when your LP wants to be a VC

The EU started to operate the EIC Fund, an initiative announced last summer and which is a fund that wants to invest equity alongside venture companies from Europe. They call it a breakthrough initiative but it is unclear why, probably because it is a first of its kind within the EU.

From what I gather, it is an equity vehicle part of a grant accelerator that has been functional already for some time.

It is notable, of course, any fresh money in the market is a good thing - after all, more money in the market is better than less money, right?

The EU is already the largest spender on the continent as a fund of funds administrator - if you are an Euro VC and don’t have EU money in your fund you are at a competitive disadvantage. They’re not only an LP but also involved in many projects as customers, including media and research initiatives aimed to contribute to the private investment ecosystem (this is made with the EU’s money, for example). And, as always, when you spend a lot of money, you have a lot of friends who say nice things to you and about you.

However. While the intentions may be wonderful on the paper, the EIC fund is a head scratcher, for many good reasons, such as the fucked-up cap table example.

I will just mention one: this transforms a passive money distributor whose job is macro and policy into an active money manager having to micromanage in order to maximize ROI.

Make no mistake, they are two very different jobs. And, btw, it’s not a secret that politicians and state employees are not exactly the best (micro)managers in the world.

Oh wait, I hear you say, there is a catch - the EU fonctionnaires from the board have hired some VCs on their investment committee in order to get their valuable advice on how to handle this.

Yes, of course, you pay those guys for advice but the question is how accountable are they, since they are not employees but consultants. This is just a nice, hopefully well-paid, side gig, while their main job is their own fund, catering to their own interests of their own LPs and portfolio companies. Turning the tables a bit, if you were an investor, would you back a company whose core competence is outsourced to consultants?

Another instance - if a portfolio company of the investment committee members raises money from the said EIC fund, is that a conflict of interest? Or, the opposite, if those portfolio cos are not allowed to raise from the EIC Fund because of presumably conflicts of interest, is that a fair decision aligned to the EU’s mission to support all Euro startups?

There’s many scenarios that can go wrong in the VC business, it’s the job. And in the VC business shit hits the fan more often than you see happy times. When all is good everybody is happy and friendly but when shit hits the fan how are things going to play out? Here’s another example of a working scenario.

As an entrepreneur you will need to evaluate this, as dealing with the EU institutions is difficult at best and a mess in general, that is a fact. It is bureaucratic and slow, they have bad comms, bad PR, contradictory info and so on.

All of this red tape has been compensated until now by the fact that the money you get in exchange was quasi-free - you go through the bureaucracy hell to get it but it is equity free and don’t have to fight with those guys in your board until you buy them out.

Now you do.

Execution follows strategy, they say, and if you sit on top of a pile of money, as the EU does, decide that supporting startups is strategic for your job and then decide that one the solutions is to become a VC - it is telling about what problems the EU thinks the local ecosystem has.

And let’s be honest with each other, Europe’s problem is not the lack of VCs. Oh, sure, it badly needs good ones, but is the EIC Fund going to be a good VC just because it’s also the largest Euro LP?

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