Chat with Hendrik Brandis: Europe's VC Scene Looking Up, Despite Challenges for Institutions
Earlybird Partner Tackles Europe's Venture Capital Landscape - Institutional Investors Confront a "Knowledge Gap"
"Investing in startups through venture capital is a beneficial strategy for pension funds"
Despite predictions of reduced VC investments in European startups in 2024, Hendrik Brandis remains hopeful. The co-founder and partner at Earlybird, a Berlin-based early-stage investor known for investments in companies like quantum computer start-up Eleqtron and neobank N26, believes that the asset class is ripe for institutional investors like pension funds.
By Karolin Rothbart, Frankfurt
With the start of a new year, there's renewed optimism for Europe's start-up sector. After expected financial relief failed to materialize in the previous year, and VC investments in the region fell by approximately 7% to an estimated €57 billion, it appears that recovery is on the horizon. This optimism is shared by Hendrik Brandis, co-founder and partner of Earlybird.
Brandis is "completely upbeat" about the prospects for 2025 and beyond. He attributes this to the consistent and significant improvement in VC performance over nearly a quarter of a century, as demonstrated by studies such as those by McKinsey. A recent analysis by the European Private Capital Association also noted that European VC has outperformed the MSCI Europe since 1986.
Brandis believes this success stems from a recurring market imbalance between exponential demand for venture capital driven by technological innovation, and the lack of supply-side response. This implies a surplus of demand, giving market participants better selection, more favorable valuations, and higher returns.
AI is poised to further spur venture capital demand, with supply still lagging behind. The UK, Europe's VC leader in Q1 2025 with £4.1 billion across 507 deals, has witnessed significant AI investments like Isomorphic Labs (£453m) and Verdiva Bio (£309m). However, deal volume decreased by 11%.
But Brandis' optimism extends beyond the long-term performance of the asset class. He attributes short-term market fluctuations to the lingering effects of the 2008 financial crisis, coronavirus pandemic, and inflation, which typically cause downturns in the VC market for around three years. Brandis predicts that this trend will continue in 2025.
VC fundraising is "astonishingly robust"
Brandis' optimism seems warranted, as fundraising for Earlybird is currently going "astonishingly well." Despite ongoing exit droughts, more funds are expected to be raised across the industry in 2024. According to a survey by Dealroom, European VC funds have already collected nearly as much capital in the first three quarters (€27 billion) as they did during the entire previous year, suggesting that the realization of venture capital's resilience is starting to spread.
While institutions like pension funds, insurers, or provident funds in the United States have extensively invested in this asset class and feel comfortable with it, the same can't be said for their European counterparts. German-based large insurers and provident funds seem to face a fundamental knowledge gap regarding venture capital due to data scarcity, making it difficult to accurately assess the risks.
Another hindrance for institutional investors in venture capital is the oversimplified risk classification mandated by the Solvency II directive. This directive requires asset managers to demonstrate a capital requirement for investments, with zero capital required for government bonds and 100% required for young, fast-growing companies. No matter whether an investor chooses to invest in a single company or a broad portfolio, the capital requirements are the same, making such investments extremely expensive for institutions.
Institutions lacking dedicated VC teams or sector-specific expertise struggle to participate effectively in Europe's high-growth venture ecosystem. These hurdles, coupled with the complexities of emerging sectors, exit uncertainties, and increased focus on ESG compliance, present significant challenges for institutional investors looking to navigate the European VC landscape.
[1] TechCityInsider, "€1.5B boost from European venture funds in Q1 2025 as UK continues to lead the pack," 6 April 2025.
[2] FinTech Global, "European Venture Capital Report 2024," January 2024.
[3] McKinsey, "The Technology, Media, and Telecommunications (TMT) sector in Europe: A catalyst for post-crisis growth," 2012.
[4] Pensions & Investments, "Soulmates Ventures raises €50 m for sustainability-focused vehicle," 20 July 2023.
[5] Pitchbook, "2024 European Venture Capital Landscape," forthcoming report.
Despite the predicted reduction in VC investments in European startups in 2024, Hendrik Brandis, partner at Earlybird, shows optimism for the asset class's potential in attracting institutional investors like pension funds. In 2025, Brandis anticipates a recovery in the VC market, attributing it to the enhanced VC performance over the past few decades.
Earlybird's fundraising in 2024 is reportedly going exceptionally well, suggesting a robust industry outlook. However, institutional investors such as German-based large insurers and provident funds can struggle to participate in Europe's VC landscape due to a lack of sector-specific expertise and a fundamental knowledge gap resulting from data scarcity.
The complexities of emerging sectors, exit uncertainties, and increased focus on ESG compliance further complicate matters for institutional investors navigating the European VC landscape.
