The European tech scene is on track for another challenging year. In 2023, funding for European startups dropped by 39% compared to 2022, according to Crunchbase. While some VCs are expressing optimism about the next 12 months, there is a strong consensus that we won’t be returning to the bullish funding days of 2020 and 2021 anytime soon, if ever. Founders are facing ongoing pressure to be prudent with cash, to keep extending their runways, and to assume that all external capital will be hard to come by.
So what does this ongoing market reality mean for the VCs? They too are under pressure. Both from their LPs (whether that’s around the pace of deployment or their efforts to raise new funds) and from their portfolios, as founders look to them for new forms of support. When faced with these ongoing challenges in a tough market, it’s not surprising that many investors tend to pull back from change. We’ve seen this over the last 18 months, with funding to more ‘traditional’ markets and founders holding up relatively well compared to startups run by women, those from under-represented backgrounds, or those innovating in fields seen as higher risk or ‘niche’. European femtech startups, for example, saw a 50% drop in funding between 2021 and 2023.
To cope with the ongoing uncertainty, some funds are taking the ‘ostrich’ approach; keeping their heads firmly down and not stepping outside of their comfort zone. Others are adopting the koala position; holding tightly to their preferred investment areas and taking an ultra-slow pace when it comes to change.
This isn’t characteristic of all VCs, but those taking the ostrich or koala approach are numerous. And while the strategy might feel logical, these funds will be missing out on huge opportunities. Namely, the appetite and flexibility needed to spot founders and potential colleagues who don’t fit the traditional mould, despite mounting evidence to suggest founders from a typically overlooked or underestimated background fare better in a downturn. Instead of turning away, ostrich or koala style, VCs should embrace 2024 as the year of the ‘iguana investor’.
Iguanas are famously adaptable. They come in a range of sizes, have keen vision that enables them to see far into the distance, can communicate well in crowded environments, and can shift their colour and appearance depending on their surroundings. All in all, a pretty ideal combination when it comes to thriving in uncertain, changeable landscapes.
The best VCs reflect these qualities. Unique, adaptable, visionary. They respond to shifting surroundings and evolve, rather than refusing to adapt and leaving themselves exposed. They apply their long-lens to all aspects of their operations; from investment criteria to hiring. And they come in all sorts of shapes and sizes.
The iguanas of the investment world are naturally better suited to a downturn. Thriving on their ability to change, explore and challenge the status quo.
The VCs who resist the iguana approach are missing out when it comes to spotting the best talent amongst prospective portfolio companies and hires. Right now, the European startup world is stuck in a diverse ‘doom loop’. According to Atomico’s latest State of European Tech report, only 16% of VC GPs in Europe are women, with even fewer owning significant stakes in the management funds, according to Ada Ventures’ recent Women in VC report. On the other side of the table, all-women founding teams only attracted 3% of VC funding in 2023. Non-white founders are significantly more likely to say they’re finding the current fundraising environment tough (87%), compared to their white counterparts (79%), according to Atomico. These numbers have been static or getting worse over recent years.
For founders, this means women, people of colour, and those from overlooked and underestimated backgrounds continue to struggle to have their voices and ideas heard. They have to fight harder for every VC dollar, with brilliant innovations falling by the wayside as a result.
And for VC firms this means a failure to diversify their own teams. The consequence? A homogeneity of thought, experience, and insight – hampering a VC firm’s ability to spot opportunities others have overlooked.
If we break out of the diversity doom loop, everyone wins. So if VC funds truly want to thrive in 2024, it’s time to embrace adaptability and new ways of doing things. It’s time to think like an iguana.
