OpinionMinimizing risk in venture capital in a complex geopolitical world
Minimizing risk in venture capital in a complex geopolitical world
“By analyzing geopolitical risks, building strategic collaborations, and embracing diversification strategies, you can steer through uncertainty, unlocking opportunities for growth, resilience, and success,” writes Raviv Sapir
Venture Capital thrives on innovation, driving both technological advancements and economic growth. However, as the world becomes increasingly interconnected yet geopolitically uncertain, VC investors must adopt a strategic approach to mitigate potential risks. But there are at least three important things you can do as a VC to minimize risk and thrive within a complex geopolitical landscape: analyse geopolitical risk, build strategic partnerships, and diversify your portfolio.
An increasingly unstable world
Starting with the Covid-19 pandemic, the world has seen a series of seemingly never-ending crises that are destabilizing the global order and creating economic uncertainties. To name a few: the Russia-Ukraine conflict, the tension between the U.S. and China, high inflation, and the accelerating climate crisis.
And if these global shocks were not enough, the Israeli tech ecosystem has been facing a major additional risk – the judicial reform process. The Start-Up Nation Central, a non-profit organization, conducted a survey in July 2023 with 734 Israeli professionals: 84% were startup/tech companies, and 16% were investors. One of their most noteworthy findings was that investments outside Israel are gaining more weight in investors’ strategies. 39% of investors have already invested in foreign companies in the past, and 28% are considering beginning to invest in foreign companies or started investing just recently.
Given the rising geopolitical risks on global and local levels, I recommend investors to adopt the following strategies in their risk management plans:
Analyse geopolitical risks
By staying ahead of geopolitical shifts and monitoring existing ones, you can better align your strategy to the changes in the market in the long term; ones that have a higher chance to impact the success of the startups you are working with, and the fund’s performance overall. If you are a global investor, one tactic could be to include a geopolitical analysis when conducting diligence on a new investment opportunity. Assess cross-border regulations, market dynamics, and supply chain weaknesses to give you a better understanding of macro constraints that could impact the growth of a startup over time. Lior Handelsman, General Partner at Grove Ventures, says: ‘’We empower our portfolio companies to endorse hedging strategies against exchange rate volatilities, offer guidance and support to their growth strategies, and, where relevant, diversify their sales regions."
To execute this approach, you can develop internal team expertise in this analysis, or use the brain power and knowledge of people outside your firm. For example, developing a robust process that enables you to develop a network on the ground, will create a net of information without relying on data that could be misinformed or biased. This will help to assess the risks straight from the source, even in situations when you are unable to be present physically and investigate with your own eyes. In a small ecosystem like Israel, it should be relatively easy to build such a network. If possible, also plan a schedule with regular visits to build these relationships. Personally, I tend to visit Israel several times a year. There is nothing like seeing the country with my own eyes, meeting peers in person, and building personal relationships. It gives a different level of understanding of the sentiment on the country level, and especially the way that investors in the region react to these risks.
Build strategic partnerships
Collaboration is a powerful strategy to navigate the uncertainties of a complex world. You can support your startups by forging strategic partnerships within the tech industry, academia, government, and international organizations. These alliances provide startups with access to essential resources, networks, and expertise, and empower startups by offering alternative market pathways and the ability to adapt.
This risk management strategy has another positive effect. To access the best startup teams, investors still need to present enough value per capital when trying to enter a highly competitive deal. The Israeli VC landscape has more players than ever, and you can potentially secure an allocation based on a unique value proposition, such as offering a pilot with a strategic global corporate to validate the product-market fit of the startup. It allows you to de-risk a potential bet and make an in-depth validation pre-investment. Moreover, cross-border mentorship from experienced industry players enables startups to learn from the past and navigate the present with resilience.
Diversify your portfolio
The concept of "smart diversification" involves a deliberate selection of startups that align with an investor's risk tolerance. Global diversification strategies are being implemented for different types of investment vehicles. I see it also in Israel, where new business models are being developed to offer limited partners the opportunity to get exposure to venture capital, beyond the traditional venture capital funds. Some could be evergreen funds (more liquidity), participating in investment syndicates, or investing in a fund of funds. By exploring different investment strategies, you can potentially invest across sectors, markets, geographies, and vintages.
Diversification stands as a shield against uncertainty, and the options are limitless. For the sake of simplicity, even if your focus is only on fund investments (and not direct investment in startups) you can create a balanced portfolio of emerging managers and established managers, global and local funds, early-stage and late-stage, small fund-size and large fund-size, specialized and generalist, across multiple vintages.
In the dynamics between venture capital and a complex geopolitical world, the pursuit of innovation collides with the management of risk. By analysing geopolitical risks, building strategic collaborations, and embracing diversification strategies, you can steer through uncertainty, unlocking opportunities for growth, resilience, and success.
However, dealing with geopolitical risks is not obvious. In a lot of fund cases, the thesis does not leave too much room for a strategy shift. In the end, there are many risks that could impact your investments, and geopolitical trends are just one of them. A more holistic approach to VC investment could be taken; Gil Dibner, General Partner at Angular Ventures, explains: "Ultimately, venture capital is a business of specifics. VC firms don't invest in sectors, themes, or countries. We invest in specific companies and specific founders. We work with them over years to overcome their specific challenges."
It is certain that the world of venture capital has more variables than ever, and each investment will always have a risk - This is the nature of the business. It’s all about focus and making informed-based decisions on how to react to different types of risks.
So, what’s next? It’s up to you to decide.
Raviv Sapir is an investment professional at Blue Future Partners