European VC pros expect fundraising challenges to squeeze emerging managers

European VC investors are warning of tougher conditions for emerging managers for the rest of the year as fundraising continues to be difficult.

At this year’s SuperVenture conference in Berlin, Mark Schmitz, managing partner of fund-of-funds Equation, said that first-time or second-time funds in Europe usually are too small to get the attention of institutional investors, so LPs tend to be family offices or company founders. The market downturn has made fundraising from those sources more difficult.

“Europe has an incredibly heterogeneous fundraising landscape, and family offices are relatively hard to spot for newcomers to the market,” Schmitz said. “It means that entrepreneur commitments are fundamental, but with the lack of liquidity in the market, they cannot commit to the funds as much anymore.”

Only €3.4 billion (about $3.6 billion) was raised by European VC funds in Q1, putting 2023 on track for its lowest annual figure since 2015, according to PitchBook’s latest European Venture Report. The number of new vehicles has also fallen. The picture for first-time funds is even less rosy, with six closing in Q1 worth around €390 million, which at its current pace would be significantly less than the 68 closed in 2022.

Funds-of-funds may be relied upon more heavily than in the past by emerging managers facing a lack of commitments from family offices and entrepreneurs.

For those emerging managers currently in the market, Multiple Capital managing partner Ertan Can believes that differentiation will be key to attracting commitments even in the more challenging environment, which may well come in the form of an increase in specialized funds.

“I think funds that start to show some specialization and degree of expertise in a specific subset of climate are highly attractive,” Can said. “If you’re spreading yourself too thin and trying to do everything, it’s got to be very challenging. Differentiation and finding your core strength is what is needed at the moment.”

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