When it comes to the world of venture-backed startups, some issues are universal and others depend largely on where the startups and their backers are located.
It's something we talked about this week in London, when TechCrunch took its Strictly VC series of more intimate and investor-focused events along the way. Sitting down with Saul Klein, the renowned founder of early-stage company LocalGlobe, along with Raluca Ragab, managing director of growth-stage company Eurazeo, we discuss with the two how similar (and different) the US venture market is. US right now compared to Europe.
Certainly, both European startups and venture capitalists have a lot to boast about these days. (The Paris-based ai startup that announced major funding comes to mind.) The continent also faces obvious challenges, including its proximity to two ongoing wars and a continuing shortage of late-stage capital.
What the two markets have a lot in common is a severe lack of exits, which isn't ideal considering how much money VCs have poured into startups in recent years (money their limited partners would like to get back!) .
Below you will find excerpts from the beginning of our talk with Klein and Ragab, edited for length. You can also watch the full meeting below. (Also, psst, our next StrictlyVC event will take place on the evening of Tuesday, June 11 in Washington DC, where we will be joined by FTC Chair Lina Khan; famous investor Steve Case; the co-founders of Humane ai, at one of their first appearances on stage; and Helen Toner, former board member of OpenAI; hope to see some of you there).
There's a lot to be excited about locally, especially when it comes to ai. What is most exciting for you right now?
SK: First, thank you for coming here. I mean (it's been) four or five years since TechCrunch did an event in London. So welcome back. What excites us all: (from where we are sitting, in the King's Cross district), I can look into the dining room of the Crick Institute, which is the Broad Institute of Europe. If you're interested in computational biology, it's literally there. If I go three minutes to the left, I'll run into the global headquarters of Alphabet's ai business, DeepMind, and I'll also run into the people who built AlphaFold (the ai program developed by DeepMind).
Here we have four of the best universities in the world. We're also literally in the heart of this five-hour train ride we call New Palo Alto (covering Paris, Dublin, Brussels, Amsterdam, and other business hotspots).
RR: The question often arises as to what Europe has to offer compared to the United States. And I think we now have an advantage in three main verticals or domains: security and privacy, sustainability and deep technology. This is due to the fact that universities have been investing in computer science degrees for a long time and that we have one and a half times more STEM graduates in Europe than in the United States.
I have to ask: what is happening in terms of the war between Israel and Hamas and Russia's war against Ukraine? As an American, it's hard to imagine how close (these conflicts) really are (to these tipping points).
SK: What a way to start with the easy things! The first was softball, and now you're (getting down to business).
It's hard to know the commercial impacts, based on the press I read in California. . .
SK: We have both had, and have, significant exposure and engagements to the Israeli startup scene. Raluca was an early investor in (self-driving company) Mobileye when she was (previously CEO) at Goldman (Sachs). But I would say that on October 9 (when Hamas attacked Israel), when we looked at our portfolio and the exposure that our portfolio had to founders in Israel and Israeli founders outside of Israel, like in Barcelona, New York or London, the The number of people working for them was about 90 founders and about 5,000 or 6,000 people working for them.
What has been incredible to see is that even though a third of their staff was on reserve duty, these companies have 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 or EMEA that have produced a unicorn. But the two cities that have produced more than 100 are London and Tel Aviv.
RR: From a business perspective, the impact is minimal. The ecosystem is incredibly rich and in fact far ahead of Europe. They have been building globally oriented companies 10 years ahead of Europe. Where there could be an impact – and I think we all need to be vigilant – is if this conflict extends to the internal politics of each country and brings more right-wing or left-wing governments to power. You are seeing this impact in the Netherlands. They are seeing what happened in Slovakia (where a populist with populist sympathies towards the Kremlin was elected prime minister for the third time in October). So I think we just need to see how this is reflected in domestic policy. The direct impact of this conflict on companies is minor.
However, these are not tense relationships. In the United States, investors really can't Talk about it.
RR: No. No. We are much more capable of engaging in delicate conversations in Europe. . .
. . . than crazy Americans. That seems fine to me. Another problem specific to Europe is the shortage of late-stage capital, a problem that has persisted for years. One investor called it the case of “missing zero” in a conversation with the Financial Times last year.
SK: More than one zero is missing. Look, the glass half full view is the Bay Area – Silicon Valley, Palo Alto – the ecosystem there is 53 years old, and our ecosystem is maybe 20 years old. Arguably, being at an equivalent stage to the Bay Area (with respect to early-stage negotiation) means that we are moving pretty quickly, meaning we are catching up.
When you get to the Series B and Series C stage, $100M+ rounds, we are (funding only a quarter of) these deals, compared to the Bay Area, which is pathetic. If you look at just the United Kingdom, there is a $35 billion gap between the Bay Area and the United Kingdom. We are basically where the Bay Area was in 2014. There is a lot of activity from a political point of view that the UK and French governments are focused on in Brussels, but at the end of the day, none of this is solved through policy. It is solved through large (regional) companies in which people can invest.
However, you have dodged many bullets; if you think about all the money that was wasted by some companies that invested in these $100 million rounds. . . Maybe it's not such a terrible thing?
SK: I think what Silicon Valley really understands that we haven't discovered yet is that a lot of the capital that is deployed at a late stage, can be written off, (because) if you are in companies that end up capitalizing at scale, you can get returns of 20,000 times 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 about what you said. Because we effectively have this (capital) gap, European companies simply have to deal with being more efficient and I think the European market has lower volatility as a result. It doesn't get overrated or overheated as much on the way up and, you know, on the way down, it's symmetrical. In fact, when you look at the risk reward, it's actually a better market because you never end up with this huge oversupply of capital.
Below. . .
