In the past few years it’s been a little bit too easy to raise money, VCs like to say. Any old startup could raise funding and look like they were doing a good job. The downturn is now testing those businesses’ mettle — and only the strongest ones will survive.
But it’s also testing their investors.
Earlier this month Seedcamp, which has given its investors top-decile returns, raised its sixth fund. Most of its backers were more than happy to reinvest — 80% of them, to be exact.
Not all VCs — even those several funds in — have been so savvy, one smug Seedcamp backer told me over drinks last week. They’re stuck with portfolio companies worth a whole lot less than they were two years ago, and facing a hard sell when they next go to LPs asking for more money before they’ve returned much (or any). Hence we’ve seen a few funds shopping secondary stakes around so they can rustle up some cash to give back to LPs.
LPs also have less capital to deploy. Some who deployed too aggressively in recent years are saying they can’t make another commitment until 2024, one top-tier fund partner who has just started fundraising told Sifted recently. They need VCs to deliver returns to recycle into the ecosystem — and aren’t letting them forget it. 45% of VCs responding to a recent survey said their LPs were pressuring them to find exits.
This is, of course, not fantastic for startups. Founders are taking calls with VCs who don’t actually have capital to invest. One later-stage investor told Sifted last week that they hadn’t done a new deal since last June. Startups relying on their early-stage VCs to follow on in subsequent rounds might realise the coffers are empty. And everything is just taking longer (unless, of course, you’re in generative AI).
This testing time will likely make better money managers out of Europe’s venture ecosystem. But when the tide comes back in, there won’t be so many in the water.
— Amy Lewin, editor