In the world of venture-backed startups, some issues are universal, while others depend heavily on the location of the startup and its backers.
That's something we discussed this week as TechCrunch hosted its StrictlyVC series, a more intimate, investor-focused event, in London. We sat down with Saul Klein, prominent founder of seed-stage company LocalGlobe, and Raluca Ragab, managing director of growth-stage company Eurazeo, and had an in-depth discussion with them about how similar and different the US venture market is compared to Europe right now.
To be sure, European startups and venture capitalists have had a lot to brag about recently. (The latest Paris-based AI company to announce a significant funding round 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 both markets have in common is a significant lack of exits, which is less than ideal given how much money VCs have been pumping into startups in recent years (money that limited partners want back).
Below is an excerpt from the beginning of Klein and Ragab's conversation, lightly edited for length, or you can watch the full video below. (Our next StrictlyVC event will be on the evening of Tuesday, June 11th in Washington DC, and we'll be joined by FTC Chair Lina Khan, prominent investor Steve Case, and Humane AI co-founder (for the first time) and former OpenAI board member Helen Toner. We hope you'll join us!)
There's a lot of exciting things happening locally, especially related to AI. What's the most exciting thing for you right now?
SK: First of all, thank you for being here. [it’s been] It's been four or five years since TechCrunch last held an event in London. Welcome back! Here's what we're all looking forward to: [from where we’re seated, in the King’s Cross district]Take a peek into the lunchroom at the Crick Institute (the Broad European Institute): if you're interested in computational biology, it's literally right there. Go left for three minutes and you'll find the world headquarters of DeepMind, Alphabet's AI business, and meet the people who built Alphafold. [the AI program developed by DeepMind].
We're home to four of the best universities in the world, and we're literally in the heart of a five-hour train journey called New Palo Alto. [encompassing Paris, Dublin, Brussels, Amsterdam and other entrepreneurial hotspots].
RR: The question often comes up: what does Europe have to offer compared to the U.S.? And I think we currently have an advantage in three key verticals or areas: security and privacy, sustainability, and deep tech. This comes from the fact that universities have been investing in computer science degrees for so long and that Europe has 1.5 times more STEM graduates than the U.S.
As an American, it's hard to imagine how close the Israeli-Hamas war and Russia's war in Ukraine are. [these conflicts] Really [to these hotspots].
SK: It's good to start with something easy! I started with softball, but now [getting down to business].
From what I've read in the reports from California, it's unclear what the impact will be on business.
SK: We both had and still do have great exposure and involvement in the Israeli startup scene. Raluca was one of the first investors in the Israeli startup scene. [the autonomous driving company] Mobileye [previously a managing director] Goldman and [Sachs]However, on October 9th [when Hamas attacked Israel]If you look at our portfolio and our exposure to founders in Israel and Israeli founders outside of Israel, in places like Barcelona, New York, London, the number of people working for them is [was] The company has about 90 founders and approximately 5,000 to 6,000 employees.
Amazingly, these companies continue to perform and grow, even though a third of their employees are reservists. 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 that have produced unicorns. But there are two cities that have produced over 100 companies: London and Tel Aviv.
RR: From a business perspective, the impact will be minimal. The ecosystem is very rich and in fact much more advanced than Europe. They have built global companies 10 years ahead of Europe. The potential impact will be if this conflict spills over into the domestic politics of countries and we see more right-wing or left-wing governments. We are seeing this impact in the Netherlands. Look at what happened in Slovakia. [where a populist with a populist sympathies toward the Kremlin was elected prime minister for the third time in October]So I think we really need to see how this impacts domestic politics. The direct impact of this conflict on business is not that great.
But it's not enough to damage the relationship. In the U.S., investors can't really talk about it.
RR: No, no. In Europe you can take part in a more nuanced conversation.
…than crazy Americans. Well, okay. Another endemic European problem is a shortage of late-stage capital, a problem that has persisted for years. One investor called it a case of “missing zeros” in a conversation with the FT last year.
SK: It's not just that we're missing a zero. The Bay Area, Silicon Valley, Palo Alto ecosystem is 53 years old, and our ecosystem is probably 20 years old. So we're at the same stage as the Bay Area. [with regard to early-stage dealmaking] So, we're moving pretty fast, we're catching up.
When we get to the Series B and Series C stage, which is $100 million and up rounds, we [funding just a quarter] Compared to the Bay Area, these deals are dismal. If you look at just the UK, there's a $35 billion difference between the Bay Area and the UK. We're basically where the Bay Area was in 2014. On the policy side, there's a lot of activity from the UK and the French government in Brussels. [focused on] But ultimately, policies cannot solve the problem. [regional] Companies that people can invest in.
But you've avoided a lot of crises, and when you think about the money some of the companies wasted on those $100 million investment rounds, maybe it's not so terrible.
SK: What Silicon Valley really understands, and we still don't, is that a lot of the capital that you put in at the later stage can be written off in some sense. [because] Ultimately, if you can scale and create a compounding effect, you can make 20,000 times your profits in the stock market. So I think there's still a lot we can learn from the Bay Area.
RR: I think there’s something to be said about what you said. [capital] To effectively close the gap, European companies need to get leaner. As a result, I think European markets are less volatile. They're not as overpriced or overheated on the upside and they're more symmetrical on the downside. In fact, when you think about risk vs. reward, it's actually a better market because you're not getting into a massive oversupply of capital.
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