Even as economic clouds gather, Europe’s investment horizon is vibrating with a new wave of venture capital (VC) vitality. Despite the tough backdrop of 2021, which is distinguished by cautious Limited Partners (LPs) and a generally risk-averse environment, new venture capital funds emerge across major European hubs. Here’s a detailed look at how to set up and optimize your first fund.
- Portfolio Construction Decoded:
The money you require may be determined by how you structure your portfolio. Prepare to respond:
Investment Stage: The size of your fund should correspond to the stage of maturity of your organization. While pre-seed startups may seek around $500k, Series B firms frequently seek between $15m and $30m.
Investment Vertical: Narrowing your focus to a certain industry might have a direct impact on the size of your fund. For example, OSS businesses focus on software-based manufacturing businesses and hope for a larger fund as it moves towards sustainable manufacturing.
Company Ownership: Finding a happy medium between ownership and collaboration can be difficult. Aim for substantial firm ownership while leaving opportunity for co-investment opportunities.
Investment Volume: The number of companies in your portfolio should correspond to the investment strategy of your fund and the potential return to your LPs.
Reinvesting in a portfolio company’s future fundraising rounds is referred to as a follow-on strategy. It’s a wide-ranging policy, with some funds reserving up to 75% for such commitments.
Managers generally invest a portion of the capital as a show of dedication and belief in your fund’s mission. This personal ownership, which averages around 2%, can be a crucial factor for potential investors.
- Compensation and Team Dynamics:
For a start-up fund, a small team with diversified experience is frequently the most efficient. While initial pay may not be competitive with industry standards, the potential long-term rewards might be a strong motivator. Furthermore, management fees typically range between 2-3% of fund size.
- Putting a Microfund to the Test?
Using a microfund to enter the VC space could be a sensible move. It enables new fund managers to demonstrate their investment expertise and begin building relationships with limited partners. Both Reece Chowdhry and Edgar Vicente used this method, steadily increasing their profiles and success stories.
Investing in venture capital is more than just a numbers game; it’s a complicated ballet of strategy, intelligence, and intuition. Aspiring fund managers may feel the sting of the post-2021 financial environment, but with the correct strategies, they can still make a significant impact.
As Europe’s investment landscape transforms, these new venture capitalists are demonstrating that adaptation, vision, and a thorough understanding of the ecosystem can lead the way, regardless of economic conditions.