regarding more investor-friendly terms.

85 % of the surveyed investors agree on the negative impact of the geopolitical instabilities on startup valuations and see the strongest impact in the later stage.  Nevertheless, the current market environment does not affect deal flow but leads to postponed funding rounds, shrinking deal count, and lower investment volumes.

Disadvantageous taxation, tougher negotiating climate

CVCs rarely receive carried interested

“Founders, managers and employees are responsible for the success of start-ups. The same applies to investment managers: It is all the more astonishing that managers of CVCs still only receive a profit share in the sense of a carried interest in 30% of cases, while this is already the case in 90% of VCs. Here, too, the team approach plays an important role, so that a certain alignment would be desirable. This understanding is consistently lived by the investment manager:s through their flexibility in incentive pools in startups.”

Prof Dr Dirk Honold, Technische Hochschule Nürnberg

Tougher negotiation climate

“Compared to the results of the previous study, investors are currently less flexible in negotiations about deal terms. The flexibility especially declines in the core terms regarding valuations, investment volume, liquidation preferences and protective provisions. A tougher negotiation climate does not necessarily imply more investor-friendly terms, but founders should be prepared for less negotiation room due to the current environment.”

Patrick Hümmer, CEO of Ventury Analytics GmbH

Taxation of incentive systems

Participation-based incentive systems are very important for innovative companies to attract highly qualified employees. Against this backdrop, most investors emphasize that the taxation of incentive schemes in Germany is a disadvantage for recruiting compared to other countries. The study underlines the importance of changing the taxation of incentive schemes in Germany – as some members of the German government have already announced.

“If the current geopolitical crisis situation is anything to go by, it is the fact that it is driving investors to look more closely at climate-friendly technologies. Investor's interest in climate tech startups has definitely increased compared to other sectors and previous investment focus.”

Enrico Reiche,Director, Transaction Consulting and Valuation, PwC Germany


For this market study, PwC Germany, Ventury Analytics GmbH, and Professor Dr. Dirk Honold (Nuremberg Institute of Technology) surveyed German and foreign investors in startups whose investment strategies have focused on the German market or who have concluded deals in Germany. Across 62 questions (except for specific detailed questions), the number of participants went up from 42 in last year’s study to 56 (and 62 investors participated at peak). The number of participants is given with each question.

Authors of the study

Prof Dirk Honold

Prof Dirk Honold, Technische Hochschule Nürnberg
With a background of about 25 years’ experience supporting tech companies in roles including CFO, and following several dozen funding rounds including IPOs, Dirk Honold is now a serial entrepreneur and coach, serving on supervisory boards and advisory boards. His academic work focuses on strengthening the startup finance ecosystem through innovation funding, VC and CVC, and on value-oriented leadership with potential for the future. Besides his academic work, Dirk. Honold also helps to generate sustainable value to the ecosystem by providing leadership and support to startups, fonds and institutions as well as the Schmalenbach-Gesellschaft e. V. among others.

Patrick Hümmer

Patrick Hümmer, Ventury Analytics GmbH
As a co-founder and CEO of Ventury Analytics GmbH, Patrick Hümmer carries out in-depth analysis and simulations to support the process of structuring and arranging VC funding rounds, aided by specialist consulting software. This provides economic decision-making aids in this process for startups, VCs, CVCs and law firms, enabling unambiguous, quantitative documentation of investment contracts.

Enrico Reiche

Enrico Reiche, Director, Transaction Consulting and Valuation, PwC Germany
With more than fourteen years experience in transaction consulting, Enrico Reiche is currently both a Co-Lead in the Venture Deals team and the Leader of the Raise programme at PwC Germany. His expertise in venture deals, VC and CVC along with his professional network enable him to create added value for startups, investors and established companies alike.

Gerhard Wacker

Gerhard Wacker, Partner im Bereich Corporate/M&A, PwC Legal Germany
Gerhard is Partner with PwC Legal leading PwC Legal’s Corporate/M&A teams in Berlin and Nuremberg. Gerhard is Head of Deals Legal of PwC Legal Germany. He has more than 20 years experience in VC, Private Equity and M&A transactions. JUVE (handbook 2022/2023) is listing Gerhard Wacker as one of the leading lawyers for Venture Capital in Germany.

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Enrico Reiche

Enrico Reiche

Director Transaction Consulting and Valuation, PwC Germany

Tel: +49 30 2636-2119

Gerhard Wacker

Gerhard Wacker

VCs / M&A, PwC Germany

Tel: +49 911 94985-281

Dr. Tim Blume

Dr. Tim Blume

Venture Deals, PwC Germany

Tel: +49 (0)1751483055