Introduction

5 Key VC Trends and what you can do as a GP

1. Increased Scrutiny and Longer Fundraising Cycles

Building on last years’ experiences, the meticulous due diligence processes by LPs, necessitated by an ever-more complex investment landscape, continue to define institutional LP investment cycles. This thorough vetting process, while ensuring alignment with an ever-growing complexity of strategic European-level mandates further extends fundraising cycles. The keyword here is “growing complexity of European-level mandates”. It’s not just deeper financial scrutiny, faced with increased capital needs of the VC ecosystem and layers of increased mandate complexity, institutional LPs take longer to screen each VC to find a good match. 

What VCs can do:

It's like preparing for a marathon rather than a sprint. VCs can smooth out this process by being transparent from the get-go. Think of it as opening your playbook to LPs, detailing your financials, governance, and risk management up front. This not only speeds up due diligence but also builds trust. 

And, with the extended cycles, there’s an opportunity: the chance to forge deeper relationships with LPs. Regular, meaningful engagements can turn these lengthy processes into valuable opportunities for mutual understanding and alignment.

To enhance communication, a great practice is to leverage technology in terms of advanced analytics and digital platforms to efficiently manage and present data, facilitating a smoother due diligence process.

2. Preference for Experienced Teams

A demonstrated track record is more and more important to get LP funding, with LPs seeking further assurance from GPs in navigating market uncertainties and generating sustainable returns. This preference leans towards fund managers who not only have experience but also showcase adaptive strategies that align with emerging market demands, especially in current market conditions where adaptability and efficiency is key.

What VCs can do:

Here, it's all about leveraging your track record. If you’ve navigated downturns successfully or pivoted strategically in the past, these stories become gold. They’re proof of your resilience and savvy. For the newer managers, it doesn’t always have to be about the size of your portfolio. You can emphasise a relevant professional background and expertise on core aspects of your fund. For example, a founder experience in a past successful startup in developing decarbonisation technologies enhances your role in a new fund focused on climate tech investments, despite a lack of portfolio investments to date.

Demonstrating adaptive strategies is also key. Illustrating how your fund has evolved its strategies in response to market changes and how it plans to address future challenges.

3. Emphasis on ESG

Since 2020, ESG has transformed from being a nice buzzword to becoming a fundamental aspect of investment decision-making for institutional LPs in 2024. This shift has already begun to influence the types of ventures attracting funding, steering capital towards startups that demonstrate clear commitments to environmental sustainability, social responsibility, and governance excellence. We can easily see this focus by checking out where VC money went in 2023 (hint: Climate tech as 27% of all capital invested in 2023.)

What VCs can do:

The shift towards a deeper commitment to ESG principles is less of a trend and more of a tectonic shift. This means it might be a good idea to start embedding ESG considerations into every stage of your investment process and educating your team on its importance. 

This means adopting comprehensive ESG frameworks for investment screening and decision-making processes to align with LP expectation and investing in ESG training for your team to enhance their understanding and ability to evaluate ESG risks and opportunities.

And don’t just do it—show it. Develop clear, quantifiable metrics to demonstrate your impact, making your commitment visible and measurable.

This brings us to the next point.

4. Rise of Super Sectors

Last year has seen a rise in investments in deep tech and climate tech. These sectors represent not only the forefront of innovation but also crucial responses to global challenges such as climate change, energy transition and sustainable development. The investment in these sectors is expected to be driven by a combination of technological breakthroughs, regulatory support, and a growing market demand for sustainable solutions. VCs and LPs will be on the lookout for startups that promise not only high returns but also long-term impact on societal well-being and environmental preservation.

What VCs can do:

This might sound like an invitation to do an opportunistic sector pivot, it doesn’t have to be. (And in many cases, that can be more detrimental to the overall integrity of your fund). Integrating deep tech into your investment considerations doesn’t have to be a black box nor a shift without foresight.

If you are lacking a substantial technological component to your expertise and want to consider possibilities to adopt hard tech, you have a few options here:

You can consider forming strategic partnerships with sector-specific funds to leverage expertise and networks, as well as building connections with academic and research institutions to access both new ideas and talent. In the meantime, it’s always good practice to continuously monitor technological advancements and regulatory changes to identify emerging opportunities.

5. Diversity in Leadership

Institutional LPs have already begun to seek VCs with a focus on diversity and inclusion;particularly on supporting female-led and ethnically diverse teams. Again, this is no longer a “cool trend” and so much more than a top-down policy initiative but rather a strategic imperative recognising the value of diverse perspectives in driving innovation. 

As Bill Gross from Idealab implies in his 25 lessons learned: diversity brings a variety of thought, perspective and skills that help build complementary teams. LPs and VCs are expected to set more concrete targets and benchmarks for diversity within their portfolios. This dynamic will likely catalyze a broader cultural shift within the VC ecosystem, promoting practices that ensure equity and inclusivity at all levels of operation.

What VCs can do:

Crafting a more inclusive and diverse team can open doors to untapped potential. It’s about building a VC ecosystem that reflects the world it’s investing in.

By being more mindful and actively seeking out and engaging with diverse entrepreneurs you can also broaden your pool of potential investments as well as talent. In the meantime, another good best practice is tracking progress on diversity goals and sharing these findings with your broad network and LPs to ensure accountability and continuous improvement.

The Verdict

As we chart the course into 2024, GPs within the European venture capital landscape are presented with an unparalleled opportunity to redefine their role and impact in the ecosystem. Beyond securing LP capital,  these evolving trends offer a call for GPs to embrace change and step up as active, impactful agents in the value chain. 

This shift is not just about adapting to meet LP expectations but about seizing the moment to enhance strategic foresight, operational efficiency and societal impact. By integrating these dynamics into their operational ethos, VC firms enhance their ability to navigate turbulent waters of 2024 and beyond, while both opening up more fundraising opportunities and contributing to a vibrant and forward-looking ecosystem.

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