Surviving the tech reset: What can global venture capitalists learn from Europe?

The tightening of market conditions for European tech offers lessons for the sector worldwide.

New research with 300 venture capitalists and limited partners reveals the strategies needed to navigate these challenges.

Building resilient relationships, demonstrating a clear value proposition, and adaptability to setbacks are key.

The past few years have witnessed a bull run in venture capital. Stimulus measures and near-zero interest rates enabled founders, angel investors, and venture capitalists (VCs) to thrive. The influx of capital blurred roles: Founders became investors, angel investors evolved into VCs, and growth investors dabbled in early-stage startups. Investments flowed freely, and valuations soared.

The European experience provides increasingly relevant insights globally as practitioners navigate similar challenges. Let’s look at what the region achieved from 2017 to 2022.

As market conditions corrected with rising interest rates and cooling valuations, a tech reset complicated fundraising f
or VCs and their backers, limited partners (LPs). As Joe Schorge of Isomer Capital noted: ‘Nothing works unless fundraising works’, as this capital is what flows into startups.

In Europe, the reset widened the gap between VCs’ advocacy and LPs’ caution. Some funds marked down portfolios by 50%, while others delayed the inevitable, eroding trust between investors and fund managers. LPs seeking quick liquidity faced frustration, driving an uptick in secondary market activity at an inopportune time.

Our research, drawn from over 300 LP and VC interviews, offers strategies to navigate this landscape and advice to strengthen fundraising efforts. Albeit originating in Europe, these insights are relevant globally:

Surviving the tech reset

1. Leverage the tech reset

??Rather than seeing this period as negative, VCs can view it as an opportunity to strengthen relationships with LPs. Resilient relationships are more likely to secure follow-on commitments from existing LPs, while new partnerships can be built on tr
ust and thorough due diligence. Daniel Keiper-Knorr from Speedinvest attributes their success in raising pound 500 million during and after the reset to transparent and proactive communication with LPs.

2. Be differentiated to align with LPs

In this challenging landscape, differentiation and transparency are paramount. VCs must define and align their value proposition with LPs’ long-term goals. HV Capital exemplifies this through its dual-fund strategy, which strategically separates investments into distinct funds-one for early-stage ventures and another for growth-stage companies-allowing them to meet the specific expectations of different types of investors.

3. Demonstrate performance

Evaluating a VC’s performance is crucial, especially when a track record is limited. LPs seek consistency, strong networks and evidence of strategic focus, scrutinising not just returns but also how managers handle downturns and exits. Rodrigo Ferreira from Vinthera notes that track records reflect more than past performan
ce; they show alignment with the investment thesis. For non-established managers, LPs may seek proof of concept through achievements like successful angel investments.

4. Deal with bad LP behaviour

Managing LP relationships requires vigilance, particularly when dealing with challenging behaviours. This can manifest in various ways, including delayed commitments, sudden withdrawal of interest, or a lack of responsiveness during crucial stages of fundraising.

To mitigate these issues, VCs should conduct thorough due diligence on potential LPs, asking about their decision-making processes and track records with previous fund commitments. Chris Wade from Isomer Capital emphasizes that fairness and transparency are key in setting expectations early. Sharing experiences with other VCs can also help identify patterns of unreliable behaviour.

However, it’s important to recognize that not all volatility stems from bad faith-external factors like economic shifts or internal LP challenges can cause delays. When LPs
fail to communicate these changes promptly, it can create unnecessary friction and mistrust.

1. Networking and relationships

Building trust-based relationships is crucial. Networking is about deepening connections and establishing credibility within target sectors. A strategic approach emphasizing authenticity and sector-specific engagement helps uncover opportunities.

Sabina Wizander from Creandum highlights that consistently delivering on promises builds trust and credibility. Tim Draper from Draper Ventures emphasises persistence, noting that success often hinges on the number of connections made: “You may receive numerous rejections before landing a single acceptance.” Targeting the right LPs is also vital for VCs. Lindsay Sharma from Industry Ventures advises seeking warm introductions and focusing on LPs with a history of supporting similar managers.

2. Commitment and resilience

Fundraising is a marathon, requiring resilience and consistent effort. VCs must remain committed to their vision, continu
ously improving their strategy while weathering setbacks.

Schorge emphasizes perseverance, stating: “It’s going to be harder than you think. So hang in there, because perseverance is the only thing that wins.” Shmuel Chafets from Target Global echoes this sentiment, describing venture capital as an endurance game: “You have to work through the cycles. It takes time to build.”

3. Expertise and trust

LPs increasingly prioritize fund managers who demonstrate deep knowledge and expertise. Success requires a blend of subject matter expertise, effective communication and forward-thinking strategies.

Fred Destin from Stride.VC emphasises the importance of mastering fundamentals, stating: “Just be a student of venture and portfolio construction … because if you don’t demonstrate to LPs that you’re a good money manager, they won’t give you money.”

4. Honesty and transparency

Authentic engagement is crucial. Being transparent about strengths, weaknesses and learnings fosters trust with LPs. In a competitive mar
ket, honesty can be a crucial differentiator. Simon Lohmann, formerly at Cavalry Ventures and now at FoodLabs, highlights the need for honest communication, even when the news isn’t positive. “Communicate about it and tell LPs why you made the decision and what you are thinking,” he says. This level of openness helps LPs understand decision-making processes and reinforces their trust in proposed approaches.

5. Adaptability

Finally, success in venture capital requires adaptability. VCs must be open to changing strategies as market conditions evolve. Schorge advises VCs to “always plan for the downside, even as you envision the upside”. Emma Steele from Ascension VC adds that flexibility extends to narrative: “You rarely get your narrative right the first time, so you have to test it often and with multiple stakeholders.”

Bogdan Iordache from Underline Ventures also stresses the importance of adaptability, particularly in the early stages of raising a fund. He likens it to a product-market fit search, where
having a strong initial model is crucial, but so is the willingness to adjust as needed: “Adjustments become increasingly challenging later on,” making early flexibility essential.

The tech reset has reshaped the venture capital landscape, particularly in Europe. These shifts in fundraising dynamics and investment strategies, and Europe’s emphasis on transparency and sustainable practices are not isolated trends. Globally, VCs face similar challenges, from managing LP expectations to navigating volatile markets. The European experience provides a valuable lens through which to understand these global shifts.

As the venture capital industry evolves, the strategies and lessons from Europe offer a roadmap for stakeholders across diverse ecosystems. By adapting these trends to local contexts, VCs can navigate the post-tech reset.

Source: World Economic Forum