FOREVER NEW FRONTIERS

An emerging venture capital landscape

In private market investing, identifying skilled fund managers is a constant pursuit. Traditionally, Limited Partners (LPs) – the investors in these funds – have relied on past performance as a key indicator for future success. However, this approach can be limiting, especially when evaluating emerging managers who lack previous fund performance or track record. This is particularly relevant in Europe and the Nordics, where an estimated 90% of all fund managers are considered emerging, managing three funds or less.

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The challenge is amplified by the lengthy investment cycles typical in venture capital, often spanning a decade or more. Fund managers often face a problem: they need to raise money for new funds before their existing investments have fully matured and generated realized returns. A general partner (GP) might spend two years raising a new fund, four years investing the capital, and then another four to five years managing and exiting those investments. Consequently, when a manager is fundraising for their next vehicle, the performance of their prior fund is often based on unrealised valuations rather than actual cash returns. This can make it difficult for LPs to assess the managers skills and fund performance capabilities.  

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Past performance can't predict the future

The venture capital landscape is constantly evolving, and the successful managers of tomorrow may not be the same as those who thrived in the unique market conditions of the past decade. The "zero interest rate period" (ZIRP), characterized by low interest rates, quantitative easing, and a global pandemic, created an unusual environment that fostered unique success stories and strategies. However, as we move into a new economic era, past performance becomes less indicative of future success.

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While historical returns can provide valuable insights, they shouldn't be the sole predictor of future success. The innovation economy and the venture capital landscape are constantly evolving, and the tools used to evaluate potential investments, especially those led by emerging managers, must evolve alongside them.

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An LP Framework for fund managers assessment

The primary goal for LPs is to determine if a fund aligns with their risk/return objectives. By adopting a broader evaluation approach, encompassing various criteria beyond performance, the absence of a prior track record becomes less significant. Instead, LPs can focus on a comprehensive assessment of the people, thesis, strategy, process, and other key aspects of the fund under review.

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LPs are increasingly adopting a framework that considers a wider range of factors beyond historical performance. This approach evaluates the following nine key areas:

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1. Venture Understanding: LPs will seek fund managers who demonstrate a thorough understanding of the venture capital  market, encompassing fund management principles, investor relations, and the ability to to navigate the VC landscape and create value for portfolio companies and LPs. ‍

2. Investment Strategy and Market Fit: LPs will scrutinize the fund's investment thesis, target market, differentiation strategy, and alignment with current market opportunities, ensuring the strategy is coherent, relevant, and positioned for success in the existing market landscape.

3. Team: LPs assess the fund management team's expertise and experience, looking for technical and operational knowledge, fund management experience, complementary skills, and a history of successful collaboration. The team's ability to navigate the VC landscape and create value for portfolio companies is a crucial factor.

4. Track record: While first-time fund managers and some emerging managers may lack a direct fund performance and track record, LPs look for evidence of past success, such as prior fund performance, successful angel investments, or leadership roles in startups. LPs need to gain confidence on the team capacity to manage the fund and successfully execute on the strategy.

‍5. Deal Flow: LPs will evaluate the GP's ability to source high-potential investments through its network, partnerships, and unique strategies, assessing if the deal flow is robust enough to generate a consistent pipeline of quality deals and differentiate the fund in the market.‍

6. Portfolio: LPs will perform a comprehensive financial analysis to understand the fund's expected returns, fee structure, and risk management strategies. They also evaluate the fund model's realism and adherence to VC principles, ensuring the fund is financially sound and well-structured.

‍7. Differentiation: LPs will seek a clear and compelling unique value proposition for both founders and LPs. The GP should articulate their unique capabilities in buying, managing, and selling assets, as well as how they add value to portfolio companies to attract top-tier entrepreneurs.‍

8. LP-GP alignment: LPs value a significant personal investment from fund managers in the fund - skin in the game-, as it demonstrates alignment of interests and confidence in the strategy. LPs will also scrutinise the fairness of fee structures, carry splits, target returns, and capital call/distribution schedules to ensure interests are aligned.

9. ESG integration: LPs increasingly scrutinise a GP's approach to environmental, social, and governance (ESG) factors. This includes evaluating the extent to which ESG considerations are embedded in the fund's strategy, how ESG risks are identified and managed within investments, and the potential impact of ESG on overall fund performance.

The nine key areas highlighted here serve as a guide, not a rigid prescription. Each fund and manager is unique, and the diligence process should be tailored accordingly. There are no single "right" answers, but rather a search for consistency and alignment between the LP's goals and the GP's approach.

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Conclusion

The venture capital landscape is dynamic, and what constituted success in the past may not hold true in the future. Market conditions shift, new technologies emerge, and investor preferences evolve. Therefore, the ability to adapt and navigate these changes is crucial for both emerging and established managers going forward. 

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Under the new market conditions, anyone can win. By embracing a holistic approach that considers a wider range of factors, LPs can confidently consider investments in both emerging and established managers, ultimately leading to more informed investment decisions, a more diversified portfolio and more adapted strategies for the new market conditions.

The Need for a Circular Economy

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We live in a linear economy, where all world materials produced are ultimately wasted. Our current linear economy largely operates on a 'take-make-dispose' model, where materials are extracted, used, and then discarded as waste.

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As of today only 7.2% all the world materials are cycled back into the economy to be re-used, as highlighted by the annual Circularity Gap Report. And unfortunately the world is less circular every year, as consumer demand is increasing faster than our capacity to recycle and reuse resources. The fact that the world economy as of today is only 7% circular, means that more than 90% of materials we produce and consume are either wasted, lost or remain unavailable for reuse. Which in other words, it means that the globe almost exclusively rely on new (virgin) materials.

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The reliance on virgin materials puts immense pressure on Earth's finite resources and emphasizes the urgent need to transition to a circular economy. This transition involves rethinking product design, production processes, and consumption patterns to focus on eliminating waste, reusing materials, and regenerating natural systems.

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Circularity is not just essential for environmental sustainability but is also key for achieving net-zero emissions. While improving energy efficiency and adopting renewable energy sources are important, they address only 55% of global emissions. The remaining 45%, related to how we produce and consume products, requires a shift towards circular economic principles. And this is called the Circular Economy, based on the principles of:

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1. Eliminating Waste and Pollution: Reducing greenhouse gas emissions across the value chain.
2. Circulating Products and Materials: Retaining their embodied energy and value.
3. Regenerating Nature: Enhancing carbon sequestration in soil and products.

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The case for Circular investing

The circular economy represents a significant investment opportunity as a new market for resources recycling will be created. By 2040, the market size of the circular economy is expected to reach EUR 820 billion in annual revenues. This growth is driven by increasing demand for sustainable products and services, as well as the economic advantages of improved resource efficiency and waste reduction.

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The shift toward a circular economy involves four main strategies, each representing a substantial investment opportunity:

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1. Circular Business Models: Maximising the value derived from each product produced.
2. Material Efficiency: Reducing the amount of material required for production.
3. Circular Materials: Substituting new primary materials with recycled equivalents.
4. Residual Waste Management: Extracting maximum value from remaining waste.

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Investing in circular economy strategies not only supports environmental sustainability but also offers financial benefits. Companies embracing circularity are better positioned to adapt to changing market conditions, regulatory pressures, and consumer preferences, presenting attractive investment opportunities. Some of the benefits of circular investing include:

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1. ‍Reduced Default Risk: Circular companies typically have lower default risk on debt. Research from Bocconi University shows that for every 0.1 increase in a company’s circularity score, there is an 8.6% decrease in the one-year probability of default. This reduction is due to their enhanced resource efficiency and better preparedness for regulatory changes.‍
2. Higher Risk-Adjusted Returns: Circular companies often achieve higher risk-adjusted returns on their stocks. A 0.2 increase in a company’s circularity score is linked to an improved Sharpe Ratio, which indicates better returns for each unit of risk. This improvement is driven by greater resource efficiency, lower regulatory costs, and new market opportunities.‍
3. Capitalizing on Sustainability Trends: Circular companies are well-positioned to benefit from growing consumer and business demand for sustainable practices. This trend can lead to increased revenue and market share, providing investors with both financial gains and a positive impact on the environment.

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We are at the point of inflection

Several forces are propelling the economy toward a circular tipping point, creating a perfect timing for investors:

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1. ‍Policy and Regulation: Strong regulatory frameworks in the EU are pushing circularity forward. Major regulations include content quotas, product design regulations, disclosure mandates, and waste treatment and handling rules.‍
2. Cost and CO2: Volatility in material prices and rising CO2 costs are incentivizing businesses to focus on recycling and material efficiency to manage costs and reduce their carbon footprint.‍
3. Consumer and Value Chain Pressure: Consumers and large organizations are exerting pressure on suppliers to meet CO2 targets and incorporate recycled content into their products.‍
4. Energy and Supply Security: Recycled materials require less energy and are locally available, mitigating geopolitical risks. Circularity supports reduced reliance on imported resources, builds resilient supply chains, and accesses new resources.‍
5. Technology Advancements: Rapid advancements in recycling technology, such as improved sorting technology, reprocessing methods, and digital tracing, are enhancing the efficiency of circular processes.‍
6. Digital Circular Business Models: The rise of digital platforms for reusing or sharing durable consumer products is facilitating the shift towards circular business models.

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How to Invest in Circularity

Investors interested in the circular economy can adopt the following approaches:

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1. ‍Exclude: Do not invest in companies with a negative circular impact—those that contribute significantly to waste and pollution or are misaligned with circular economy principles. This involves excluding companies, sectors, or practices based on circular economy criteria. Example: "Plastic-packaging startups" that produce single-use plastics which are difficult or impossible to recycle. Investing in these companies contradicts circular economy principles and perpetuates environmental waste.
2. ‍Promote: Invest in companies with a positive circular impact—those that do not directly operate a circular economy business model but implement circular economy principles within their business operations. Example: "Patagonia" is an example of a company that promotes circular economy principles through its Worn Wear program. While Patagonia’s core business model is not entirely circular, the company supports circularity by encouraging customers to repair their clothes and offering a trade-in service for used gear.
3. ‍Invest: Invest in companies based on circular economy business models, where revenue is generated through one or more of the 10R activities: recover, recycle, repurpose, remanufacture, refurbish, repair, reuse, reduce, rethink, and refuse. Example:"Too Good To Go" operates on a circular economy model by generating revenue from reselling surplus food from restaurants and stores at discounted prices. This model prevents food waste and engages in recovery and repurposing, aligning with circular economy principles.

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Conclusion

The transition to a circular economy is both an environmental necessity and a significant economic opportunity. Investors who integrate circular principles into their strategies can mitigate risks, maximize returns, and contribute to a more sustainable and resilient global economy. As Pete Seeger wisely noted, "If it can’t be reduced, reused, repaired, rebuilt, refurbished, resold, recycled, or composted, then it should be restricted, redesigned, or removed from production." Embracing circular investing aligns financial goals with environmental stewardship, paving the way for a sustainable use of resources and the potential of exponential returns.

The Ocean Economy in the world and in the Nordics

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The Ocean Economy is referred to as the sum of the economic activities of ocean-based industries, together with the assets, goods and services provided by marine ecosystems.The Ocean covers 70% of our planet and we rely on it for food, energy and water. In the global economy, the Ocean Economy contributes to €1.5 trillion of global economic output, with projections indicating an increase to €3 trillion by 2030.

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In the Nordic region, the Ocean Economy accounts for an average of 9% of GDP and represents an estimated 1.5% of the global Ocean Economy's GDP. It generates an annual turnover of approximately €120 billion for the region's economy. While the Ocean Economy is vital across all Nordic countries, it is particularly crucial for nations like Norway and Iceland, where it represents 18% and 13% of their GDP, respectively.

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The decade of the Ocean

The UN has declared 2021-2030 as the Decade of the Ocean, initiating a global effort to address key oceanic challenges, such as maritime pollution, biodiversity degradation, and unsustainable fisheries, among others.

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"Life Below Water" is also the least funded of the UN's Sustainable Development Goals. It is estimated that €147 billion per year globally is needed to restore and maintain the health of our oceans. However, to date, only €21 billion is available, primarily from public investments, leaving a funding gap of €126 billion still to be addressed.

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The Ocean Vision for 2030 aims to accelerate the development of new and innovative ocean solutions that can help achieve clean and healthy oceans, thereby fostering a more vibrant and productive Ocean Economy. The goal is to promote the development of cutting-edge ocean technologies and innovations, as well as to stimulate private capital markets that can support the growth of companies in this sector.

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The Nordic opportunity

The Nordic region, with its long history of ocean innovation, a well-developed Ocean Economy sector, and deep expertise in key industries (such as aquaculture, offshore energy, maritime transportation, and marine biotechnology), coupled with a strong commitment to sustainable ocean practices, is uniquely positioned to lead the development and acceleration of sustainable ocean solutions. In other words, the Nordics have the opportunity to leverage their ocean expertise and the strengths of their Ocean Economy companies to play a pivotal role in shaping the Decade of the Ocean.

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To achieve this, it is crucial to support the development of both new and existing ocean solutions in the Nordic region. But it is equally important to encourage investors of all types to explore and invest in these solutions, in order to enable more innovative technologies to be developed, brought to market, and effectively solve some of the major ocean challenges. 

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We believe the Ocean Economy is one of the most promising emerging sectors in the Nordic region, offering a unique and compelling investment opportunity for both Nordic and international investors. However, a coordinated effort is necessary to clearly articulate its appeal and attract more private capital into this space.

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This project aims to set the foundations for more investors to understand and seize the Nordic Ocean Opportunity. 

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About the project

The NOOP is a Nordic initiative to help close the funding gap in the Nordic Ocean Economy and channel more private capital into Nordic ocean solutions by researching, highlighting and promoting the Nordic Ocean Investment Opportunity. 

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The NOOP project is divided into three stages. In this initial first phase, the project will focus on the Ocean Economy in Scandinavia—specifically Norway, Sweden, and Denmark. In the next stage of the project, we will broaden our scope to include Finland and Iceland, further expanding our exploration of the Nordic Ocean Economy.

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This project will thoroughly examine this dynamic sector, assessing its potential, highlighting its strengths, and identifying key investment opportunities. We will also place a strong emphasis on uncovering potential funding gaps and addressing critical investment barriers, ultimately developing actionable recommendations to enhance private investment in the Nordic Ocean Economy.

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The project will culminate with the release of a comprehensive report, which will be distributed and promoted in the fall of 2024.

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The project's main goal is to mobilize more private capital to the Nordic Ocean Economy and Nordic ocean solutions. We aim to achieve this by:

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• Building the investment case: Researching the Nordic Ocean Economy to analyze current and required funding levels, growth potential, and specific investment opportunities within the region.
• Showcasing Nordic strengths: Highlighting the region's leading ocean sectors, innovations, and companies to demonstrate the unique value and potential of Nordic ocean solutions.
• Identifying main barriers: Identifying and addressing the investment barriers that currently hinder capital flows into the Nordic Ocean Economy.
• Developing actionable recommendations: Creating a roadmap with concrete steps for stakeholders to increase private investment in the Nordic Ocean Economy.
• Collaborating: Attracting and engaging more investors in the Nordic Ocean Economy while fostering collaboration within the Nordic ecosystem to support this emerging sector.

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The project partners

The Nordic Ocean Opportunity project group consists of 4 organizations:

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• Nordic Innovation
• Norway: FRONTTIER
• Denmark: the Danish Ocean Cluster, in cooperation with the Port of Hirtshals and the North Sea Science Park
• Sweden: TBC

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In later stages of the project, organizations from Finland and Iceland will also be added as a part of the consortium.

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Join us to explore the next great economic frontier in the Nordics. Join us to navigate the Nordic Ocean Opportunity.

Angel investing as unique type of private capital

Angel investing is a form of Private Equity, generally defined as capital invested in private companies in exchange for equity or ownership. Within the private equity landscape, angel investing is a type of strategy that differs from other private equity strategies in the maturity of the portfolio companies invested in. Typically young, start-up, or early stage businesses that are pre-revenue and pre-product and that have the potential to grow quickly. This is why business angels are a unique and vital component of the private capital markets, playing a vital role in the early stages of a company's lifecycle. 

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Angel investors are in essence private individuals who invest their own capital in startups, in contrast with venture capital funds and institutional investors, which manage and invest other investors' capital. 

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This distinction is what makes angel capital a unique type of private capital for founders and entrepreneurs. The fact that angel investors invest they own money often translates into:

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• Reduced bureaucracy and fewer investment criteria compared to traditional financial institutions, as they do not have what is called a "fiduciary responsibility". Fiduciary responsibility is the legal obligation to act in the best financial interests of another person or group, which comes with a set of governance and compliance policies and a subset of investment evaluation and reporting obligations. While professional angels do have a set of investment processes and criterias, they don’t have governance and compliance obligations which means they can make faster investment decisions faster and take more risks.
• More flexibility to decide how and where to invest. Unlike many institutional investors, business angels aren't bound by "investment mandates", essentially rulebooks dictating institutional investors what, where, and how an investor can invest their money. This includes specifying asset classes, sectors, geographies, risk tolerance, and return objectives. Institutional investors need to agree investment mandates with their investors beforehand and then they are legally bound by them. Again, since angels are investing their own money, they don’t need to pre-define where and how to invest, which means that they can invest in any opportunity they deem promising and that they are more agile to invest in new emerging trends, technologies or sectors.
• A hands-on approach and better alignment with founders. Precisely because they are investing their own money, they have what is called “skin in the game” and they are the first ones interested to see the company succeed. Because no one likes to lose money, angels are specially motivated to work closely with founders to help the company succeed and that gives them a much more active and hands-on approach compared to other investors. This often translates into a deeper involvement in the company, offering not just financial support, but also mentorship, strategic guidance, and industry connections. ‍

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With increased awareness of startup investment opportunities and improved access through networks, events, and platforms, more investors are venturing into private markets, particularly through direct investments in companies. This increase of interest and access, once primarily limited to institutional investors, marks a significant evolution in the investment landscape and promises to play an increasingly vital role in supporting European companies, helping them bring innovative products to market and solve some of the most pressing societal challenges in Europe and the world.

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The role of angels in the startup ecosystem

Angel investors are crucial for any startup ecosystem's health and development, and they are particularly vital in the European startup ecosystem, where access to early-stage funding can be challenging. Europe boasts exceptional talent, cutting-edge technologies, and groundbreaking research, yet often struggles to translate these advancements into market-ready solutions for end-users. Business angels play a pivotal role in bridging this gap, ensuring that European innovation reaches the market and secures further funding to scale. 

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Business angels' main role is to fill up the financial gap between bootstrapping and venture capital funding. In other words, they help early-stage companies overcome what is called the "valley of death." This "valley of death" refers to the critical period in a startup's life cycle when the company is developing its product or service but hasn't yet launched it to market. During this phase, costs are high as the company invests in research, development, and initial marketing efforts, while revenue is typically non-existent. This period of high costs and no revenue is only possible due to the infusion of early-stage capital, often provided by angel investors. This funding is specifically targeted to cover the expenses associated with product development and the subsequent go-to-market strategy, enabling the startup to reach potential customers and start generating revenue to be viable by itself. 

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Simply put, without this early-stage funding, many promising products and solutions would never make it to market, that is why this stage is referred to as the valley of death, because most startups don’t survive it. By filling this funding gap, angel investors provide a lifeline for promising startups, enabling them to develop their ideas, build prototypes, and reach key milestones that allow them to start generating revenue and attract further capital.

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Key numbers of the angel market in 2023

Based on the reports provided by organisations such as the Center for Venture Research (CVR), Nordic Angels, European Commission, EBAN and Eurostats, we have summarized some of the key numbers of the European angel market in 2023 to paint the picture of the current state of the Angel market in Europe.

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• Total investments: In 2023 a total of €17.4 billion was invested in European startups by angel investors, down from €20.25 billion in 2022, a 16.4% decrease compared to the previous year.
• Number of deals: The number of angel deals reached 54,735 in 2023, down from 62,345  in 2022, a 12.2% decline compared to the previous year.
• Active angel investors: The number of active angel investors in Europe reached 422,350 in 2023, a significant increase of 14.8% compared to 2022.
• Nationalities of these investors: UK hosts the largest number of active angel investors in Europe, estimated to be a total of 10,000 angel investors.This is followed by Germany, with 7,500 active investors, France, with 5,500 active investors, Spain with 3,800 and Turkey with 1,500 active angel investors.
• ‍Average deal size: The average angel deal size in 2023 was €318,120, down by 4.8% compared to 2022. 
• Average ticket size by angel: The ticket sizes by angel investor can range between €10,000 and €200,000 however the average angel ticket size in Europe is estimated to be below €25,000.
• Sector trends: HealthTech and B2B SaaS emerged as the dominant sectors, each securing 25% of total angel investments in European startups, followed by ‍FinTech (12.9%) and Energy Tech (12.1%), Retail (5.7%) and BioTech (5.1%)
• Stage focus: From all angel investments in Europe 41% were directed towards seed and start-up stage companies, 35% to early stage and 18% to the expansion stage, this last one down from 35% in 2022.

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The contraction in terms of total investments, total number of deals and average deal sizes in the European angel market has followed the same trends as the overall Venture market, which experienced in 2023 what has been called the “Great correction” or great pullback. After a decade of zero interest rates, COVID and the war in Ukraine, increased inflation and increased prices of commodities has made money more expensive, and therefore less available in the private markets. 

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What is positive to see from these numbers is a strong increase of new angels in the European market indicating a growing interest of more investors into startup investing as an asset class. This increased engagement is with no doubt the result of over two decades of development in the European startup and investor ecosystem, leading to heightened awareness of angel investing as a viable and attractive asset class. The trend also reflects a notable shift, with more individuals choosing to invest directly in early-stage companies rather than relying solely on traditional financial institutions.

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Key Challenges Facing Angel Investors

What are the main challenges European business angels are facing? Below we have summarized some of the most important and more raised by the angel community:

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• Regulatory fragmentation. A significant challenge lies in the fragmented regulatory environment across European countries. In contrast with the US angel market, in Europe each country has unique rules and tax systems that create complexities for cross-border investments. This fragmentation contributes to slower investment decision making processes, more expensive due diligence processes and a general perception of increased risk and uncertainty for investors unfamiliar with the diverse legal frameworks.
• Increased competition. More types of investors, including large institutional investors as well as international investors are increasingly venturing into pre-seed and seed stages in Europe, traditionally the domain of angel investors. This influx of capital means an increased competition for the best deals and increased valuations at the very early stages.
• Increased specialization. More types of investors and an increased level of competition are making more investors choose to narrow their scope and increase their levels of specialization to be able to spot the best opportunities earlier and to provide a more compelling value proposition to founders to win the deal. An increasing number of specializations in the venture industry is forcing many investors, including angels, to re-define what is their unique value proposition and which investment opportunities they should focus on.  
• Time commitment. The time-intensive nature of angel investing presents another significant challenge. Proper startup investing is a full time job. Thoroughly evaluating numerous startups, conducting comprehensive due diligence, and providing ongoing mentorship and support to portfolio companies demands a substantial time commitment that many individuals may find difficult to accommodate alongside other professional or personal obligations. Combined with an increased competition and specialization of the European venture landscape, many angel investors risk to be outcompeted by full time investors.
• Bargain power. Finally, angel investors because they don’t represent investment firms, have recognizable names or brands and do not provide large sums of capital sometimes face challenges in terms of bargaining power compared to established venture capital firms, limiting their capacity to lead rounds or negotiate the deal.

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Our recommendations to address these challenges

‍While non-exhaustive, here are some of our recommendations for European business angels and the European angel market to address some of these key challenges limiting more angel investments in Europe:

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• Harmonized regulations and incentives: European countries should recognize the vital role business angels play in driving innovation and economic development. Additionally, the EU could harmonize shareholder regulations and investment procedures for private companies, codifying simple and universally recognisable processes and creating a level playing field for all investors. By implementing angel-friendly policies, tax incentives, and harmonizing regulations across the EU, governments can create a more attractive and accessible investment environment for angel investors. ‍‍
• ‍Targeted investment strategies: With limited time and increased competition, angel investors can adopt more focused and intentional investment strategies aligned with their goals and expected outcomes, rather than adopting a broad, opportunistic approach. By concentrating on specific sectors, stages, or geographies where they have expertise and passion, angels can optimize their time and resources while maximizing their impact on the startups they support. ‍
• Professionalization and differentiation: Angel investors can learn from the practices of institutional investors and adopt a more professional approach. By clearly defining their investment thesis, articulating their unique value proposition, and building a strong track record and brand in their ecosystem, angels can enhance their credibility, differentiate themselves from the competition, and gain access to high-quality deal flow. By adopting a more "institutional" approach to startup investing, they can also increase their bargaining power and gain access to top-tier opportunities.‍
• Leveraging Indirect Investments and co-investments: For angel investors with limited time or resources, collaboration and co-investment can be a valuable strategy. By partnering with other angel investors, joining angel groups or networks, or investing alongside experienced venture capital firms, angels can leverage collective expertise, diversify their portfolios, and access a wider range of investment opportunities. They can also consider allocating a portion of their capital to funds aligned with their investment objectives, thus outsourcing some of the time-consuming tasks associated with sourcing, due diligence and portfolio management responsibilities.

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The Future of European Angel Investing

The European angel investment landscape is still in its early days, demonstrating significant growth potential and signaling a promising journey ahead. As of today only 0.09% of the EU population actively participated as angel investors, representing less than 0.02% of the estimated total wealth in the EU.  

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We predict that many new actors will enter the European angel market, and that this will evolve into a thriving industry in itself, as more investors choose to diversify their portfolio with private equity investments, either by doing it directly themselves, or by investing through funds. The trajectory of European angel investing suggests continued growth in the number of active investors and the amount of capital deployed in startups and an overall increase of the private equity activity in Europe. We are bullish about the investment opportunities in European ventures and the future of European Angel Investing. We cannot wait for the future of European Angel Investing to arrive.

Direct vs Indirect investing

Venture Capital is a form of private investment that focuses on financing early-stage, high potential, high-growth startups. Venture Capital is also commonly  referred to as “risk capital”. According to various estimates, between 75% and 94% of startups fail, indicating to investors that losing money is an intrinsic part of venture investing. Luckily, there exist several strategies for Venture Investing providing investors with different flavours for potential risks and returns.

Let's start with the basics. The two primary approaches to venture capital investing are direct and indirect investment. 

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Direct Investment: In direct investing, you personally select and invest directly in a startup company, becoming a direct owner. This hands-on approach provides greater control throughout the whole investment process, from decision making to portfolio management and exit, and the potential for astronomical returns (100x or more) if the chosen company skyrockets in value.

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Indirect Investment: Indirect investment involves investing in an investment fund by a fund manager. The manager is then entrusted with the capital to select and invest in companies on behalf of the fund's investors, who become indirect owners through their stake in the fund. When investing indirectly, investors lose control in the investment decision making and process, however this diversified approach opens access to deals that individual investors might miss. In venture investing, there are two main ways to invest indirectly:

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1. Investing in Venture Capital funds: Investing in a VC fund grants exposure to a portfolio of typically 20-30 startups, selected and managed by dedicated fund managers over the fund's lifespan. 
2. Investing in Fund of Funds (FoF): FoFs invest in multiple VC funds, offering broad diversification in across 10-15 funds and, ultimately, 300-500 companies

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Strategies for Venture Investing

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The world of venture investing offers a variety of strategies, each with its own balance of risk and potential return. Here's a breakdown of the five primary approaches:

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1. Direct Investing (Self-Sourcing): The highest risk, highest reward option. While the potential for massive returns exists, so does the likelihood of a total loss. This requires extensive time, expertise, and deal flow. In direct investing, you might be lucky and generate with one company 100x or more your money, but research on venture outcomes show that you are more likely to get a 0x.  
2. Investing Alongside a Sponsor: This is a more tempered approach to direct investing. You partner with a sponsor who brings promising deals to the table to invest alongside them. These sponsors could be anything from co-investors such as angels and VCs, to  investment managers such as Multi-Family Office. By leveraging the expertise and network of active and professional investors, you can access carefully vetted opportunities and reduce the burden of due diligence.
3. Investing in Emerging Managers: This strategy offers perhaps the greatest potential within indirect venture investing, but also carries the most inherent risk. In this strategy you invest in new managers or emerging managers, characterised for managing three funds or less. These newer VC funds often focus on early-stage companies and tend to be more aligned with LP interests due to their focus on performance-based carry rather than management fees and in general are hungrier to prove themselves. However, their lack of a long track record increases the risk of underperformance or even fund failure. 
4. Investing in Established Managers: This is a lower-risk approach in indirect investing where you invest in funds with a proven history of generating returns. While the potential returns may be more modest compared to emerging managers, the likelihood of losing your entire investment is significantly reduced. Established managers typically invest in later-stage companies with more predictable growth trajectories and have been able to consistently prove capacity to manage and return investor capital. 
5. Investing in a Fund of Funds (FoF): The most diversified and lowest-risk strategy. FoFs invest in multiple VC funds, providing exposure to a broad range of startups across various stages and sectors. This diversification aims for consistent, moderate returns over the long term.This is the most diversified and conservative venture investing strategy. FoFs invest in multiple VC funds, providing exposure to a broad range of startups across various stages and sectors. This diversification minimizes risk and aims for consistent, moderate returns in the range of 2x-2.5x net.

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Considerations for Choosing an Investment Approach

When choosing between direct and indirect venture investing, several key factors should guide your decision:

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• ‍Time Commitment: Direct investing demands a substantial time commitment. Are you prepared to dedicate countless hours to sourcing, evaluating, and conducting due diligence on potential deals? Do you have the bandwidth to meet with hundreds of potential managers or thousands of potential founders each year ? Professional venture investing often involves a thorough diligence process that can take 40-60 hours or more per deal. If you are not able to do venture investments full time, it is wise to outsource the sourcing, evaluation and DD to more dedicated investors. ‍
• Risk Tolerance: Venture capital is inherently high-risk, and it's essential to assess your risk tolerance realistically. As highlighted in research, the majority of venture-backed companies fail to return invested capital, with only a small percentage achieving significant returns. Before diving into direct investments, ask yourself: How much capital am I truly comfortable potentially losing?‍
• Experience: Your experience level in venture investing plays a significant role. If you're new to the asset class, it's wise to start with indirect investing. This allows you to learn the ropes, gain exposure to a diversified portfolio, and benefit from the expertise of active and full time fund managers. As you gain knowledge and confidence, you can gradually transition into direct investments if desired.

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These three considerations are interconnected. A high-risk tolerance might make direct investing more appealing, but only if you have the time and experience to navigate the complexities involved. Conversely, if you lack the time or experience, indirect investing offers a more manageable entry point with lower risk.

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SUMMARY 

Choosing how to invest in the venture capital landscape is a decision with significant implications. Direct investment offers control and the potential for exceptional returns, but it demands extensive time, expertise, and risk tolerance. Indirect investment, through VC funds or Fund of Funds, provides diversification and access to professional management, but at the cost of reduced control and additional fees.

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The following summarises the key pros and cons of each approach, along with essential factors to consider when making your investment decision:

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Direct Investment

• Pros:
  • Greater control over investment decisions.
  • Potential for outsized returns (100x or more) if a single company becomes a massive success.
  • Direct involvement in a startup's growth and development.
• Cons:
  • Requires significant time and effort for deal sourcing and due diligence.
  • Higher risk due to lack of diversification.
  • Limited access to deals compared to larger funds.

Indirect Investment

• Pros:
  • Access to a wider range of deals and diversified portfolio.
  • Expertise of fund managers in sourcing, evaluating, and managing investments.
  • Potential for strong returns through diversified exposure to multiple successful companies.
• Cons:
  • Management fees and carried interest reduce overall returns.
  • Less control over individual investment decisions.

Why should you care?

Sustainable investing, simply put, means investing in companies and projects that prioritize environmental, social, and governance (ESG) factors alongside financial returns. Unlike philanthropic investing, sustainable investing is financially driven, requiring competitive returns in line with industry standards, but with the added goal of positive ESG outcomes.

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The focus on sustainable finance has surged in recent years, propelled by growing awareness of global challenges, increasing pressure from investors and regulators alike. New regulations like the SFDR (Sustainable Finance Disclosure Regulation) in Europe have significantly accelerated this trend. The SFDR aims to increase transparency and prevent "greenwashing" by requiring asset managers and other financial institutions to disclose how they incorporate sustainability into their investment decisions and the potential impact of their investments on the environment and society. This has led to greater scrutiny of ESG claims and a heightened focus on the impact of investments.

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Simultaneously, Limited Partners (LPs), are placing increasing emphasis on ESG, impact, and climate investing in their own strategies and assessments of fund managers. Furthermore, LPs with mandates focused on these areas are raising the bar, demanding demonstrable expertise and track records in delivering not only financial returns but also measurable positive impact. Some are even taking the drastic step of withholding investments in subsequent funds from managers who fail to meet their standards.

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Understanding what is sustainable investing, the different strategies and some of the main subcategories is relevant for any investor -both LPs and GPs, both emerging and established managers- but also to founders at every level of the funding ladder, as this is defining present and future capital flows and is prompting rapid shifts in investors investment priorities and investment decision-making processes.

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Two main approaches

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Sustainable investing offers two main approaches, each with distinct strategies for aligning investments with sustainability goals. Investors can approach sustainable investing in two main ways:

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1. Integrating Sustainability Principles: This approach involves incorporating environmental, social, and governance (ESG) factors into the traditional investment process at every stage. This means considering ESG performance alongside financial metrics when screening, evaluating, and making investment decisions. Three main strategies to do so:
   • Exclusion: Avoiding companies or sectors with negative ESG impacts, such as those involved in fossil fuels or with poor labor practices.
   • Promotion: Prioritizing companies that demonstrate strong ESG performance, such as those with robust environmental policies or a commitment to social responsibility.
   • Best-in-Class : Choosing the top ESG performers within each sector, investing in companies that are leading the way in sustainability.

2. Investing Directly in Sustainability: This approach focuses on investments that directly address sustainability challenges and contribute to positive environmental or social outcomes. This includes:
   • Thematic Investing: Targeting specific sectors or themes related to sustainability, such as renewable energy, clean technology, or sustainable agriculture. This allows investors to focus on areas they believe will have a significant impact on the future.
   • Impact Investing: Investing in companies or projects that aim to solve specific social or environmental problems while also generating financial returns. This could involve supporting initiatives like affordable housing, clean water access, or education in underserved communities.

Both approaches and subset of strategies offer distinct ways to align investments with values and contribute to a more sustainable future. Investors can choose the approach or combination of strategies that best aligns with their individual goals and priorities.

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RI vs ESG vs Impact vs Climate Investing

While the terms "sustainable," "ESG," "impact," and "climate" investing are often used interchangeably, they represent distinct approaches with varying implications for investment decisions, risk assessment, and impact measurement. Understanding the difference between the sub-categories in sustainable investing is crucial for investors seeking to align their portfolios with their values and effectively engage with founders and Limited Partners (LPs) who operate within specific niches of sustainable finance.

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Let's break down and explain the differences between some of the main subcategories: Responsible Investing (RI), ESG Investing, Impact Investing, and Climate Investing.

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• Responsible Investing (RI): The foundation of sustainable investing, RI employs negative screening to exclude companies involved in harmful activities deemed harmful to society or the environment, such as weapons manufacturing or tobacco production. While RI aligns investments with ethical principles, it doesn't actively seek out solutions to global challenges.
  
  
• Environmental, Social, and Governance (ESG) Investing: Building upon RI, ESG investing takes a more comprehensive approach. It evaluates companies based on their environmental impact (e.g., carbon emissions), social responsibility (e.g., labor practices), and governance structures (e.g., board diversity). By integrating ESG analysis into investment decisions, investors can identify potential risks and opportunities that traditional financial metrics may miss. ESG investments prioritize companies with strong ESG performance or those whose activities promote positive ESG practices.
  
  Example: Spotify, the Swedish music streaming giant, has made significant commitments to reduce its carbon footprint and promote diversity and inclusion within its workforce.
  
  
• Impact Investing: A more targeted approach within ESG, impact investing actively seeks investments in companies or projects that directly address social or environmental challenges. The goal is to generate measurable positive impact alongside financial returns, often focusing on directly solving global issues like poverty, inequality, and environmental degradation.
  
  Example: Too Good To Go, a Danish app, tackles food waste by enabling users to purchase surplus food from restaurants and stores at discounted prices.
  
  
• Climate Investing: A subset of impact investing, this approach specifically targets investments in companies and projects that address climate change, either by reducing greenhouse gas emissions (mitigation) or promoting adaptation to its effects.
  
  Example: Northvolt: A Swedish battery manufacturer focused on producing sustainable batteries for electric vehicles.
  
  

It's important to note that these subcategories are not always complementary and each of them require the development and implementation of different strategy and investment assessment processes. A company with strong ESG performance may not necessarily have a positive impact on a specific social or environmental issue, or the other way around. Take Tesla as an example: while it addresses climate change by promoting electric vehicles, the company faces criticism for its labor practices. Or take Patagonia: while conscious of the recycling and durability of their fabrics, the fashion company does not solve any global social, environmental or governance challenge. Not every ESG company can be considered an impact company, and certainly not every Impact company is an ESG positive company.

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How to get started

Start by clarifying what you hope to achieve through your investments. Are you focused on avoiding harm, promoting positive practices, tackling specific challenges, or addressing any specific global change? Identifying your priorities will help you choose the right approach.

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Based on your goals, select the sustainable investing strategy or subcategories that align with your values and objectives. From there, the next step is to effectively develop and adapt your investment strategy, focus, assessment processes, portfolio management approach, and returns measurement framework. This ensures that your investments have real, positive, and measurable environmental, social, or governance outcomes.

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Remember, even if a company is creating incredible solutions for carbon capture, it doesn't automatically mean they are best-in-class when it comes to ESG standards. Make sure each of your investment values and goals is integrated into your investment process and focus.

Why your VC firm needs an edge

The European venture capital landscape is booming, with the Nordics serving as a prime example. Only in the Nordics we have counted more than 100 active VC firms and an average of 20 new VC firms are being created yearly. Extrapolating these figures for the whole European region, we can roughly estimate these numbers to be at least tenfold. 

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In contrast to the mature US venture market, which has been operating for over half a century, Europe's venture ecosystem is still in its relative infancy, with roughly two decades of practice, indicating that we might be in the early stages of our venture ecosystem development and that many new managers are yet to come.  

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In this increasingly competitive landscape, a well-defined edge isn't just a nice-to-have; it's essential for survival and success. Without a clear understanding of your unique value proposition, you risk getting lost in the crowd, struggling to attract Limited Partners (LPs), and missing out on promising investment opportunities.

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Your edge is more than just having a talented team. It's about identifying and articulating the specific strengths, experiences, networks, and insights that set your firm apart. It's about crafting a compelling narrative that resonates with both LPs and entrepreneurs, a narrative that clearly demonstrates your ability to deliver exceptional value and outperform the competition.

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But defining your edge is just the beginning. The true test lies in your ability to defend and sustain it over time. As new VC firms enter the market and conditions evolve, your edge must remain relevant, adaptable, and difficult to replicate. Your ability to protect and adapt your unique value proposition will determine your long-term success as a fund manager.

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The three pillars of your VC edge

To solidify your position in the European emerging VC landscape, consider these three fundamental pillars:

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1. Uniqueness: What makes your VC firm truly distinct? What unique combination of skills, experiences, networks, and insights sets you apart? Go beyond the obvious – your edge is more than just a talented team.‍

• ‍Key questions: What are your team's core strengths? What specialized knowledge or access do you have? What unique processes or methodologies do you employ? What sets your investment thesis and investment strategy apart?

2. Defensibility: How can you protect your unique value proposition from being replicated by competitors?

• ‍Key questions: Are your advantages rooted in proprietary technology, exclusive partnerships, or deep industry expertise that are difficult to replicate? How easy or difficult is it to replicate your unique value proposition (UVP)? How can you create barriers to entry for new firms seeking to emulate your approach?

3. Sustainability: Can your edge withstand the test of time? As the VC landscape evolves, will your value proposition remain relevant and attractive to both LPs and portfolio companies?

• ‍Key questions: How will you adapt your investment strategy as new VC firms enter the market and conditions change? What steps can you take to ensure your team's knowledge and expertise stay ahead of the curve? Are your unique insights enduring, or are they based on fleeting trends?

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Conclusion

Defining your edge isn't just an exercise in self-reflection for both emerging and established fund managers. It's a critical component of your fundraising strategy in the crowded European and Nordic VC market. By clearly articulating your superpower, unfair advantage, and unique insights specific to the region or sub-regions, and how you will be able to sustain it and defend it over time, you give LPs a compelling reason to invest in your fund.

The imperative reason

The venture capital and innovation ecosystem plays a pivotal role in shaping the products we consume, the solutions available to our problems and the health and performance of both the private markets and the economy of a country. 

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It is widely known that women are underrepresented in the Nordic and European venture and innovation ecosystem. Some key numbers supporting this statement.

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Across Europe: 

• Among VCs, only 20% of investment professionals are women:
  • At senior level, the figure falls to 10%
  •  At junior level, the figure improves to 34% 
• Among business angels, roughly only 10% are women
• Among founders, women led teams or teams with at least one female member, receive 10% of the total capital invested into startups. 

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The need to promote and support more women in Europe to become investors and entrepreneurs becomes, therefore, imperative.

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The 5 arguments in favour of gender balance in venture

Below we highlight the 5 key arguments on why we need more women investors and entrepreneurs in the venture and innovation ecosystem. 

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1. More women investors mean more investments in women-led startups:

• Women investors are twice as likely to invest in female-founded startups (Kauffman Fellows, 2020). This not only supports women entrepreneurs but also taps into a wider range of innovative ideas and solutions.

2. Diverse fund teams lead to higher performance and returns:

• Diverse teams outperform homogeneous ones. All-male funds or those with partners of the same ethnicity underperform by 20-30% on average (HBR Report).
  • Funds with partners from the same school underperform by 11%.
  • All-male funds underperform by 20%.
  • Funds with partners of the same ethnicity underperform by 30%.
• The presence of women in senior fund management teams is correlated with higher returns: Each 10-point increase in the representation of women in senior management is associated with a 1.3% increase in IRR (European Women in VC, 2023).

3. More women investors and entrepreneurs accelerate the sustainability and the green transition:

• Women-led startups are 73% more likely to be considered impact companies, focusing on solving social and environmental challenges (Unconventional Ventures Report, 2021).
• By supporting new and existing women investors in the ecosystem we can accelerate the sustainability and green transition: More women investors lead to more investments in women-led startups, resulting in more successful sustainable companies and accelerating the green transition.

4. Gender diversity is becoming a mainstream investment criteria for investors of all kinds:

• More and more LPs are integrating gender diversity criteria in their investment decision and DD process. Institutional investors, pension funds and Family Offices are increasing their gender diversity requirements in order to invest in VC funds. 
• VC and fund managers, following LPs requirements, are increasing the gender diversity both at the GP level as well as at the portfolio level.

5. More women investors are essential for the role of venture in the market and in society:

• New investors, including women, are crucial for filling funding gaps in the market and ensuring promising startups receive the capital they need.
• Diversity of thought, skills, and strategy that comes with more women investors leads to greater innovation and a wider range of investment opportunities.
• Venture Capital shapes society, therefore it needs to be representative. Precisely because venture capital does so much to shape society, it should effectively represent the society it serves. 

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Two main European initiatives supporting women in Venture and Innovation

There are multiple initiatives supporting gender balance in the Nordic and European innovation landscape. Below we have highlighted the two main initiatives providing free support to emerging and evolving female professionals in the European venture and innovation landscape:

• EIT Supernovas, supporting women entrepreneurs, business angels and VCs at all levels of experience. Link
• EIF Gender Smart Equity Program, supporting women aspiring, emerging and established fund managers. Link‍

6 common LP mistakes

Alternatives such as PE and VC have become an increasingly attractive asset class for investors, driven by its strong historical performance, the extended time tech companies stay private, and the growing influence of technology in our daily lives. 

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Many LPs of all backgrounds and sizes are now adventuring themselves into this emerging asset class, however it is important to note that Venture investing is in effect complex and requires discipline, if the goal is to maximise returns. Limited Partners can easily stumble if they're not careful.  Here are some common mistakes we see:

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1 Going solo

Many LPs prefer to invest directly into companies that indirectly into funds, but there is a reason VC funds charge a fee. And that is that the tech landscape -in Europe, US, the world - is highly mature and very competitive and is getting more and more difficult to access and win the best deals. Partnering with the right VC funds, in the form of committing to their fund, co-investing or a combination of both can provide access to better deal flow and valuable expertise than trying to source direct deals alone.

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2 Lack of a defined Strategy

Many LPs prefer to invest in managers that they know. While that is a general good practice, it can sometimes translate into under diversification and investments into funds without a clear understanding of how they fit into the LP overall portfolio strategy. Instead, LPs should approach VC investing with a clear strategy and a well-defined thesis to be able to invest in the best performing funds of each category and in funds with a strategic fit. LPs should diversify across managers, stages, and vintages to capture a wider range of opportunities, mitigate risk and achieve sustainable returns. 

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3 Ignoring the Power Law

The joke in the venture industry says that “Venture is not normal”. This is, Venture capital doesn't follow a normal distribution. Instead, it follows the Power Law distribution, meaning that  a small percentage of investments drive the majority of returns. This principle applies to both individual companies and VC funds themselves. Unfortunately, most VC funds will not return the committed capital (1x), so LPs should understand and be very aware of this dynamic and how it impacts their portfolio and liquidity. 

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4 Overrating past performance or experience

Track records as well as successful exits or entrepreneurship stories provide a glimpse into a manager's abilities and potential, but they don't guarantee future success. LPs should look beyond the LinkedIn followers or social media presence of the managers and instead evaluate the underlying reasons for a manager's performance, considering team dynamics, fund size, market conditions and deaflow quality and consistency overtime. Dig deeper than surface-level.

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5 Momentum Investing

Venture capital is subject to market cycles and it will always bring many ups and down moments. Chasing returns during hot markets and retreating during downturns can lead to missed opportunities and high-point investing. Furthermore, FOMO (Fear of Missing Out) can lead to investing in overvalued companies during hot trends. Instead, LPs should establish a long-term strategy and discipline with consistent investments across various market conditions.

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6 Focusing on the wrong things

Some LPs fall in the trap of focusing solely on the management fees or negotiating the ticket size, among many other examples.  While fees matter, the ultimate goal is maximising your DPI. Top-performing funds may have higher fee structures or larger minimum ticket sizes, but they are able to consistently deliver results and distributions. LPs should establish a consistent portfolio model with standard terms and ticket sizes and then spend the time finding the right funds for their strategy and risk-return appetite. 

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Learning Venture investing is expensive

New LPs entering the venture space will have to face two options: learning by doing, or doing and then learning, with the potential to make costly mistakes, or partnering up with venture experts to develop a solid, long-term strategy. It all depends on how much time and money they have available to lose.