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[29] Geopolitical risk threatens to trip up venture capital's global strides

[Pitchbook] War in Europe is making geopolitical risk a front-burner concern for venture capitalists, a striking turnabout for an industry that in recent years had epitomized the freewheeling globalization of finance and technology. In the wake of economic sanctions imposed on Russia over its invasion of Ukraine, much of the international business world is shutting down its Russian commercial interests.

While most US and European venture capital firms will likely be spared the difficult process of extricating themselves from Russia, the war in Ukraine is likely to prompt many VCs to be more discerning about accepting capital from investors based in geopolitical hot zones.

Most funds don't reveal the names of their limited partners publicly. But founders of their portfolio companies could start asking questions. Entrepreneurs don't want their hard work to benefit autocratic regimes or other bad actors inadvertently.

Moreover, 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 been distancing themselves from China over the last several years amid a worsening trade rift between the two countries. China's perceived solidarity with Russia, as well as its increased rhetoric of claims to Taiwan, will only add to investor caution.

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

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

Many international investors have blunted the blow from this isolation because they already had lessened their Russia exposure years ago. Their ties to the country waned significantly following Putin's annexation of Crimea from Ukraine in 2014.

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

In the few cases where Western VCs still are invested in startups based in Russia, firms will likely be expected to help relocate companies abroad wherever possible, divest them or walk away from their investments entirely.

Meanwhile, every private fund is making sure that they don't have sanctioned institutions or oligarchs among their LP base. Many top-tier funds have taken capital from Russian investors, including in some cases from oligarchs, said Victor Orlovski, a partner at Silicon Valley-based Fort Ross Ventures, a firm initially backed by the now-sanctioned Sberbank. However, there is likely not a great amount of Russian capital backing Silicon Valley funds, according to several investors and placement agents I spoke with.

Still, prior to the invasion of Ukraine, Russian-based investors from time to time have approached reputable US firms.

"We were considering taking a few Russian-based LPs the next time we raise, but now we will be more cautious," said a partner at a Silicon Valley venture firm who declined to be named in this article discussing LP relations.

More generally, it is easy to see how the war in Ukraine could significantly curtail the globalization of venture capital and the interconnectedness of countries.

But it could also have a starkly different effect, said Phil Libin, former managing director at General Catalyst and co-founder of Evernote and Mmhmm.

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

"[The conflict] could unify some countries, make people re-examine shared 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-speaking mediamost of which has since been closed down by Putinbarely able to focus on anything else. But he is now ready to jump into action by starting to hire designers, illustrators and artists in the Ukrainian refugee community. "There are many unknowns," Libin said, "but you gotta do what is right for the world."

Featured image by Joey Schaffer/PitchBook News


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