The last few months have been great for European Venture Capital. But is that all about the change?

n their quarterly update about new European venture capital funds, impact investor Stefano Bernardi and Yannick Roux of Semantic Ventures write that it has been “the wildest quarter in a long time”, with “33 new European funds closing almost €3bn in fresh new capital”.

That might sound a bit surprising in the context of COVID-19. Who would have thought that limited partners in European VC funds would be just as oddly bullish as US stock market investors given such a grim economic context? But what this all reflects, obviously, is more the optimistic mood of late 2019 than the apocalyptic one of 2020.

Indeed, there are reasons to think things will slow down in the future. One is that LPs will have their own wounds to lick. They’ll need to redeploy capital according to a multi-asset allocation strategy. In this context, it is likely that the tiny, marginal, and illiquid asset class that is venture capital will be rather low on the priority list, and so fund managers will have a much harder time raising money in the future than those who were lucky enough to close their new funds during the “wild” second quarter of 2020.

Another adverse trend is that there’s been a tendency to diversify a fund’s LP base from a geographic perspective over recent years, with more limited partners coming from abroad—including Asia and the US. But that trend could be reversed with what I call the “Great Fragmentation”. As we look to the East, the fast-growing rift between the Western world and China could lead outward-looking Chinese investors away from European VC funds. Further, as Danny Crichton writes in Venture Capital’s Red Flags, there’s now a backlash against Chinese money being invested in US startups. If the Huawei ban can be taken as a precedent, then the European tech ecosystem will soon start asking if it’s wise to keep taking money from LPs connected to the People’s Republic of China.

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