The venture capital market continues to reset after the highs of 2021-22, and while investment activity is picking up, LPs remain cautious about new commitments. In this insightful conversation, Karey Barker, Founder & Managing Director of Cross Creek, shares her perspective on the European VC landscape, the opportunities in secondary markets, and Cross Creek’s investment strategy as both an LP and GP.
From the differences between European and US VC ecosystems to the key challenges in due diligence, Karey offers a deep dive into the sectors showing the most promise, the impact of sovereign support in Europe, and how Cross Creek balances investments between established and emerging managers. She also shares her outlook on M&A and IPO trends heading into 2025 and the factors that could shape liquidity across global markets.
Karey will be speaking at the upcoming 0100 Europe conference from April 2-4th in Amsterdam, at the panel "LP Trends: Deep Dive into Investors’ Appetite & Concerns for the European VC Fund Allocation", together with Simeon Williams, Director at Vertawealth; Justinas Milašauskas, Investment Manager at Willgrow; and Anselm Adams, CAIA, Director at PECA Family Office.
What is the current appetite among international investors for European VC funds? Are you currently investing in Europe as an LP or GP?
The global VC market is still resetting after the run-up of 2021-22. Like their US counterparts, European managers were affected by the pullback. As we begin to see investment pacing pick up, managers are returning to the market both in the US and in Europe. However, due to weak distributions in the last few years, LPs are often focused on their existing managers, making fewer new commitments.
Euro VC is a smaller ecosystem than the US, but we believe it is fertile especially in seed and early-stage. There is no shortage of entrepreneurialism, but it is a more fragmented market. Cross Creek has spent a lot of time in Europe in the past few years surveying the landscape of managers.
In addition to two existing long-term relationships with European managers, Cross Creek has recently added two new Europe-based managers, as well as two global funds that expect to have material exposure to Europe. Each has a strong track record, a differentiated sector specialty and/or a unique and powerful sourcing network.
What are the key concerns when evaluating European VC funds? Are there any specific challenges that stand out in due diligence?
We would note two challenges investing in Europe.
First, the European venture ecosystem is smaller than that of the US, with a shorter track record. It is more fragmented due to language, culture, limited capital, and capital restrictions imposed by certain European LPs.
Second, go-to-market (GTM) for European companies is often more difficult than for their US counterparts. GTM can be hampered by country-specific regulations and other barriers in Europe and may require access to the US market for attractive revenue scale. These additional obstacles must be considered in the diligence phase.
How do European VC funds compare to their US counterparts? What are the major strengths and weaknesses of each market?
European managers are very strong in early tech. Sectors of innovation often stem from the region’s historical industrial and economic strengths. Notable is European leadership in climate tech relative to the US as well as a very strong centers of engineering excellence and AI innovation.
It is positive that many European governments support innovation and VC through sovereign schemes, but they often require VCs to invest in homegrown technologies. While this is an opportunity for managers, it may be limiting the manager’s opportunity set.
From your perspective, as both an LP and GP, which sectors in Europe offer the most attractive investment opportunities? How does this align with Cross Creek’s investment focus?
Seed and early-stage technology, where Europe is a leader, is a substantial portion of Cross Creek’s exposure. Sectors of interest to us are B2B SaaS, deep tech, healthcare tech, gaming, and climate tech. Of course, AI is a differentiator everywhere, so assessing for The Disruptors vs. The Disrupted will be part of our diligence regardless of geography. As a direct investor, we have been less active in Europe as we do not currently have full-time local resources which is preferable for making direct company investments.
Cross Creek partners with both established venture/growth managers and select smaller funds with deep domain expertise. How do you balance these two investment approaches, and what are the key challenges in managing such a diversified strategy?
We find this approach hugely complementary: our established “core” managers, have proven track records but have typically been those that have maintained a specific expertise or capability, e.g. stage or sector. In fact, we have rotated out of managers who have raised larger funds, become generalists or built out additional strategies in which we have less interest.
We prefer managers who keep their fund sizes small, focusing on performance rather than asset gathering – the “20%” rather than the “2%”. This is true of both a “core” established or a newer, emerging manager.
In our “Focus” manager program, we seek to identify the next generation of managers, many of whom are spin-outs with a strong, identifiable track record from larger, more generalist funds. These managers may have been GPs at their prior firms but wish to build their own funds with a more specific focus on what they believe – and have proven - they do best.
It’s long been known that there is greater persistence in VC than in PE: the top-quartile VC managers are more likely to remain top-quartile in subsequent funds than their lower quartile counterparts. There is now empirical evidence that first-time managers also outperform lower quartile managers. Cross Creek looks to identify and gain access to these managers early. In time, we hope some of our “focus” managers will graduate to “core”.
In our Partners “hybrid” strategy we build portfolios with both core and focus managers, combining them with direct late-stage investments (Cross Creek’s original capability). The result is a broadly diversified offering that provides investors access across the venture capital spectrum – from seed/early to late stage, with vintage year, sector and geographic diversification.
Looking ahead to 2025, what are your expectations for M&A activity and IPO trends in both the US and Europe?
M&A is currently maintaining its pre-peak activity levels, including cross-border deals. (A good example of this is Cross Creek’s US-based portfolio company AuditBoard which was acquired by UK-based HG in 2024.) However, the market needs IPOs to reach normal historical levels of liquidity. Right now, the US and Europe IPO markets seem only selectively open for a narrow profile of offerings.
In the immediate term, there is considerable uncertainty given the new US administration and European political developments. There is the possibility of less regulation, which increases the chances for more M&A and potentially lower interest rates which could support more M&A by private equity firms. On the flip side, the unquantifiable impact of an ever-changing tariff policy is an overhang. Ultimately, uncertainty is not a good environment for either the IPO market or M&A underwriting, so we continue to be cautious regarding liquidity in 2025.
