Research

The Emerging European VC Landscape: A Changing Economy of Fund Formation

The traditional hierarchy of venture capital is undergoing a fundamental shift. Insights from a recent Women in VC/PE conference reveal a dynamic industry where emerging fund managers are finding unprecedented opportunities, while established funds struggle to maintain their historical advantages. The conversation underscores a transition: alignment and specialization are increasingly more valuable than track record and platform scale.

The Emerging Manager Advantage

The opportunity for new managers has never been clearer. Established funds have become institutionalized, often leading to a misalignment with LP interests. Their large-scale fee structures reflect comfort, not hunger. Investment committees move slowly, and portfolio companies compete for attention across vast investment lists. As one LP noted, “Some of those entities aren’t the same as the ones you invested in 10-15 years ago that made you great returns,” suggesting a structural evolution that may no longer benefit performance.

Emerging managers offer a contrasting value proposition:

• Alignment and Drive: They are hungrier, more focused, and often better aligned with LP interests through higher personal investment in the fund.
• Speed and Access: They move faster on investment decisions and can access unique deals that larger, generalist funds might overlook.
• Expertise: They provide portfolio companies with more attention and specialized domain expertise.

Structural Barriers to First-Time Fundraising

Despite the strong value proposition, first-time fund formation remains challenging:

• LPA Complexity: Term negotiation is a major hurdle, with many emerging managers lacking experience in the complexity of Limited Partnership Agreements (LPAs). The key advice: “Choose your anchor wisely,” as early LP terms often dictate the entire fund structure.
• The Anchor Dynamic: While anchor investors provide credibility, their terms can sometimes be unfavorable, making subsequent fundraising difficult. Lengthy negotiations with institutional anchors have been known to lock in terms that impede broader capital raising.
• The European Ecosystem: European managers face a smaller, less developed LP ecosystem compared to the US. While government support exists, it is not at the scale of US institutional capital, forcing many managers to look internationally, which adds significant complexity and travel.

Strategies and Economics: Leading the Renaissance

The European landscape, however, offers unique tailwinds for emerging managers:

• Specialized LP Support: Initiatives exist to support diverse and women-led teams, offering not just capital but also operational support and critical network access.
• Focus on Specialization: Successful first-time managers thrive by abandoning the generalist approach. They focus on specific sectors, geographies, or investment stages, building genuine expertise and differentiated deal flow.
  • Deep Tech: Managers with technical backgrounds are launching focused funds in areas like AI, climate technology, and biotech, using specialized knowledge to evaluate deals missed or undervalued by generalists.
  • Geographic Niche: Deep regional networks allow managers to access deal flow in underserved European markets, as established funds often concentrate only on major hubs like London or Berlin.

The economic model is also evolving beyond fund formation:

• Strained Traditional Model: The long-standing 2% management fee / 20% carry model is strained by increased operational complexity, including compliance, ESG reporting, and intensive portfolio support, while fees have stagnated.
• Innovative Fee Structures: Emerging managers are experimenting with new models, such as lower management fees paired with higher carry percentages, equity participation in management companies, and performance fees tied to specific milestones. These structures better align incentives but require more sophisticated LPs.
• Concentrated Portfolios: Lacking the capital for the traditional 20-30 investment “power law” strategy, EMs are building more concentrated portfolios. This approach requires deep operational expertise and hands-on support but can generate superior returns by focusing resources on the highest-potential investments.

The Evolving LP Partnership

LP attitudes toward first-time funds are becoming more sophisticated. Institutional investors are moving past a preference for established names and are developing robust frameworks for evaluating emerging managers. This due diligence focuses on:

• Future Potential: Assessing founder market fit, team composition, investment strategy, and operational capabilities rather than simply extrapolating from historical performance.
• Differentiation: Identifying exceptional opportunities based on competitive differentiation and market opportunity.

European venture capital appears uniquely suited for this emerging manager renaissance. The ecosystem values genuine expertise and relationships over pure scale, and a collaborative culture supports knowledge sharing. While the transition from an emerging to an established manager (fund II formation) remains a difficult test, those who succeed emerge with stronger LP relationships, proven operational excellence, and a position to lead the next evolution of sophisticated, post-institutional venture capital.