Europe’s VC reality check: long hauls, liquidity squeeze, and the deep tech trust test

The post-ZIRP era has ushered in a harsh reset for venture capital returns, with even top-tier funds from 2021 and 2022 struggling to surpass what were once median performance benchmarks, as highlighted by Carta's dataset covering nearly 1,000 U.S. funds. This reset has forced both GPs and LPs to confront a liquidity drought and a frozen market environment where traditional metrics of 'good' performance no longer hold, compelling fund managers raising capital in 2025 and beyond to recalibrate strategies and expectations accordingly.

Extended fund lifecycles have become a defining challenge for LPs, with some funds now stretching up to 20 years, as noted by Adam Grosher of the J. Paul Getty Trust. This longevity has driven LPs like Lara Banks of Makena Capital to model fund lives of 18 years, anticipating capital returns predominantly in years 16 to 18, reflecting a fundamental shift in allocation frameworks and liquidity planning within the venture ecosystem.

Secondary markets have emerged as a critical mechanism for managing liquidity and mitigating risk, with Matt Hodan of Lexington Partners emphasizing that opting out of secondary engagement effectively sidelines LPs from a core liquidity strategy. However, this tool comes with stark valuation disparities, exemplified by portfolio companies trading at discounts as steep as 90% compared to their last private valuations, underscoring the tension between paper returns and realizable value in today’s venture landscape.

European LPs increasingly prioritize distributions and liquidity over paper gains, expressing concern over prolonged exit timelines and lagging DPI relative to U.S. counterparts. This has accelerated the adoption of secondary sales as a tactical response to liquidity constraints, with managers and LPs alike viewing secondaries as essential to navigating extended fund durations. By early 2026, deep tech funds are also adapting by extending fund lives to 12 years with possible extensions, while proactively seeking early liquidity through sales in years 5 to 7 to return capital and alleviate LP concerns, illustrating a broader industry pivot towards disciplined liquidity management and realistic performance expectations.

By late 2025, European venture capital fundraising had become a protracted and arduous process, with timelines stretching from 18 months up to three years, largely due to a crowded landscape of numerous small managers struggling to differentiate themselves. As one analysis noted, "there's also a thousand small managers out there who look and talk the same," making it increasingly difficult for emerging funds to capture LP attention amid fundraising fatigue. This saturation has intensified competition and elongated capital raising cycles, underscoring the challenges within Europe's relatively young and fragmented venture ecosystem.

Limited partners (LPs) have gravitated toward established, larger funds—often Fund III and beyond—embracing a 'you never get fired for buying IBM' mentality driven by career risk and structural barriers. This cautious stance is reinforced by the disappointing performance of the 2021 vintage, where median IRRs hovered near zero and even top deciles underperformed, eroding trust in brand names and crowded deals. Consequently, LPs now demand proof of disciplined, differentiated judgment over momentum, concentrating their commitments into fewer funds with anchor investments that remain standard sized but are harder to secure without demonstrated conviction.

Amid these structural shifts, LPs have elevated transparency, values alignment, and active engagement as critical criteria for fund selection. As Heidi from a leading fund observed, LPs increasingly conduct value alignment assessments, probing beyond financial returns to assess diversity and ethical considerations, signaling a strategic pivot toward mission-aligned investing. This evolution is echoed by Christina Brink of Volvo Group, who highlights a more collaborative LP-fund relationship involving due diligence support and portfolio company engagement, reflecting a broader trend of LPs seeking deeper insight and influence over their venture allocations.

Given Europe's fragmented venture landscape—with promising tech emerging from nearly every country—LPs like Joe Schorge emphasize the necessity of extensive, hands-on vetting and diversification to manage high return dispersion. Without the luxury of long track records common in more mature markets, LPs assess fund managers on first principles such as market opportunity, strategy, and team experience, running large, diversified portfolios to balance risk and capture outsized gains. This approach, combined with a willingness to back emerging funds demonstrating discipline and entrepreneurial spirit—as noted in a 2026 interview—illustrates how trust and transparent communication have become the currency of successful fundraising in Europe's evolving venture ecosystem.

By early 2026, the EIC Scaleup Fund had mobilized around €3 billion to support over 800 scaleups across Europe, emphasizing the necessity of structured corporate collaboration to overcome deep tech commercialization bottlenecks. This initiative not only fosters a European corporate network of about 90 engaged companies but also organizes corporate days designed to build trust and encourage greater corporate courage in partnering with startups, recognizing that alignment between startups and corporations—whether as clients or industrial partners—is essential for scaling innovations with turnovers reaching €50 to 100 million.

The commercialization challenge for European deep tech startups is less about funding and more about securing customers, a sentiment echoed by Martin Schilling of Deep Tech Momentum (DTM), which aims to catalyze €100 billion in capital and 10,000 enterprise contracts by creating a marketplace that prioritizes corporate buyers over mere events. Europe's strength in deep tech research and university spinouts is undeniable, yet the critical hurdle remains translating innovation into scalable business through direct P&L impact partnerships that CEOs must own, focusing on measurable revenue growth or cost savings within 9 to 12 months to gain corporate buy-in.

Trust issues continue to impede startup-corporate collaborations, with corporate decision makers wary of startup longevity, product reliability, and procurement delays, which slow down innovation adoption. To counteract this, European corporates are increasingly adopting venture clienting models, building in-house capabilities to engage startups more effectively, especially smaller firms lacking such expertise. This approach, coupled with CEO leadership and ecosystem events like those experienced by Almovio's CEO Philip von Hirschatl, fosters meaningful, confidential interactions that break down barriers and accelerate commercialization.

Despite the promise of corporate venture capital (CVC), its impact on deep tech commercialization is nuanced; it can either facilitate or hinder progress depending on integration within broader corporate strategies. Moreover, initiatives like Deep Tech Momentum deliberately eschew EU funding to maintain independence and emphasize the state's role as a customer rather than a grant provider. Ultimately, the deepest constraint for European deep tech lies in the courage of both startups and corporates to navigate long, complex sales cycles in regulated markets, underscoring that beyond programs and capital, bold engagement is paramount.

By early 2026, corporate venture capital (CVC) models are undergoing a fundamental transformation from peripheral, software-centric activities to deeply embedded strategic capabilities that align with industrial and deep tech evolution. Jessica Persson of Scania emphasizes that traditional CVCs, designed for fast software cycles and optional innovation, must now reposition themselves to navigate complex supply chains and industrial scale, shifting from mere startup access to becoming integral players within changing industrial systems—where strategic returns are inseparable from financial ones.

Sustaining successful CVC units hinges on crystal-clear mission definition—strategic focus being the preferred path for corporations over purely financial returns—as well as carefully selecting portfolio companies that are mature enough (typically Series B or with revenues above €5 million) and not overly dependent on corporate funding. This approach fosters robust partnerships where companies value more than capital, enabling CVCs to leverage investments as gateways to strategic collaboration rather than just financial support.

Effective governance and incentive structures tailored to strategic objectives are critical to CVC longevity, as highlighted by Oliver Schmäschke of T.Capital and Deutsche Telekom’s decades-long venture experience since 1997. Unlike financial investors motivated by carry interest, strategic CVCs require governance frameworks involving corporate stakeholders and incentives aligned with long-term industrial impact, which also aids in attracting and retaining talent despite competition from high-paying financial venture firms.