Currency risk varies significantly by ecosystem fund and represents an important consideration for investors evaluating international venture exposure.
US Ecosystem Funds
Bay Area, Boston, New York, Austin, and other US ecosystem funds operate primarily in US dollars with minimal direct currency exposure. Underlying investments, fees, capital calls, and distributions all occur in USD.
Some portfolio companies may have international operations creating indirect currency exposure, but fund-level currency risk is minimal.
International Ecosystem Funds
Tel Aviv, London, Stockholm, Munich, Zurich, and other international ecosystem funds involve currency considerations:
Deployment: Capital may be deployed in local currencies (Israeli Shekels, British Pounds, Euros, Swedish Krona) to underlying local venture funds.
Operations: Fund expenses and management fees may be denominated in local currencies.
Exits: Many venture-backed companies eventually exit to US acquirers or list on US exchanges, converting returns back to USD regardless of local deployment currency.
Currency Translation Impact
Currency fluctuations between deployment and exit affect realized returns:
- Strengthening local currency vs. USD enhances returns for USD-based investors
- Weakening local currency vs. USD reduces returns for USD-based investors
This creates additional return variability beyond company performance.
Partial Natural Hedge
Many international venture-backed companies raise capital in USD, maintain USD reserves, or operate with USD-based business models even while headquartered internationally. This creates partial natural hedge against local currency depreciation.
No Active Currency Hedging
Most venture fund-of-funds do not implement active currency hedging strategies. Hedging costs would reduce returns, and the multi-year deployment and exit timelines make effective hedging complex and expensive.
Diversification Benefit
For USD-based investors, international ecosystem exposure provides currency diversification. A portfolio including Tel Aviv and London alongside Bay Area gains exposure to multiple currencies, potentially reducing overall volatility.
Investor Base Considerations
Local investors (Israeli investors in Tel Aviv fund, UK investors in London fund) face different currency dynamics than US investors. Each investor's home currency determines their specific currency risk profile.
Long-Term Perspective
Currency fluctuations matter less over 10-12 year holding periods than over short timeframes. Long-term economic fundamentals typically dominate currency effects for venture returns.
Reporting Currency
Esinli funds report performance in US dollars regardless of underlying deployment currencies. Currency translation effects are incorporated into reported returns, making them visible to investors.
Investors concerned about currency risk should consider concentrating in US ecosystem funds or accepting currency exposure as part of international diversification strategy.