Superb dissection of the fee structure problem. The 2% management fee becoming the primary revenue stream rather than carry is such an underappreciated distortion, and I've seen this play out firsthand where European funds optimize for AUM growth instead of returns. The insight about how government LPs evaluate deployment over performance creates this weird environmetn where bad capital allocators actually have longer careers than in any other asset class. What's nuts is that hedge fund managers with way better risk managment skills and daily accountability make less than VCs who might not see a real exit for a decade.
Yes. Absolutely. It’s wild! Anyway I don’t think it’ll be a problem for too long. I’m very bearish on the asset class. I would say it’s about to wind down, but then… never underestimate the ability of the EU governments to keep a bad thing going! 🫣
In Israel, there are state funds to invest in startup companies, but they must be matched by private funds. Seems an easy way to impose some market discipline.
There’s truth in this, but it’s incomplete. The problem isn’t “European VCs are bad investors”. It’s that Europe optimised VC for capital deployment, not capital selection.
Once incentives reward box-ticking, AUM growth, and political signalling, you get exactly this outcome: funds that survive independently of returns. That doesn’t make the individuals stupid. It makes the system rationally misaligned.
The real damage isn’t poor fund performance. It’s founders being trained, from Seed onward, to optimise for compliance and narrative instead of competitive brutality. By Series B, that mindset is very hard to unlearn.
Europe doesn’t lack talent or ambition. It lacks investor incentives that punish being wrong. Until that changes, the ceiling stays structural.
Hi Susan, thanks for the comment. Not sure if you read the piece or not, but what you have stated is in fact my core claim, nearly verbatim… so I suppose we are aligned!
Astute observations but the interesting part is that you still need some private money to close and it repeatedly backs same GPs who never hit DPI>1. How do you think this is possible?
I think it’s largely because institutions like pension funds have mandated allocation buckets. So they have to deploy capital into “venture,” even if returns are shit! Hence $$$ concentrates in the “least bad”, most acceptable GPs rather than genuinely good performers?? I kind of addressed this in the last piece on VC. Also, yes European VCs are at a 10yr low. But the industry writ large is facing extinction for similar reasons (no returns!)
Well... "coming to an end" - a fund is a ~10 year commitment. So even if the EU stopped investing today (which, given their multi-billion euro announcement into a single investor last week is unlikely), the gravy train will continue for at least a decade! ha.
Just gold. Thanks 🙏🏻
Thanks for reading, Miguel!
Superb dissection of the fee structure problem. The 2% management fee becoming the primary revenue stream rather than carry is such an underappreciated distortion, and I've seen this play out firsthand where European funds optimize for AUM growth instead of returns. The insight about how government LPs evaluate deployment over performance creates this weird environmetn where bad capital allocators actually have longer careers than in any other asset class. What's nuts is that hedge fund managers with way better risk managment skills and daily accountability make less than VCs who might not see a real exit for a decade.
Yes. Absolutely. It’s wild! Anyway I don’t think it’ll be a problem for too long. I’m very bearish on the asset class. I would say it’s about to wind down, but then… never underestimate the ability of the EU governments to keep a bad thing going! 🫣
In Israel, there are state funds to invest in startup companies, but they must be matched by private funds. Seems an easy way to impose some market discipline.
Sobering… great read!
Angel investor here.
There’s truth in this, but it’s incomplete. The problem isn’t “European VCs are bad investors”. It’s that Europe optimised VC for capital deployment, not capital selection.
Once incentives reward box-ticking, AUM growth, and political signalling, you get exactly this outcome: funds that survive independently of returns. That doesn’t make the individuals stupid. It makes the system rationally misaligned.
The real damage isn’t poor fund performance. It’s founders being trained, from Seed onward, to optimise for compliance and narrative instead of competitive brutality. By Series B, that mindset is very hard to unlearn.
Europe doesn’t lack talent or ambition. It lacks investor incentives that punish being wrong. Until that changes, the ceiling stays structural.
Hi Susan, thanks for the comment. Not sure if you read the piece or not, but what you have stated is in fact my core claim, nearly verbatim… so I suppose we are aligned!
I did yes. It was a comment more for readers than for you! Nice to be aligned!
Astute observations but the interesting part is that you still need some private money to close and it repeatedly backs same GPs who never hit DPI>1. How do you think this is possible?
I think it’s largely because institutions like pension funds have mandated allocation buckets. So they have to deploy capital into “venture,” even if returns are shit! Hence $$$ concentrates in the “least bad”, most acceptable GPs rather than genuinely good performers?? I kind of addressed this in the last piece on VC. Also, yes European VCs are at a 10yr low. But the industry writ large is facing extinction for similar reasons (no returns!)
Also quite telling is the current EU VC fundraising statistics pointing to a 10 year low. That narrative milking sees to be coming to an end.
Well... "coming to an end" - a fund is a ~10 year commitment. So even if the EU stopped investing today (which, given their multi-billion euro announcement into a single investor last week is unlikely), the gravy train will continue for at least a decade! ha.