If you're managing a venture fund, you've likely encountered currency challenges – whether you planned for them or not.
Here are three major FX challenges for VCs:
Management fees in one currency, operational expenses in another.
Exchange rate fluctuations between signing term sheets and closing deals.
Maximising returns from foreign exits.
In this article, we’ll break down common pitfalls, explore real-world examples, and provide practical strategies to help protect your fund from currency volatility.
The Problem
Most VCs think about FX too late – after an exit has been announced, when the deal is closing, or even worse, when the money is already in transit. The reality is that FX risk doesn’t just show up at exit, it begins the moment a VC invests in a company denominated in a different currency from its fund. For example, if you’re raising capital in USD but deploying it into European startups in EUR, FX rate fluctuations can quickly skew the economics of a hard-fought investment.
Your investing team spends countless hours finding standout companies, evaluating opportunities, and hammering out terms that work for everyone. A signed term sheet reflects all that effort – a win for your LPs, the fund, and the founders you’re backing. The last thing you need during due diligence is FX rate swings throwing the deal off balance.
Big FX swings during due diligence:
Might adversely impact the economics or entry price of the deal.
Can force your team to redo financial models and revise investment memos.
Could require you to build in buffers or overcall capital to ensure sufficient funding in case rates move against you.
In extreme cases, this may result in having to revisit terms with founders.
And if rates move in your favour and the investment ends up costing less, you may have still called more capital than needed from LPs. In addition, extreme currency movements could also strain founder relationships if they require revisiting previously agreed terms.
The FX risks of making capital calls to international LPs
Capital calls typically allow two weeks for investors to make a payment. Within this period, exchange rate volatility can work for or against the fund.
A negative currency movement could mean the fund doesn’t receive enough capital to complete an investment, forcing a follow-on capital call or creating cash shortfalls.
A favourable market move might mean drawing more capital than necessary, creating IRR drag and inefficiencies in capital allocation.
Connect Ventures’ success story: FX made simple for investments
The challenge
Connect Ventures faced a FX headache when managing cross-border investments. A sudden 15-20% surge in GBP during an EUR-denominated deal increased their capital calls beyond initial expectations. Adding to the frustration, outdated banking platforms with clunky interfaces, poor transparency, and subpar rates made it difficult to manage currency fluctuations effectively.
The solution
By using Bound’s forwarding strategy, Connect locked in exchange rates long before deals closed, ensuring predictability and protecting against sudden market swings – which have become increasingly frequent and sizeable in the last 10 years. In turn, this proactive approach gave the team confidence that their capital calls would stay on track, no matter how the market moved.
The impact
Switching to Bound was a game-changer for Connect Ventures:
No more surprises: Locked-in rates turned unpredictable capital calls into a streamlined, predictable process.
Time saved: Moving away from outdated manual systems freed up the team to focus on growing their portfolio.
We wrote a full guide that will show you how to handle FX risk quickly, simply and efficiently. And we’ll share how top VCs have tackled currency volatility, letting them focus on what really counts – growing their portfolio.
No opinion given in the material constitutes a recommendation by Bound Rates Limited that any particular transaction or investment strategy is suitable for any specific company or person. Results may and will vary. The information in this publication does not constitute legal, tax or other professional advice from Bound Rates Limited or its affiliates.
