When it involves the world of venture-backed startups, some issues are universal, while others depend largely on where the startups and their supporters are positioned.
We talked about it this week in London when TechCrunch covered it StrictlyVC a series of more intimate, more investor-oriented events on the road. Speaking with Saul Klein, the renowned founder of seed-stage firm LocalGlobe, and Raluca Ragab, managing director of growth-stage firm Eurazeo, we talked to the two about how similar – yet distinct – the US enterprise capital market is straight away in comparison with Europe.
Certainly, each European start-ups and VCs have a lot to say as of late. (The latest Paris-based AI company to announce massive funding involves mind). The continent also faces obvious challenges, including the proximity of two ongoing wars and a persistent shortage of late-stage capital.
What each markets have in common is a massive lack of exits, which is not ideal considering how much money VCs have pumped into startups in recent years (money that their limited partners would really like to get back!).
Below you’ll find excerpts from the starting of our conversation with Klein and Ragab, edited for length. You also can watch the entire meeting below. (Our next StrictlyVC event will likely be on Tuesday, June 11 in Washington, D.C., where we’ll be joined by FTC Chair Lina Khan, famed investor Steve Case, co-founders of Humane AI in one of their first stage performances; and former OpenAI board member Helen Toner — I hope that I’ll meet some of you there.)
There’s a lot to be excited about locally, especially when it involves AI. What are you most excited about straight away?
SK: First of all, thanks for coming here. Meaning [it’s been] 4 or five years since TechCrunch held an event in London. Welcome again. What excites us all: [from where we’re seated, in the King’s Cross district]I can look into the dining room Crick Institute, i.e. the Broad Institute of Europe. If you are interested in computational biology, it’s literally here. If I go left in three minutes, I’ll come across the global headquarters of Alphabet’s artificial intelligence company, DeepMind, and I’ll also come across the individuals who built AlphaFold [the AI program developed by DeepMind].
We have 4 of the best universities in the world here. We are also literally in the heart of this five-hour train ride we call New Palo Alto [encompassing Paris, Dublin, Brussels, Amsterdam and other entrepreneurial hot spots].
RR: The query often arises as to what Europe has to supply in comparison with the US. I think we now have an advantage in three major industries or areas: security and privacy, sustainability and advanced technology. This is because universities have been investing in computer science degrees for a very very long time and we have one and a half times more STEM graduates in Europe than in the US
I have to ask: what is happening in the context of the Israel-Hamas war and Russia’s war with Ukraine? As an American, it’s hard for me to fathom how close these hot spots really are to those conflicts.
SK: Way to start out with the easy stuff! First it was softball, now it’s you [getting down to business].
It’s hard to gauge the impact on business based on the press I’m reading in California …
SK: We each had and proceed to have significant exposure to the Israeli startup scene. Raluca was one of the first investors in [the autonomous driving company] Mobileye when she was [previously a managing director] with Goldman [Sachs]. But I might say October ninth [when Hamas attacked Israel]when we looked at our portfolio and the exposure that our portfolio needed to founders in Israel and Israeli founders outside of Israel like in Barcelona or New York or London, the number of people who work for them [was] about 90 founders and about 5,000 or 6,000 people.
The amazing thing was that despite the fact that a third of their employees were on reserve duty, these firms simply continued to deliver and grow. Capital continues to flow into Israel, not only from domestic investors, but also from international investors. I think there are 65 cities in Europe and EMEA where a unicorn has been bred. But the two cities that produced over 100 were London and Tel Aviv.
RR: From a business perspective, the impact is minimal. The ecosystem is extremely wealthy and in fact is far ahead of Europe. They built global firms, 10 years before Europe. The impact could occur – and I think all of us need to observe it – when this conflict spills over into the domestic politics of each country and brings more right-wing or left-wing governments into power. This influence may be seen in the Netherlands. You see what happened in Slovakia [where a populist with populist sympathies toward the Kremlin was elected prime minister for the third time in October]. So I think we just have to see how this translates into domestic policy. This conflict has less direct impact on the business.
However, this is not a strain on the relationship. In the US, investors really cannot Talking about it.
RR: NO. NO. In Europe it is much easier for us to have sensitive conversations…
… than crazy Americans. Rightly. Another problem specific to Europe is the lack of late-stage capital, a problem that has been going on for years. One investor told the FT last 12 months that it was a case of the “missing zero.”
SK: That’s greater than one missing zero. Look, the half-full view is the Bay Area – Silicon Valley, Palo Alto. The ecosystem there is 53 years old, and our ecosystem is perhaps 20 years old. We’re probably at the same stage as the Bay Area [with regard to early-stage dealmaking] means we’re going quite fast – as if we’re catching up.
When you get to the $100+ million Series B and Series C stage rounds, we are here [funding just a quarter] these deals in comparison with the Bay Area, which is pathetic. If you look just at the UK, there is a $35 billion difference between the Bay Area and the UK. We are mainly where the Bay Area was in 2014. The British and French governments are very lively politically. they are in Brussels [focused on] but ultimately none of these issues will likely be resolved through politics. This was solved great [regional] firms that individuals want to take a position in.
You dodged a lot of bullets though; if you think about all the money that was wasted by some of the firms investing in these $100 million rounds… perhaps it is not that bad?
SK: I think what Silicon Valley really understands, which we’ve not discovered yet, is that a lot of the capital that you simply invest at a later stage may be kind of written off, [because] if you are the type of company that finally ends up investing on a large scale, you possibly can get a 20,000x return in the public market. So I think we still have a lot to learn from the Bay Area.
RR: I think there’s something to be said for what you said. Because we have it [capital] gaps, European firms simply have to manage with being more lean, and I actually think that the European market is less volatile as a result. It’s not that expensive and doesn’t overheat as much on the way up, and it’s symmetrical on the way down. In fact, if you look at the risk return, it’s actually a higher market because you will never find yourself with such a massive oversupply of capital.
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