Venture capital investors are going through a tough time with fundraising, and US GPs are getting hit particularly hard.
In the first quarter of this year, a meager 100 VC vehicles closed, worth a total of $9.3 billion, according to the latest PitchBook-NVCA Venture Monitor, with last year seeing the lowest fund count since 2015. On a percentage basis, the number of closed VC vehicles in the US fell further last year than in Europe, Asia and Africa.
US-based LPs are still feeling the impact of the imbalance in their portfolios from the public market downturn over the past couple of years. Additionally, the lack of capital being returned to LPs due to muted exit activity for VC-backed companies has meant that for some, putting more cash into VC is not an attractive option.
This is especially an issue for first-time and emerging managers, who typically don’t have as strong LP networks to tap into when looking for funds.
With options more limited in the US than in previous years, many of these GPs will be looking to Europe to fulfill their capital needs.
Historically, US VCs haven’t needed to venture across the pond for LPs given that the US is home to many more investors with typically deeper pockets. But several emerging fund managers, including Overture VC and Maniv Mobility, have crossed the pond this year for capital from LPs across Europe. European LPs have also been more receptive to these funds with emerging US VC vehicles representing 12.2% of overall commitments this year, up from 6.9% in 2023.
The VC denominator effect is less of a factor in Europe, where LPs on average commit less to VC. Given the US VC market’s maturity and longer history, domestic LPs have a higher comfort level and risk appetite when it comes to investment in the asset class.
Furthermore, startup valuations in Europe, where the region’s LPs have the most exposure, are broadly lower than in the US—for example, the latter’s median early stage pre-money valuation in 2023 stood at €5.5 million (around $5.9 million) compared to $38.2 million, according to PitchBook data.
This would suggest that European LPs are less exposed to VC than those in the US, leaving more room to commit to the asset class. They also appear to have an appetite.
According to Atomico’s State of European Tech 2023 report, 35% of LPs reported that they are looking to increase their allocation to VC over the 12 months starting from November. Although many European countries have restrictions for pension funds and insurance companies when it comes to investing in unlisted equities, some governments are pushing for change, as are European LPs.
Having a more geographically diverse investor base can be beneficial for funds since it reduces the impact of regional economic downturns or market fluctuations. When US firms look to invest beyond their own borders, European LPs can offer networks and market knowledge that they may not otherwise be able to access.
There is a strong rationale for US GPs to seek European capital and vice versa. Private European LPs typically favor more mature markets even in Europe, with managers in established hubs such as the UK and France receiving a larger share of commitments. As the world’s largest VC ecosystem, LPs could be drawn to the US.
Being so much bigger than any other market, the US has a much wider pool of startups to back and a bigger exit market. LPs also benefit from having more diverse portfolios. And in terms of returns, the US outperforms Europe across nearly all horizons.
Access to the world’s leading venture hub may be enticing, but if LP capital departs from the region’s shores, where does that leave Europe’s VCs?
While better than in the US, European VC fundraising had a less-than-stellar 2023 with fund count halving compared to 2022. Some 47 vehicles have closed this year, which at the current pace would only be a slight increase on last year’s figure.
There is only so much capital to go around, and a reduction in available capital could potentially constrain European VC firms’ ability to invest. A 2023 working paper from the European Investment Fund found a lack of sufficient private domestic limited partners was a major obstacle to fundraising.
A US fund would be expected to prioritize US investments and therefore, a lack of capital for European GPs could translate into less funding for European startups.
It is highly unlikely that European LPs would abandon their domestic market en masse but, at the end of the day, their purpose is to make money. And some may find that investing in the US makes that easier.
Featured image by Joey Schaffer/PitchBook News
