Why Are U.S. Venture Capital Firms Turning to European LPs for Fundraising?
The United States venture capital (VC) industry has been fraught with fundraising obstacles. These difficulties have been driven by a downturn in exit activities and broader economic uncertainty that is weighing on investor confidence. This pain is particularly felt by new VC managers who lack the extensive networks of limited partners (LPs) traditionally relied on for capital commitments.
In the face of these difficulties, U.S. venture capital firms are increasingly looking to European investors to secure funding. European LPs have become a viable alternative to shrinking U.S. capital markets with their distinct investment criteria and growing interest in diversified international portfolios.
In this article, we’ll explore the reasons behind the shift towards more global fundraising for U.S. VC firms, its implications, its benefits. and what US firms need to consider. In addition, discover how Edda’s CRM for venture capital can help you better manage transatlantic partnerships.
Challenges in U.S. Fundraising
The venture capital scene in the U.S. has seen a notable downturn in fundraising activities, which has made itself apparent since the onset of public market instability and lower-than-expected returns on VC-backed exits.
In the first quarter of 2024 alone, only 100 VC vehicles closed, collectively raising a modest $9.3 billion. This is the lowest fund count since 2015, which demonstrates the severity of the current fundraising environment. This decline is worsened by decreasing amounts of capital returned to LPs, influencing their ability to reinvest in new funds.
The reduced fundraising activity has proven especially challenging for first-time managers who typically lack the comprehensive LP networks that more established firms have on hand. This makes it difficult to secure the necessary commitments to launch or sustain their funds. The situation is further strained by an economic environment where potential investors are more cautious, scrutinizing potential returns and the stability of their investments more than ever.
The Role of European LPs Historically
U.S. venture capital firms have not historically relied heavily on European LPs due to the abundance of available capital domestically. The U.S. has traditionally housed a surplus of investors with deep pockets, which have always been more than sufficient to support startups. Due to a less mature VC market and different regulations and economics, European investors, have been more conservative with their capital allocations.
However, the European venture capital market has become increasingly sophisticated, and investment portfolios have become more globalized. European LPs are now more open to investing in U.S.-based VC funds, attracted by their higher growth potential and the diversification benefits these investments bring to their portfolios.
This has been made possible by improvements in regulatory frameworks, more aggressive investment strategies by European investors, and a mutual interest in fostering transatlantic business ties.
Economic Drivers of the Shift
The shift toward European LPs by U.S. venture capital firms is largely driven by economic factors that have made that market increasingly attractive for fundraising. Key among these is the relative stability and availability of capital in Europe compared to the U.S., where domestic LPs are still reeling from the impacts of public market downturns.
European LPs, on the other hand, have faced fewer disturbances in their home markets. As a result, they possess more liquidity and are looking for opportunities to deploy capital in markets offering higher returns, such as the U.S. venture space.
Additionally, the valuation environment in Europe is generally more conservative than in the U.S., making European investments less volatile. This conservative approach can be appealing to U.S. general partners (GPs), especially in an overall global market characterized by high valuation discrepancies and increased economic uncertainty.
The Appeal of the European Market
The European market offers several attractions that are drawing U.S. GPs. For one, European LPs are not as heavily impacted by the “denominator effect” — a situation where the relative value of an illiquid asset class increases as public equity markets decline, leading to overexposure to that asset class. This effect has been a major issue for U.S. LPs but less so for the Europeans, who typically have a smaller proportion of their portfolios in venture capital.
Moreover, the growing receptiveness of European LPs to invest in U.S. funds is supported by an increase in commitments. For instance, emerging U.S. VC managers reported that European LPs represented 12.2% of overall commitments this year, a notable increase from 6.9% in 2023.
This openness is partly due to active efforts by some European governments in pushing for greater unlisted equities investments and a higher appetite for venture investments among European investors.
These dynamics indicate fertile grounds for U.S. GPs looking to expand their investor base beyond saturated domestic markets and tap into a diverse pool of European capital sources that are increasingly eager to engage with the real of U.S. venture capital.
Network Expansion & Strategic Partnerships
Expansion into European investor markets offers U.S. firms both financial and strategic benefits. Through fostering relationships with European LPs, U.S. VCs can access a broader network of potential business partnerships, market insights, and even new avenues for their portfolio companies. These connections can be invaluable for firms looking to globalize their operations or simply diversify their exposure to different economic cycles and market dynamics.
European LPs often bring their own unique perspectives and a knowledge of markets that might be less familiar to U.S. firms. This opens up opportunities for U.S. startups looking to expand internationally, providing a soft landing through established European partners with an understanding of local regulations, market conditions, and consumer behavior.
Risk Mitigation & Diversification
Engaging with European LPs allows U.S. VCs to mitigate some of the risks associated with domestic capital sources. By diversifying their funding base, firms can better shield themselves from region-specific economic downturns and the impacts of U.S. market volatility. Geographical diversification of capital sources helps stabilize the fund’s operational capabilities during periods of domestic financial stress.
The addition of European LPs often means diversifying the type of investor profiles and investment criteria, potentially leading to a more balanced and thorough investment strategy. European investors may have different risk appetites and priorities, such as a stronger focus on sustainability or social impact, which help guide a fund’s investment decisions toward more sustainable and socially responsible ventures.
Strategic Engagement With Edda’s Investor CRM
Incorporating Edda’s venture capital CRM into these strategic transatlantic efforts substantially boosts their effectiveness. Edda’s CRM enhances relationship management and communication with European LPs, so interactions can be both consistent and impactful.
The platform’s comprehensive data management and analytics capabilities allow U.S. VCs to maintain a clear overview of their interactions and agreements with European partners, optimize their engagement strategies based on real-time insights, and monitor the health and status of these international relationships.
By integrating Edda’s CRM for VCs, U.S. venture capital firms can better manage global expansion and economic fluctuations to maximize every opportunity for collaboration and investment. This simplifies logistical challenges and enriches the strategic partnerships necessary for success.
Looking for strategies to transform your global investment efforts? Edda’s CRM investor relations platform has you covered. Contact us today and start optimizing your engagement with European partners.
