Geopolitical risk threatens to stumble global venture capital advances

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The war in Europe is making geopolitical risk a major concern for venture capitalists, a startling turnaround for an industry that in recent years has epitomized the freewheeling globalization of finance and technology.

Following the economic sanctions imposed on Russia following its invasion of Ukraine, much of the international business community is shutting down its Russian business interests.

While most US and European venture capitalists will likely be spared the difficult process of exiting Russia, the war in Ukraine will likely cause many venture capitalists to be more discerning about accepting investment capital. investors based in sensitive geopolitical areas.

Most funds do not publicly reveal the names of their sponsors. But the founders of their portfolio companies might start asking questions. Entrepreneurs don’t want their hard work to inadvertently benefit autocratic regimes or other malicious actors.

Additionally, Russian President Vladimir Putin’s close relationship with Chinese leader Xi Jinping could complicate Western investors’ already significant concerns about China. US-based VCs and LPs have moved away from China in recent years amid a widening trade divide between the two countries. China’s perceived solidarity with Russia, as well as its heightened rhetoric of demands on Taiwan, will only add to investor caution.

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With new capital now even less likely to flow into China, many existing investors feel they have developed a deep understanding of the country and continue to see strong opportunities there, despite elevated geopolitical risk.

As for Russia, it is now clear that Western venture capitalists will no longer consider investing in what was, until two weeks ago, the world’s 12th largest economy.

Many international investors have cushioned the blow of this isolation because they had already reduced their exposure to Russia years ago. Their ties with the country weakened significantly after Putin annexed Crimea from Ukraine in 2014.

Since then, many Russian-founded startups with international ambitions have moved their headquarters and most of their operations out of the country, including InDriver, a ride-hailing app operator, which raised $150 million and was valued at $1.23 billion last year. in a round led by Insight Partners.

In the rare cases where Western VCs are still invested in Russian-based startups, companies will likely need to help relocate companies overseas where possible, divest them, or forfeit their investments altogether.

Meanwhile, each private fund ensures that there are no sanctioned institutions or oligarchs among its LP base. Many top funds have taken capital from Russian investors, including in some cases oligarchs, said Victor Orlovski, a partner at Silicon Valley-based Fort Ross Ventures, a company initially supported by Sberbank now sanctioned. However, there probably isn’t a lot of Russian capital backing Silicon Valley funds, according to several investors and brokers I’ve spoken with.

Yet before the invasion of Ukraine, Russian-based investors occasionally approached reputable US companies.

“We were considering taking a few Russia-based LPs the next time we go up, but now we’ll be more cautious,” said a partner at a Silicon Valley venture capital firm who declined to be named in the interview. article on LP relationships.

More generally, it is easy to see how the war in Ukraine could considerably slow down the globalization of venture capital and the interdependence of countries.

But it could also have a radically different effect, said Phil Libin, former chief executive of General Catalyst and co-founder of Evernote and Mmhmm.

Roelof Botha, a partner at Sequoia and a board member at Mmhmm, often talks about pivotal moments that change the trajectory of companies, like Netflix’s decision to stream content rather than ship DVDs. Libin chooses to be optimistic, viewing Russia’s invasion of Ukraine as a pivotal moment that will ultimately have a positive outcome for the world.

“[The conflict] could unify some countries, make people re-examine common values ​​and foster a culture of cooperation,” Libin said.

Like many other immigrants from the former Soviet Union, myself included, Libin spent the first 10 days of the conflict listening to pro-Western Russian-language media, most of which have since been shut down by Putin, barely able to focus on something else. . But he is now ready to take action by starting to hire designers, illustrators and artists from the Ukrainian refugee community. “There are a lot of unknowns,” Libin said, “but you have to do what’s good for the world.”

Featured image by Joey Schaffer/PitchBook News

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