Being on the buy and sell side in the innovation ecosystems of EMEA, you really start to understand a key thing. And it is how risk management kills the ecosystem.
To understand this, look at the numbers. How many EMEA VC partners have a CFA, come from an asset management or quant background or from mega PE firms? Yeah, probably 0. So how do they understand LP requirements from Institutionals, Family offices and the alike? Well, they don’t. Young guns are particularly vulnerable : they just don’t raise institutional or family office money. Period. And there is basically no endowment and pension system as there is in the US which might be fed from university connections and that get a new guy some money from these more risk-friendly LPs. Then having idiotic LPs, not knowing how to manage LPs, also rarely making a 1000x exit – if you do, you join a US VC -, you are likely understanding 10% of the global capital game. Chances are if you are new, you make a decent 0.8x on your portfolio or you do some weird investments that don’t really build a logo wall, and you are living a VC life of obsoletion and oblivion. That’s 98% of what’s out there. because all are obsessed with their tax statues, everyone does passive majority investments, also not adding to the whole thing. And by holding okayish portfolios in an okayish region with okayish LPs, it’s hard to hit it big. That kills the carried interest incentive and the best partners also leave the region. Leaving us with maybe 0.01% partners in VC firms that have what it takes to run decent portfolios. But they still have an okayish LP base and due to the entire ecosystem working terrible, the opportunities they hunt are difficult and medium attractive.
That all could be turned around if Partners in VC funds did their CFAs, hired more top 20 AuM asset management risk guys and would at least try to go a blackrock way of disciplined quantitative risk management. They could even outperform if they step up – given that they have nothing to lose – by leading data-driven investment strategies and they become savvy enough to run 500 million to 5 billion funds instead of 50 – 150 million ones. Because then you can start focusing on investing fully diversified on risk and generating alpha – non corrolating with market returns – return strategies, which would pull in more institutional money and then would help them to use their management fee share to built out their quantitative and data driven strategies. But even then, one fund and partnership can’t kill it. But the network among those guys to pursue shared interests is lower due to educational and career backgrounds different far stronger than in the us where VCs hire from a fairly lowly diversified recruitment pool from 5 to 20 institutions. So cross-partnership syndication on alpha genreneration to negotiate higher management fees against the existing LP interest won’t happen. And money spent on networking and really focusing on value adding activities for sales and hiring doesn’t really pull through.
It’s a devious cycle. And it starts by all those guys not getting the risk based approach to investment that large LPs are taking. And probably is why LP fund managers still rather lose 500 million on a PE fund of funds investment than losing 5 million on a VC FoF investment.
Just my 2 cents.