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Welcome to the 60th edition of Deep Tech Catalyst, the channel by The Scenarionist where science meets venture!
In this milestone episode, we’re thrilled to welcome Oscar Farres, Head of the Tech VC Unit at the European Investment Fund (EIF).
We’ll dive deep into the mechanics of venture capital in Europe, exploring how fund-of-funds models shape the startup ecosystem and what it takes to build sustainable investment networks.
If you’re a startup founder, investor, or Deep Tech operator, this episode will give you a clearer understanding of the forces driving venture capital in Europe—and what they mean for your own journey.
Quick Facts:
🚀 €3.5 Billion Deployed Annually – The EIF invests in 85-90 VC funds each year, fueling deep tech, life sciences, and climate startups across Europe.
📊 The ‘Magic Triangle’ of a Strong VC Fund:
Team Composition
Market Access
Fund Structure
📈 How to Build a VC Market from Scratch: A Case Study – In Cyprus, the EIF worked with the government to launch a brand-new venture capital ecosystem, conducting market research, structuring funds, and attracting both local & international investors.
🚀 Final Thought: Europe has world-class talent, but closing the funding gap is key. Mobilizing private capital, strengthening VC ecosystems, and driving long-term investment will ensure Europe’s Deep Tech sector continues to thrive.
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🔎 The Role of a Fund of Funds in Venture Capital
To better understand how venture capital funding works at a fund-of-funds level, let’s explore the daily activities and investment approach of the European Investment Fund (EIF), a key player in financing innovative SMEs across Europe.
The EIF is a public institution and part of the European Investment Bank (EIB) Group. Its core mission is to facilitate access to finance for innovative startups and SMEs through two main financial products:
Loan guarantees
Equity and growth equity investments
While the EIF does not invest directly in startups, it operates as a fund of funds, meaning it selects and funds venture capital (VC) managers who, in turn, invest in startups.
How Does a Fund of Funds Work?
A fund of funds (FoF) operates similarly to a typical venture capital fund but with an important distinction: it does not directly invest in startups. Instead, it:
Raises capital from various sources.
Selects and invests in VC fund managers who align with its investment strategy and policy goals.
Oversees and supports these VC managers as they invest in promising startups.
The EIF Raises Capital from 4 Main Sources
To understand how the EIF operates, it’s important to break down where its funding comes from.
1️⃣ The European Investment Bank (EIB): As the EIF’s parent institution, the EIB contributes capital directly from its balance sheet. Since this funding impacts the bank’s P&L, there’s a strong focus on financial returns alongside policy objectives.
2️⃣ The European Commission: The EIF’s largest stakeholder provides funding through targeted mandates like InvestEU, which aims to strengthen European technological autonomy—especially in response to geopolitical challenges. These funds are often used to back first-time VC teams and riskier investment strategies.
3️⃣ EU Member States: Some European countries directly allocate capital to the EIF, tasking it with funding local VC initiatives. This allows them to tackle specific market gaps within their national startup ecosystems.
4️⃣ Private Institutional Investors: The EIF also raises money from large private investors who want access to European venture capital.
How Does the EIF Select VC Funds?
The EIF evaluates hundreds of venture capital proposals annually across different stages (seed, early-stage, and growth) and investment strategies (generalist and specialized).
The selection process involves:
✔ Step 1: Identifying Alignment—Does the VC fund’s investment strategy align with the EIF’s policy goals and financial criteria?
✔ Step 2: Deep Due Diligence—The EIF analyzes the fund’s team, investment thesis, track record, and financial structure.
✔ Step 3: Engaging with the Team—It’s not just about numbers; the EIF takes time to meet fund managers, assess team dynamics, and evaluate long-term viability.
✔ Step 4: Decision & Commitment—If a fund passes all checks, the EIF commits capital—but the entire process can take 10 to 12 months from initial application to final agreement. During this time, the EIF engages with fund managers to deeply understand their strategy, strengths, and weaknesses before making an investment decision.
🏦 How the EIF Deploys Capital in Venture Capital
As a fund of funds, it doesn’t invest in startups directly—it selects and funds venture capital firms, which then deploy capital into high-potential startups across the continent.
€3.5 Billion Deployed Annually
Each year, the EIF deploys approximately €3.5 billion across 85 to 90 venture capital funds. This money isn’t just focused on tech—it spans multiple verticals, including:
Deep Tech & AI
Life Sciences & Biotech
Climate & Sustainability Innovation
Some of these VC funds are first-time fund managers and emerging players, while others are well-established firms with a long track record of investments.
Key Investment Criteria & Strategic Priorities
Backing a venture capital fund isn’t just about handing over money—it’s about finding the right teams, the right strategies, and the right market fit.
Public-Private Partnerships
Unlike traditional investors who focus solely on financial returns, the EIF operates with a dual mission:
Ensuring strong financial performance to attract private capital.
Aligning investments with policy-driven goals, such as fostering innovation in underfunded regions.
Addressing Market Gaps
One of the EIF’s priorities is to fill market gaps—areas where capital is lacking but high-growth potential exists. (e.g. Growth-stage funding.)
The ‘Magic Triangle’
To select the right VC funds, the EIF evaluates three key factors, often referred to as the "Magic Triangle":
✅ The Team: A well-balanced mix of operational expertise (ex-founders, C-level execs) and financial expertise (experienced investors, fund managers).
✅ Market Opportunity: Does the fund have access to high-quality deal flow in an underfunded or emerging sector?
✅ Fund Structure & Investment Strategy: The EIF analyzes fund size, the expected number of portfolio investments, and follow-on reserves—ensuring the fund can double down on winners to maximize returns.
📌 Why This Matters: Unlike traditional investments, VC success is highly concentrated—a small number of portfolio companies drive most of the returns. The best funds double down on their winners, ensuring their most successful startups get additional capital to scale.
4 Red Flags
Not all VC funds are a good fit for EIF backing. Some red flags that can disqualify a fund include:
🚩 Unbalanced Team Economics – If the fund’s structure unfairly favors certain partners, it can lead to internal conflicts and instability.
🚩 Weak Team Dynamics – If the leadership team lacks a clear history of working together, there’s a higher risk of dysfunction down the line.
🚩 Overly Dominant Decision-Makers – If one person controls all decisions, it can create governance issues that threaten the fund’s long-term viability.
🚩 External Sponsors Taking Excessive Control – If an outside sponsor demands too much of the fund’s economics, it can limit the ability of fund managers to operate effectively.
🙌 What Makes a Strong VC Fund Team?
At Deep Tech Catalyst, we often discuss the importance of a strong team in startups—how a CEO, CTO, and other key roles shape a company’s success. But what about the teams behind venture capital funds?
Just like in startups, the composition of a VC fund team plays a critical role in its performance, investment strategy, and long-term success.
The Ideal Composition of a VC Fund Team
At its core, a successful VC fund team is built on a balance—blending operational experience with financial expertise.
Operational Expertise
Ideally, a VC team includes ex-entrepreneurs or C-level executives from successful startups. These individuals have firsthand experience in scaling, fundraising, and even exiting a company. More importantly, they understand founders on a deeper level. When a startup founder speaks with a VC who has walked in their shoes, it builds a natural sense of trust and credibility.
Investment Expertise
On the other hand, deep financial knowledge is just as important. A great VC team needs people who understand portfolio diversification, follow-on investment strategies, and the financial obligations to limited partners (LPs). These are the people who ensure that the fund is structured correctly and that investments align with long-term value creation.
How the European VC Landscape Has Evolved
In the early 2000s, many European VC funds were dominated by teams with financial or consulting backgrounds. While this provided strong financial acumen, many lacked the hands-on operational experience necessary to guide startups through the challenges of growth.
Today, things have changed. More balanced teams—with a mix of former entrepreneurs, operators, and financial experts—have emerged.
Investors now value teams with a real, long-standing connection—people who have worked together before, whether through angel investing, past startups, or even studying together years ago. This pre-existing synergy often translates into better decision-making and a stronger ability to navigate high-pressure situations.
How Do First-Time VC Managers Prove Their Credibility?
For aspiring VC managers—especially those launching their first fund—one of the biggest hurdles is proving that they have real access to high-quality deal flow.
The question is: How do they demonstrate that they can successfully source and invest in promising startups?
Here’s what investors look for:
✅ Strong Track Record: The background of the fund’s partners is a strong indicator. If they’ve worked in the industry, built a startup, or been involved in major deals, it’s a positive sign that they can access great investment opportunities.
✅ Real-World Pipeline: One of the best ways to prove credibility is by presenting a concrete investment pipeline—a list of startups the fund would invest in today if it had the capital. Investors want to see that fund managers aren’t starting from scratch but already have a network of founders and companies in their space.
✅ Industry Recognition & Network: Investors also cross-check reputations by speaking to startup founders and other VCs. Have entrepreneurs heard of the fund’s partners? Have they already interacted with them in the ecosystem? If a VC manager has been actively engaging with founders—whether through angel investing, industry events, or advisory roles—it’s a huge advantage.
✅ Community Engagement: Many emerging fund managers organize industry meetups, host events, or create niche investment networks. Being a visible, well-connected figure in a specific vertical reassures investors that they have access to the right deals at the right time.
🚀 How a Fund of Funds Unlock a Startup Ecosystem: A Case Study
Venture capital doesn’t just fund startups—it builds ecosystems. A great example of this in action is the development of Cyprus' startup and VC market. This story isn’t just about one investment; it’s about how a fund-of-funds approach can identify market gaps, mobilize capital, and catalyze long-term growth in an underdeveloped ecosystem.
Step 1: Identifying the Gap
A few years ago, the Cypriot government approached the European Investment Fund (EIF) with an interest in developing a local venture capital ecosystem.
The challenge: Cyprus had little to no VC infrastructure at the time. Unlike established European hubs, there were few funds, few investors, and limited startup activity.
So, the EIF team flew to Cyprus and began extensive market research. This meant meeting directly with key stakeholders:
Business angels with an interest in startups.
Large corporations with funding programs for innovation.
Government officials to assess policy alignment.
Expats & investors abroad who might have an interest in returning.
By listening to the market, the EIF could map out the challenges and opportunities, setting the foundation for a sustainable fund structure.
Step 2: Structuring the Fund
With these insights, the EIF worked closely with the government to design a tailored VC mandate, considering:
Fund size—What’s realistic given local investment capacity?
Geographical flexibility—Should funds be allowed to invest outside Cyprus to ensure returns?
Private investor participation—How to attract co-investors alongside public capital?
Once the framework was ready, the EIF launched a call for VC fund managers. Some applicants had already been identified during the research phase, while others came from outside networks, including Cypriots with international VC experience looking to return home.
Step 3: Selecting & Structuring the VC Fund
Choosing the right fund manager wasn’t just about investment expertise—it was also about ecosystem-building potential. Ultimately, the EIF selected one of the multiple applicants, but this was just the beginning.
One of the biggest hurdles in developing a first-time fund in an emerging market is the legal and operational setup.
Unlike mature VC markets, where fund structures follow standardized models, newer ecosystems require extensive negotiation to align with best practices and international investment standards.
Step 4: Attracting Private Capital
With the fund in place, the next challenge was raising private capital—a critical factor in making the VC ecosystem self-sustaining.
The EIF’s involvement helped in two key ways:ù
Credibility: Being backed by the EIF gave the fund legitimacy, making it easier to secure co-investment from private players.
Financial Discipline: The market recognizes that the EIF conducts rigorous due diligence and maintains high legal and financial standards, ensuring the fund is structured for success.
This combination helped mobilize private investment, creating a blueprint for future VC activity in Cyprus.
📈 Building a New Market: What Truly Matters?
While economic growth itself is not the primary goal of VC funds, the impact of capital deployment can shape entire ecosystems.
So, one last interesting question could be: What are the biggest obstacles to building a startup ecosystem in an underdeveloped market?
The Biggest Challenge: The Flow of Private Capital
If there’s one key challenge in venture capital—especially in emerging ecosystems—it’s access to private capital.
While some European markets, like Germany and France, have relatively strong VC investment pools, they pale in comparison to the United States.
The European vs. U.S. VC Funding Gap
One of the biggest differences between Europe and the U.S. is the role of institutional capital. Pension funds, university endowments, and foundations play a huge role in VC funding.
In contrast, Europe lacks a comparable level of private institutional investment in venture capital. While foundations and alternative funding sources exist, the gap remains significant.
Talent is Everywhere—But It Needs Capital to Thrive
Talent is not the issue. Europe has an incredibly distributed and diverse ecosystem—unlike the U.S., where talent clusters in Silicon Valley or New York.
How to Accelerate Value Chains?
1️⃣ Capital Accessibility – The biggest roadblock is ensuring that private capital flows into emerging ecosystems. Without local investors, angel networks, and VC funding, even the most talented founders struggle to scale.
2️⃣ Mindset Shift – In markets where entrepreneurship isn’t deeply ingrained, founders and investors need cultural shifts to embrace risk-taking, failure, and innovation.
3️⃣ Talent Retention & Return – Many of Europe’s top founders move abroad due to better funding environments. But if local VC markets strengthen, experienced founders will return to build thriving companies at home and foster vibrant ecosystems.
