30% of VCs Have Vanished as Europe's Funding Market Splits in Two
 
What happens when emerging managers - the investors who historically find the early outliers - can only raise $25M funds? When the specialists who understand DeepTech or Defence or Climate are reduced to writing angel-sized cheques?
 
Europe is on track for one of its worst years for VC fundraising. Already on a steady decline since 2022, just €6.9 billion has been raised across 87 VC vehicles as of October 1, 2025 – down over 50% YoY and on track for the lowest level in a decade.
 
Across Europe, we're witnessing an unprecedented restructuring: Not just a collapse in absolute funding capacity but a 30% drop in the number of active VCs in just two years, while the market tears itself in half.
 
At one extreme, the likes of Index and Balderton continue to raise $500M-$1B funds. At the other, an increasing number are struggling to raise north of $25M for their first fund. The middle ground - those $100-300M funds that once bridged early-stage to growth - is under severe pressure.
 
For founders, this bifurcation creates a challenging new reality: the funding escalator that once carried startups smoothly from Seed to Series C now has big gaps in its middle steps. And the specialists who understand how to navigate these gaps – emerging managers on Fund II or III – have either stalled or are operating on very limited resources.
 
 
The Forgotten Foundation of European Tech
 
Let's be clear about what emerging managers are - and why their transformation matters. These are venture firms raising their first three funds, typically managing less than $100M. They're not household names. They're the outsiders trying to break in. They're the startups of the funding world.
 
Every European venture success story started with managers like these. Take Seedcamp, which launched way back in 2007 (Fund I - $4M, Fund II - $7M, Fund III - $23M) backing founders when they had nothing but an idea and ambition. They wrote first cheques into companies like TransferWise, Revolut, and UiPath - all now worth billions. From that tiny first fund, they've grown to manage almost $1B. But they built their reputation and expertise when they were complete unknowns, operating on a shoestring.
 
Cambridge Associates research shows that between 2004 and 2016, 53% of the top ten performing venture capital funds each year were run by emerging managers. And from 2013-2022, 73% of the top ten VC funds annually were smaller than $100M. That's not a statistical anomaly - it's proof that hunger beats heritage.
 
Why? Because emerging managers back other outsiders. Mountside's analysis of Europe's top emerging managers reveals that 31% have been founders and 22% operators - only 30% were previously investment professionals. They understand the struggle because they're living it. They'll take meetings larger funds won't. They dive deep into sectors others ignore. They champion founders from backgrounds traditional VCs overlook.
 
But here's what's changed: many of these managers are now operating with funds so small they can barely lead rounds, let alone provide follow-on capital. Their value proposition is shifting from being primary capital providers to being expert navigators trying to help founders cross the increasingly treacherous middle ground to reach the giants.
 
 
The 30% Collapse and the Bifurcation
 
Sifted's analysis reveals that the number of active VCs in Europe has plummeted by 30% over the past two years. But it’s the distribution of this collapse that tells the real story. The median fund size has fallen from €66.6 million to €48.7 million. While the giants raise billions the emerging managers are getting squeezed.
 
69% of all new VC funds are now smaller than $25M, up from 49% in 2020. The middle ground - those $100-300M funds that could write meaningful Seed and Series A cheques and still maintain decent reserve allocations - they're the real casualties.
 
Oliver Holle of Speedinvest predicted this precisely: "I believe you will have institutional investors who look for established brands, track record, a certain amount of safety, and then, on the other hand, solo GPs or small structures that can be more exciting, more volatile, more outsized returns."
 
It's hard for founders to keep track of which investors have pulled back. Rarely is this made public. VCs continue taking meetings, maintaining their websites, even expressing interest - all while knowing they may not have capital to deploy. This shadow game wastes precious months founders don't have.
 
Fred Destin's Stride VC was a rare exception - a firm that backed multiple successful companies and publicly announced they couldn't raise Fund III. How many others are having the same conversation behind closed doors? "There's never a press release about the 'We can't raise it, we're shutting down,'" notes Joe Schorge of Isomer Capital. "It plays out over multi-years."
 
Meanwhile, founders are feeling the squeeze directly. Investors are prioritising existing relationships, focusing almost exclusively on follow-on funding for portfolio companies rather than new entrants. First-time founders without deep industry connections or prior exits face an even steeper climb.
 
 
The New Funding Gauntlet
 
The bifurcation creates a specific challenge for founders: how do you get from a $2M Seed round to a $20M+ Series B? The big Seed and Series A investors who once bridged this gap are becoming scarcer, though not extinct. Recent closes by Notion Capital ($130M) and Serena (€200M first close) show some mid-sized funds are still fighting through.
 
SeedBlink's Q1 analysis found that nearly 70% of all closed funds came from emerging players - but many are smaller vehicles than originally planned. Six first-time managers celebrated closings in Q1, though raising amounts that would barely qualify as a decent Seed round.
 
And this all translates into confusion for founders. Emerging managers are increasingly making term sheet offers conditional on closing their own fundraise - a dangerous game of musical chairs where founders get left standing. Some don't even disclose this conditionality upfront, only to withdraw later and crater entire rounds. Others are taking 18-24 months to raise funds that should have closed in 9-12 months, leaving their existing portfolio companies orphaned and unable to secure follow-on funding.
 
Investor sentiment has hit an all-time low. British Business Bank research found 69% of UK VC fund managers view conditions for raising a new fund as poor or very poor. For emerging managers without track records or institutional relationships? It's not just poor - it's almost impossible.
 
 
Why Performance Excellence Can't Save Them
 
But why such a crisis when European venture capital seems to be outperforming? Invest Europe data shows European VC yielded 20.77% net IRR over 10 years, compared to North American VC's 18.18%. We're literally beating Silicon Valley at returns.
 
Research from PitchBook shows specialised emerging VC managers outperform everyone - beating established generalists, emerging generalists, and even established specialists. Yet these are exactly the managers being forced to operate with micro-funds or exit the market entirely.
 
The cruel irony? Performance doesn't matter without distributions. Vestbee reports that half of European VC funds failed to return any capital to LPs in 2024. British Business Bank data reveals UK funds' pooled DPI sits at just 0.37 - meaning they've returned 37p for every pound invested.
 
Even if you're generating world-beating paper returns, LPs won't recommit if they haven't seen cash. With exit markets frozen until recently, even high-performing emerging managers are caught in a difficult funding cycle. The recent flurry of fund launches since September - including Concept Ventures' $88M second vehicle - suggests some optimism for 2026, but the structural challenges remain.
 
 
The Specialisation We Need Most
 
In a bifurcated market, specialisation becomes even more critical. Generalist mega-funds won't understand the nuances of specialist markets. Just look at some of the emerging managers that scraped together funds in 2025: Vinted Ventures for re-commerce, NUNC Capital's €20m for Ukrainian defence startups, Iron Wolf Capital's €30m for Baltic DeepTech. These aren't spray-and-pray generalists. They're specialists who spent years building sector expertise.
 
VC Factory research confirms startup founders overwhelmingly prefer specialist VC firms - their networks and value-add are demonstrably more relevant. A Defence Tech founder needs an investor who understands procurement cycles, not someone who made their name backing food delivery apps.
 
But with smaller funds becoming the norm, these specialists often can't lead larger rounds or provide substantial follow-on capital. Many VC firms haven't raised a new fund for two years. Some are zombies: managing existing portfolios but unable to make new investments, watching their companies struggle without follow-on capital. Others, however, are adapting by becoming co-investors and syndicate builders rather than solo leads.
 
 
The Bridge-Building Imperative
 
Governments and institutions recognise the problem - sort of. The British Business Bank announced £500M to support diverse and emerging fund managers, marking a first for the country. The European Investment Fund continues backing select emerging managers.
 
But against a bifurcated market, these interventions miss the point. We don't just need more small funds or bigger funds - we need to rebuild the middle. UK pension funds hold over £2.5T in assets yet invest virtually nothing in venture capital. IPE research identifies the main barriers as limited in-house teams and heavy due diligence demands. Translation: it's easier to buy bonds than back the future.
 
Meanwhile, Mountside Ventures research shows 87% of Europe's VCs and LPs agree that increased diversity in venture capital leads to better performance, yet only 16% of Europe's GPs were women in 2023. Emerging managers drive diversity - when they shrink to micro-funds, so does any hope of a more inclusive ecosystem.
 
This isn't just about money - it's about knowledge transfer. When emerging managers fail to raise Fund II or III, years of sector expertise, founder relationships, and pattern recognition simply evaporate. The institutional memory of how to spot and support outliers? Gone.
 
 
The Bottom Line
 
The European venture market hasn't just shrunk by 30% - it's splitting into two incompatible halves. For founders, this means:
 
Your seed funding exists, but it's often smaller. Emerging managers are typically now operating with $10M-$25M for Fund I and $50M-$75M for Fund II. They can write your first cheque but will struggle to protect you through Series A alone. Exceptional teams with strong track records might secure bigger mandates but the bar is very high.
 
The middle ground is thinning dramatically. Those $100-300M funds, typically Fund III and beyond, that could bridge you from Seed to early growth are under pressure, though some quality players like Notion and Serena are still raising. You'll need to work harder to find and secure these increasingly rare bridge investors.
 
Specialists are adapting their models. Defence, Climate, DeepTech experts still exist, but often with funds too small to lead larger rounds solo. Their expertise remains valuable; they're learning to syndicate and co-invest rather than go it alone.

Due diligence on investors is now survival. Many VCs taking meetings can't actually deploy capital. Research who recently closed funds, who's actively deploying, who's been silent for two years.
 
The best emerging managers are more valuable than ever. Not for their capital – many don't have enough - but for their ability to help you navigate you across the gap to the mega-funds. Choose those with proven bridge-building skills.
 
For UK founders, the brutal reality is this: Know Your Investor. Above all, do they actually have money to invest now or are they really in zombie mode?
 
The venture capital ladder that previous generations climbed? Some of the middle rungs disappeared while no-one was watching. But determined climbers are finding new ways up.
 

If you're planning to raise in the next 6-12 months and want help navigating this bifurcated landscape, let's talk.