Mountside Ventures and ALLOCATE have released their inaugural annual report entitled, "Capital Behind Venture 2020." The report provides insights on Venture Capital (VC) firms looking to raise funds from Limited Partners (LPs) such as pension funds, university endowments, government agencies, fund-of-funds, and high net worth (HNW) individuals or family offices who actively invest in Europe's growing VC ecosystem.
"There is very little information in the public domain on best practices, preferred terms and practical advice on raising a VC Fund in Europe, even less so for emerging fund managers," said Jonathan Hollis, Managing Partner at Mountside Ventures. "Our goal in writing this report was to reduce barriers for VC fund managers, but also show LPs how their peers are exploring investing in this space."
Mountside Ventures and ALLOCATE surveyed over 60 LPs that invest in European Venture Capital funds. Below are some key highlights of the report.
What LPs Want
No one size fits all when it comes to what LPs are looking for in their next VC fund manager, however, some trends rose to the top of the survey's findings.
● While returns are important, LPs surveyed identified the following as key reasons why they are driven to invest in a particular VC: financial returns, portfolio diversification and option to deploy capital into later startup funding rounds
● 90 percent of LPs were willing to take a risk with emerging fund managers, now or in the future. Over 80 percent had already invested in them, and half of those investments were where they took the biggest stake
● 64 percent of LPs surveyed said they are aiming to increase their investments into female-led GPs, while 18 percent have set a KPI
● 18 percent say they have the intent to increase their investment into funds run by BAME (Black, Asian and Minority Ethnic) VCs, while 18 percent have set a KPI
● 65 percent of LPs were interested in alternatives to investing solely in VC funds to get exposure to this asset class, such as investing directly into companies, investing in fund-of-funds and secondaries
Best Practices for VCs Raising Money
LPs have their fair share of frustrations with the VCs they meet. The top issues they cited were:
● Not enough investment experience or understanding: LPs lack confidence in fund managers that come across as being too "green"
● Lack of transparency: VCs don't invest in founders who they believe are not being truthful, and LPs feel the same way about funds they're investing in
● Weak competitive differentiator: LPs want to hear from GPs on their fund's unique understanding and strategy
● Neglecting to build long-term relationships: No speed dating for LPs. Those surveyed indicated they truly value establishing relationships before investing
It Takes Time to Raise Money
While startups can meet a VC and raise money within a few months, VCs need to put in more time and effort. Most LPs surveyed said they take one to two years to build VC relationships before they invest.
● Collectively, the LP respondents met with over 2,000 prospective VCs in the last 12 months. Over the last three years, they invested in 360 VCs
● 20 percent of LPs surveyed had invested in a fund whom they have known less than a year
● Over 70 percent wanted to meet with a VC as early in their fundraising process as possible
● 27 percent of LPs said they had invested in a fund whom they have known for over two years
"Despite COVID and its related challenges, this is a very exciting time for the European technology VC ecosystem," said Lomax Ward, Co-Founder of ALLOCATE. "European deal-making has not slowed down as tech startups continue to flourish and investment size is trending upwards."
The European venture ecosystem is maturing and beginning to catch up with that of the US and Asia. According to a recent Pitchbook report, European Venture Capital activity came to €10.6 billion in the third quarter of 2020, marking one of the strongest quarterly showings on record. Deal value for the year stands at €29.5 billion as of Q3 2020 and is on pace to surpass the record €37.2 billion deployed in 2019.
To see the full findings, please visit: www.capitalbehindventure.com.