GP/LP dynamics

Through the tech reset a fundamental chasm between how VCs and many LPs thought about the market emerged, as clearly evidenced by the broad as clearly evidenced by the broad use tagline “now’s the best time to invest” amongst the VCs and the simultaneous retraction from the asset class by LPs.

For many LPs, the fact that entry valuations were low, many of the biggest successes historically having been seeded during downturns and the best vintages typically being those deployed in these periods, did not counter the forces they were looking at: massive repricing of existing portfolios, the denominator effect, the end of ZIRP and importantly a loss of trust in VCs.

To bridge this chasm, the tech reset became a period of recalibration and realignment between LPs and VCs where the two had to rediscover how they believe VC companies should be funded, grown and exited and how funds should be raised, deployed and returned.

Let’s venture back in time and see what some of Europe’s leading VCs said back in the beginning of the tech reset.

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My take is you can only control what you can control. And I think it’s the biggest cause of stress and anxiety. To try to control these things which are completely outside of your purview.

Tom Wilson

I have been kind of wanting a little bit of a correction for some time. We were going into FOMO land in 2021. And that’s precisely what happened in 2000. And it wasn’t just high value VC investments. It was major corporations buying companies that had little substance. It had gone crazy. And so a correction is useful, however, we must be prepared for the consequences.

Chris Wade
Isomer Capital

Now let’s venture back in time to the days where the tech reset had only just started to become apparent. Take a listen to what Shmuel Chafets, Oliver Holle, Jimmy Fussing, Lindsay Sharma and Kemper Ahl had to say when asked how they read the market and how one should react as a VC:


First of all, you should panic. Because it’s very hard to anticipate what’s going to happen. And there is the obvious advice in a crisis. Amidst crisis, the conventional wisdom of safeguarding capital and adhering to standard protocols prevails in the advice circulated. And you should raise when you can. The advice I’ve been trying to give people is to be responsibly aggressive.

Shmuel Chafets
Target Global

What I’ve seen in the past, is that it’s always the same. So first of all, tech always reacts faster than the rest. So we are always early and then much more dramatic. Our bounces up and down are much bigger than the regular economy. So that’s happening as we speak. But what I’m also keep seeing is that the US is much faster and much more brutal in and direction than Europe. So now I’m dialing out of Austria and nobody in the tech ecosystem has seen it yet. Everybody is talking about it, but it’s all still very comfortable. I was on the West Coast a few weeks ago and that was a very, very different atmosphere. So it’s coming.

Oliver Holle

I think it’s time to buckle up right? And extend runway and so on. But the best companies are also created now, right?

Jimmy Fussing

We’re preparing for what we expect to be a very robust market for secondaries as companies, fund managers and stakeholders broadly across the venture ecosystem begin to seek liquidity in alternative formats.

Lindsay Sharma
Industry Ventures
Kemper Ahl
Industry Ventures

And to wrap up this time journey, let’s go to November 2023 and hear how Fred Destin of Stride reflects on the tech reset:

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A return to prudent practices

The tech reset prompted a swift and necessary return to core business fundamentals, compelling managers to (in some cases somewhat suddenly) prioritise margins and profitability over unchecked growth. VCs would soon encourage founders to focus on key markets that show resilient demand and growth potential even in the more conservative economic climate that had arisen. Runway extension moved to the forefront of strategic considerations and retainment of core talent became exceedingly important.

VC world view
LP world view
The best companies are seeded in a crisis
Interest rate have little impact at early-stage
More talent available
Record amount of dry powder
Technology is not a momentum play but a long term trend
Same number of M&A transactions (albeit at lower value)
Verticalized arguments about inflection points (Nuclear fusion breakthrough, AI Chatbot, James Webb telescope, breakthrough Alzheimer’s treatment, climate change international agreement, Metaverse, Crypto, ...)
Tech is overvalued
Rising interest rate will impact future earnings
Newly listed tech companies are completely overvalued
Massive layoffs in tech companies
IPO window completely closed
Fundraising has stopped and there is no more cash for growing companies
Corporate scandals in venture backed companies
Denominator effect
Frothy use of LP funds (too short deployment cycles, unsustainable unit economic businesses, loss of price discipline)

I vividly remember speaking to a very successful Berlin founder back in February 2023 and he said to me that for five years, not a single investor asked him when or how they would be profitable and then suddenly it all turned completely and everybody only asks about that. As investors, we must act as buffers to pressure, not as amplifiers.

Chris Wade
Isomer Capital

You just have to be patient, put your head down, focus on the portfolio, drive value one company at a time.

Fred Destin

New(er) VCs (and LPs) would quickly realise that mark-ups were just that and that the art and science of generating DPI could not be forgotten. The old adage that races are won at the finish line became mantras at VC firms and the active work of finding M&A and secondary sales opportunities soon began. Where deployment periods had shortened to, at times, less than 12 months in the past ZIRP era, deployments would slow down to such an extent that reports of ‘record dry powder’ would don the frontpages of the tech media. Or as Stephan Heller, founding partner of AQVC said to us in January ‘23: “the 12-18 month deployment periods are over.”

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We were being pushed. I guess all of us were being pushed maybe a year ago to make decisions very quickly with “FOMO-kind-of-fundraising, and I don’t think that’s healthy. I always think particularly on the fund side, we’re getting into partnership for at least a decade, probably longer. I really don’t like this fake urgency […] So personally, I see everything having slowed down and I’m really happy about that. Not because I think markets should generally go slower, but because you have time to do a proper job of it and everybody around the table has that same expectation. We will take time, we will be thorough, and that feels much healthier. I think health is a good word. It’s a much healthier way to go about this business.

Restoring trust

Following the tech reset, VC suffered a substantial loss of trust with the general public as well as non-VC-specialised LPs.

Many were surprised as they witnessed the involvement of multiple of the most highly-esteemed venture firms in events such as the FTX debacle, the (US) SVB bankruptcy and the unraveling of entire business models reliant on VC injections to prop up inherently unsustainable unit economics – e-scooters, fast fashion, and last-mile delivery services come to mind here – precipitated a reevaluation of the sobriety of the venture industry among many observers of the industry.

However, the European venture ecosystem has rallied to restore trust quickly and effectively. Equity and debt financing strategies have been re-evaluated to offer runway extensions in uncertain times. Cost-cutting measures have been implemented judiciously, effectively balancing the need for efficiency with the imperative to maintain operational integrity.

The community’s network has shown its strength, offering support to startups navigating these turbulent times, reinforcing the collaborative spirit that is a hallmark of the European venture scene, maybe most beautifully exemplified by the swift handling of the SVB UK situation. But also at the individual firm level, VCs have shown up and proven their worth by successfully supporting founders through a period where tough decisions had to be made on a daily basis.

The role of public sector LPs in the current market

In a market where private market LPs are holding out from the market, the public sector LPs are more important than ever. We spoke with two of Europe’s leading public sector LPs, David Dana of EIF and Christian Roehle of KFW, as well as Joe Schorge of Isomer Capital and Michael Sidgmore of Broadhaven Ventures, on this topic.

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Key learnings

Role of governmental and public investors
Public investors like EIF, KFW, BPI, and others play a critical role in supporting the VC market, especially during economic downturns. There’s a noted shift in their investment focus towards sustainability, climate tech, and disruptive technologies such as deep tech, space tech, AI, blockchain, and quantum technology. Their involvement has become crucial not just for achieving first closings of funds but for the very existence of some funds, highlighting the increasing challenges even for teams with strong potential.

Market dynamics and challenges
The discussion acknowledges the changing landscape for fundraising. Previously, many funds, even those declined by major investors, could raise significant amounts. Now, while top-tier funds continue to raise capital, albeit more slowly, emerging and innovative funds face heightened challenges. This shift is attributed to a combination of factors, including the greater scrutiny of unrealised performance, geopolitical tensions, inflation, and the inherently high risk associated with VC investments.

Private vs. public investor dynamics
A key point discussed is the symbiotic relationship between public and private investors, with a focus on the necessity for a balanced mix of funding. Public entities often require a significant percentage of a fund to come from private investors, which underscores the importance of private capital in the ecosystem. This balance is critical for the sustainability and growth of VC funds.

The current investment climate
The conversation touches on the “denominator effect,” where the relative value of an investment portfolio can shift, affecting allocations to venture capital. This effect, combined with a lack of distributions to paid-in capital (DPI) and the attractiveness of alternatives, contributes to a more cautious approach from Limited Partners (LPs). The result is longer fundraising cycles, reduced fund sizes, and a challenging environment for new, first-time funds.

Perspectives on market cycles
Panelists debate whether the current challenges are part of a normal market cycle or if there are unique aspects requiring a different approach. Some believe that Europe’s VC ecosystem, having rebooted post-financial crisis with continuous growth, faces a unique situation with many LPs new to VC. This demographic may lack the patience required for VC investments, leading to increased interest in secondary markets as some reconsider their involvement in tech.

Outlook and opportunities
Despite challenges, there are positive signs for the European VC ecosystem. There’s a noticeable trend of private capital, particularly from the wealth channel, moving into the VC space, which could offset some institutional hesitancy. Additionally, the increasing interest of US funds in Europe, the influx of international talent, and the robust developer and engineering ecosystem present long-term growth opportunities for European venture capital.

Up Next

Chapter 02
Fundraising dynamics