Groupthink and operational inexperience are stifling the European venture product

In the past year, the venture capital (VC) funding funnelled into start ups has shrunk by more than half, with European Q1 2023 funding down by 66% year-on-year. The severity of the market tightening – especially compared to the previous few years of Covid-induced tech disruption – is pushing founders to their limits as they attempt to secure the necessary capital for their business growth.

It's a situation we'll be discussing in our panel debate on building a better European venture product at next month's SuperVenture conference.

For while the current strategy of encouraging founders to pursue profitable growth and greater capital expediency is no bad thing, the current venture product falls well short of meeting founders' near-term needs.

A lack of diversity across the investment community leads to persistent groupthink, influencing not just the choice of founders and startups to back but also the support offered to existing portfolio companies. And crucially, too few European VCs carry the requisite company-building experience to guide founders through the current economic headwinds.

Founders need guidance from operators who have walked the walk

Stem Tamkivi, co-founder of Plural Platform, which invests in embryonic tech companies solving seriously difficult problems, is particularly critical of the European VC community's current shortcomings. "Europe lacks founders turned investors. In Silicon Valley, at least 50% of all investors at top VCs have built a company; in Europe, it's under 10%. Frankly, without this hands-on experience, it's hard to see how VCs can materially help startups navigate the early-stage risks they face on a daily basis. These founders don't need number crunchers or passive observers – they need seasoned pros who can share practical advice and insights."

For example, it's still a commonly held view that being a founder requires an always-on mentality and work ethic. Indeed, relentless determination is a quality actively sought by VCs in their prospective founders. This is despite research suggesting entrepreneurs are 50% more likely than non-entrepreneurs to report mental health conditions. Experienced operators who have spent years on the fundraising treadmill understand the pressures faced by fellow founders. Too many European VCs simply do not get it.

A narrow view of founders' lived experiences

Similarly, a VC industry that – for all of its overtures towards greater inclusivity – remains predominantly white, male, and comfortably middle-class cannot profess a deep understanding of the additional obstacles encountered by founders of different genders, ethnicities, and backgrounds.

"The ecosystem isn't doing enough to create conditions that will allow underserved founders to flourish, nor has it stepped up its support for founders' mental health, which has taken a battering over the past three difficult years," suggests Bettine Schmitz, general partner at Auxxo, an investment company focusing on female entrepreneurs.

VCs must recognise their limitations, prejudices, and blind spots. We all have them; it's part of being human. However, it's crucial to address these limitations for the betterment of the ecosystem. Again, seasoned operators with lived experiences of these challenges are far better placed to offer meaningful guidance.

It's why, at Ada Ventures, we have assembled 20 operator angels, who understand the funding journey and can provide our portfolio with relevant advice and support, alongside over 100 scouts from underrepresented communities, helping us access diverse founders and ensure their inclusion in the venture process.

There is no one-size-fits-all approach to company building. Greater diversity of gender, ethnicity, and background creates greater diversity of thought and the emergence of unique perspectives that can help more nascent companies achieve their potential.

Bringing experienced operators to the table

To create a better European venture product, VCs must take proactive steps to compensate for their lack of hands-on experience and guard against the perils of groupthink, namely, the risk that the same mistakes keep being made.

"We need to invent new mechanisms within the European tech ecosystem that attract experienced founders to assist the new ones," argues Tamkivi. "We're working hard on a variety of solutions that make our platform more attractive to these founders – even those who have avoided conventional VC funds in the past."

If our community can address these shortcomings, Europe has a clear opportunity to lead the development of a more versatile and productive VC proposition. As Schmitz points out, "The venture community doesn't cater to founders targeting more modest – but still significant – returns of 3x-10x. It's a vast funding gap for high-potential and often highly sustainable businesses that's left completely unaddressed."

To truly serve founders, we must challenge groupthink, embrace diversity, and leverage the hands-on experience that truly understands and can navigate the complexities of company building. It's time to evolve the European venture product to give the founders of the future a better footing from which to grow successful companies.

This article is an excerpt of an article first published on Forbes.