Talking Shop with Hendrik Brandis: Positive Vibes for Europe's VC Landscape
Earlybird Co-founder makes a Case for Institutional Investment - "Knowledge Gap" persists in Germany's venture scene
Investing in Venture Capital is an appropriate avenue for pension funds.
In a bid for optimism in Europe's startup landscape, Hendrik Brandis, co-founder and partner at Earlybird, is bullish on 2025. Despite a projected dip in VC investments next year, he foresees a recovery for the asset class, particularly interesting for institutional investors like pensions funds.
By Karolin Rothbart, Frankfurt
Ringing in the new year with renewed hopes, Europe's startup scene might be on the mend. After a drought of financial aid in 2023, VC investments in the region dropped by approximately 7%, according to Pitchbook, down to an estimated €57 billion. But Hendrik Brandis, an early-stage investor at Berlin-based Earlybird, known for their activity in Europe and investments in companies like quantum computer startup Eleqtron and neobank N26, remains hopeful.
"I'm feeling fundamentally optimistic for 2025 and the years to come," says Brandis, an investor and aerospace engineer. "The long-term development of the venture capital asset class speaks for itself. In fact, studies like those from McKinsey show that performance has consistently and significantly improved over almost a quarter of a century."
Brandis attributes this long-term improvement to a consistent imbalance in the market, with exponential demand for venture capital outweighing supply. "Demand for venture capital is driven by technological innovation, which is advancing exponentially," he explains. "This demand is not reflected on the supply side."
AI enhances this gap further, driving a surge in demand and a shortage of supply. "There's no reason to assume this trend will change now, in the age of AI," he states. Indeed, investor enthusiasm for AI has remained high, with more than €10 billion flowing into European AI startups by the end of September, a 25% increase over the same period in the previous year.
With large sums pouring into companies like UK-based AI startup Wayve (USD 1 billion in May), Paris-based language model developer Mistral (€468 million in June), and Munich-based AI defense startup Helsing (€450 million in July), Brandis' optimism seems well-founded.
However, Brandis' positive outlook for 2025 is not merely a long-term play but also grounded in short-term market developments. "After the impact of the 2008 financial crisis, the VC market grew steadily until it crashed in 2022 due to multiple crises like the COVID-19 pandemic and inflation," he explains. "Such short-term setbacks in the VC market typically last around three years, and I predict that this time will be no different."
Indeed, fundraising with Earlybird is going "remarkably well" despite the ongoing exit drought, and broader industry-wide numbers show a rise in funds. According to a survey by Dealroom, European VC funds have already collected 27 billion dollars by the third quarter, almost as much as in the entire previous year. "Maybe it's becoming increasingly recognized that venture capital and technology investments are much more resilient to crises than people think," says Brandis.
Yet, among those investors handling substantial sums—institutional investors like pension funds, insurers, or provident funds—this is not a widely-held belief in Europe. For instance, European pension funds have invested only 0.01% of their capital in local VC, as shown in a study by Atomico in November. This reluctance to finance startups often frustrates the ecosystem.
Brandis is convinced that VC is suitable for pension funds, especially in the US, where they are extensively invested in the asset class. He believes that this reluctance stems from a "fundamental knowledge gap" regarding German-based large insurers and provident funds. "This gap is partly driven by a data shortage, which is due to the fact that the European VC scene is relatively small," explains Brandis. "For large asset managers, it's difficult to accurately assess the factual risk of VC investments."
There's another reason for the hesitation of institutional investors in VC: regulatory barriers. The Solvency II directive's "oversimplified risk classification" makes VC investments expensive for institutional investors due to high equity capital requirements. "For government bonds, it doesn't matter if they're from Germany or Greece, you need zero equity capital," explains Brandis. "But for young, fast-growing companies, you need 100% equity capital, even if you're investing in a diversified portfolio. That makes such investments extremely expensive for institutional investors," says Brandis.
To help bridge this gap, increased collaboration between VC firms and institutions is crucial. Additionally, smarter regulation and improved data visibility could help institutional investors feel more comfortable investing in Europe's startup scene, ultimately benefiting the entire ecosystem.
Hendrik Brandis, an early-stage investor at Berlin-based Earlybird, believes institutional investors like pensions funds will find the VC asset class particularly interesting in 2025, as he forecasts a recovery from a projected dip in VC investments next year. Brandis anticipates that performance in the venture capital asset class will continue to improve, attributing this long-term improvement to a consistent imbalance between exponential demand for venture capital and its supply.
Despite European pension funds investing only 0.01% of their capital in local VC, Brandis is convinced that VC is suitable for these institutions, especially in the US. He attributes the reluctance of European pension funds to finance startups to a "fundamental knowledge gap" regarding German-based large insurers and provident funds, which is partly driven by a data shortage in the European VC scene.
Brandis suggests that increased collaboration between VC firms and institutions, along with smarter regulation and improved data visibility, could help institutional investors feel more comfortable investing in Europe's startup scene, ultimately benefiting the entire ecosystem.
