What is an assessment at PWC

How do investors shape the financing and evaluation of startups during COVID-19?

Market study 2020: Financing startups with venture capital and evaluating them in practice

Enrico Reiche
Transaction Consulting and Valuation
at PwC Germany
Tel .: +49 30 2636-2119
e-mail

This can improve the ef fi ciency of the financial ecosystem of startups

Financing startups with venture capital always involves uncertainties for investors with regard to the realistic assessment of the value potential of future portfolio companies. This is all the more true as a single investor usually only has a stake of between ten and around 25 percent in a start-up company. In the early phase in particular, it is the founders who decide on the future development of their ambitious, innovative company.

The underlying company valuation is also based more on empirical values ​​than on concrete quantitative methods. To compensate for these imponderables, complex participation agreements often regulate comprehensive special rights for investors. For the founders, however, these can lead to sometimes unexpected economic effects.

The current market study by PwC, Ventury Analytics and Prof. Dr. Dirk Honold (Technische Hochschule Nürnberg) analyzes the approach of the venture capitalists and builds the interdisciplinary bridge between the valuation practice and the legal design of financing rounds in participation agreements. The analysis thus provides practical insights into the methods currently used in the valuation of companies and the most common design variants of contractual clauses in venture capital investments. Action aids can be derived from the study that contribute to the ef fi ciency and effectiveness of the start-up's financial ecosystem. A special focus is also placed on the extent to which the COVID-19 pandemic affects the assessment and startup financing.

“The interdisciplinary bridge built in this study between valuation practice and the legal design of financing rounds in participation agreements allows conclusions to be drawn about negotiation processes and their motivations. The findings lead to a good understanding of contractual conditions and to improved ef fi ciency and effectiveness in the implementation of participation agreements in the interests of all parties. "

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

More large-volume venture capital funds needed

Only the least funds invest more than 15 million euros in a portfolio company. If more domestic investors are to lead larger rounds in Germany or participate in them in the future, higher fund volumes are desirable for both classic venture capital investors and corporate venture capital units.

“Startups are an important engine for innovation and growth. Venture capital is the fuel that drives startups forward and gives the founders the space they need to develop their performance and passion. The financial ecosystem thus decisively shapes the development of young companies. "

Prof. Dr. Dirk Honold, Professor of Corporate Finance, Georg Simon Ohm Technical University, Nuremberg

The negotiation process has a great in fl uence on the company price

The company price ultimately achieved depends on the one hand on the company's scaling potential and current market trends, but the negotiation process also has a major in fl uence on the price. Among other things, this has to be seen in the context of special rights: liquidation preferences can, for example, allow investors to accept a valuation that they would have rejected without - or with weaker - liquidation preferences.

Startups in Germany are rated comparatively low

The financing volume provided by the investors allows for implicit evaluations of the startups due to the expected participation rates. Due to the relatively low volume of individual investments, this market logic leads to comparatively low valuations in Germany. In order to counteract this, large-volume funds are required. In this way, the framework can be set to also carry out larger individual investments.

"The data from the market study close a gap on the specific design of startup financing in contracts that are not publicly known and the associated determination of company valuation in Germany."

Patrick Hümmer, Managing Director Ventury Analytics GmbH

COVID-19 and the consequences for the German venture capital market

The COVID-19 pandemic has hit the German startup scene and the venture capital market. This can also affect the financing rounds that have just taken place as well as the upcoming follow-up rounds. In the current COVID-19 crisis, startups therefore continue to need government support to meet their capital requirements. Government funding can help support the startup ecosystem in this difficult situation.

"With our study we want to ensure more transparency about the often confidential details of startup financing and thus enable benchmarking that can serve as a decision-making aid for all parties within the transaction process."

Enrico Reiche, Director, Deal Advisory at PwC Germany

For the market study, PwC, Ventury Analytics GmbH and Prof. Dr. In the summer of 2020, Dirk Honold (Technische Hochschule Nürnberg) interviewed German and foreign investors in startups who are focusing their investment strategy on the German market or who have made deals in Germany. Across a total of 113 questions, 74 investors took part in the study, investing more than two billion euros per year.

Prof. Dr. Dirk Honold, Technical University Georg Simon Ohm Nuremberg

Building on more than 20 years of experience in supporting technology companies, including as CFO, and a medium, double-digit number of financing rounds including IPOs, Mr. Honold now acts as a serial entrepreneur, supervisory board, advisory board and coach. As a professor, he focuses on innovation financing and (corporate) venture capital to strengthen the financial ecosystem of startups, for which he scientifically heads the working group of the Schmalenbach Society, as well as value-oriented management with future potential.

Patrick Hümmer, Ventury Analytics GmbH

As co-founder and managing director of Ventury Analytics GmbH, Patrick Hümmer supports the structuring and design of financings with risk capital through in-depth analysis and simulation with the help of software-based advice. This gives startups, (corporate) venture capitalists and law firms economic decision-making aids in the process, which allow unambiguous, quantitative documentation in the participation agreements.

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

With over twelve years of experience in transaction consulting, as co-lead of the venture deals team and head of the raise program at PwC Germany, he brings his expertise in venture deals and (corporate) venture capital as well as his network to add value to both startups, Investors but also established companies.

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

Gerhard Wacker is a partner at PwC Legal and works in corporate / M & A with a focus on legal advice on venture capital transactions. He has more than 18 years of experience in VC / PE and M&A. He is responsible for the corporate / M&A teams in Berlin and Nuremberg and is co-leader of the corporate / M&A practice group at PwC Legal Germany. Juve (2020/2021) lists him as a "Leading Advisor for Venture Capital".