In the world of venture-backed startups, some challenges are universal and others vary greatly depending on the location of the startup and its backer.
This is what TechCrunch was talking about this week in London as we run the StrictlyVC series of more intimate, investor-focused events. Sitting down with Saul Klein, renowned founder of early-stage company LocalGlobe, and Raluca Ragab, managing director of growth-stage company Eurazeo, we explained how similar and different the US venture market is. Compared to Europe now
Certainly, there is a lot to cry about these days, both for European startups and VCs. (The latest Paris-based AI company to announce massive funding comes to mind.) The continent also faces obvious challenges, including its proximity to two ongoing wars and a persistent shortage of late-stage capital.
What both markets have in common is a severe lack of outlets. This is not ideal considering how much money VCs have poured into startups in recent years (funds that limited partners would like to get back!).
Below are excerpts from the beginning of our conversation with Klein and Ragab, edited at length. You can also sit down and watch the whole thing below. (Also, the next StrictlyVC event is scheduled for Tuesday night, June 11 in Washington, D.C., where FTC Chair Lina Khan, renowned investor Steve Case, co-founders of Humane AI will make first appearances on stage; and former OpenAI board members Member Helen Toner — I hope to meet some of you.)
There are so many interesting things locally, especially when it comes to AI. What is most exciting to you right now?
SK: First of all, thank you for being here. I mean, it's been four or five years since TechCrunch has held an event in London. Welcome back. What interests us all is that (from where we are sitting, in the King's Cross district) we can look into the dining room of the Crick Institute, the Broad Institute of Europe. If you're interested in computational biology, it's literally right there for you. If you go to the left for about 3 minutes, you will also encounter DeepMind, the global headquarters of Alphabet's AI business, and the people who created AlphaFold (an AI program developed by DeepMind).
It is home to four of the world's best universities. We're also literally in the heart of this five-hour train ride called New Palo Alto (which includes Paris, Dublin, Brussels, Amsterdam and other entrepreneurial hotspots).
RR: The question arises many times about what Europe has to offer compared to the United States. And I think we now have an advantage in three key verticals or areas: security and privacy, sustainability, and deep tech. This stems from the fact that universities have been investing in computer science degrees for a very long time, and there are 1.5 times more STEM graduates in Europe than in the United States.
I would like to ask: What is happening with the Israel-Hamas war and Russia's war in Ukraine? As Americans, it's difficult to gauge how close we actually are to these hotspots.
SK: Start with the easy ones! First was softball and now (I'm starting a business).
From what I've read in the media out of California, it's hard to know the impact on business. . .
SK: We both have had and still have significant exposure and involvement in the Israeli startup scene. Raluca was one of the first investors in (self-driving company) Mobileye at Goldman (Sachs) where he was a former managing director. But on October 9 (when Hamas attacked Israel), if we look at our portfolio and see that our portfolio is exposed to founders in Israel or to Israeli founders outside of Israel, such as Barcelona, New York, London, etc., we say: I would like to. The number of people working for them was around 5,000 to 6,000 people with about 90 founders.
What's amazing is that these companies continue to serve and grow despite one-third of their employees being reservists. Capital continues to flow into Israel from domestic as well as international investors. I think there are 65 cities in Europe or EMEA that have produced unicorns. However, the two cities that produced more than 100 units were London and Tel Aviv.
RR: From a business perspective, the impact is minimal. The ecosystem is incredibly rich and is actually far ahead of Europe. They have been building a global company 10 years ahead of Europe. Where there could be an impact – and I think we all need to watch – is if this conflict affects the domestic politics of each country and if more right-wing or left-wing governments come to power. You can see this impact in the Netherlands. You see what happened in Slovakia (a populist with populist sympathies for the Kremlin was elected prime minister for the third time in October). So I think we need to really look at how this plays out in domestic politics. The direct impact of these conflicts on business is small.
But that doesn't mean the relationship is strained. In America, investors can't really talk about this.
RR: no. no. We can engage much more in sensitive conversations in Europe. . .
. . . Better than crazy Americans. Another problem specific to Europe is the lack of late-stage capital, which has persisted for many years. Speaking to the FT last year, one investor called it a 'Missing Zero' case.
SK: One or more zeros are missing. See, the half-visible pane is the Bay Area (Silicon Valley, Palo Alto). Their ecosystem is 53 years old, ours is probably 20 years old. So being on par with the Bay Area when it comes to early stage deals means we're moving along pretty quickly. That means you're catching up.
There are rounds of $100 million or more that reach the Series B and Series C stages, and compared to the Bay Area, we're only doing a quarter of those deals. This is pathetic. If you look at the UK alone, there is a $35 billion gap between the Bay Area and the UK. We're basically where the Bay Area was in 2014. There is a lot of activity on the policy side (on which the British and French governments in Brussels are focused), but in the end none of this is resolved into policy. This is done through great (local) companies that people can invest in.
But you dodged a lot of bullets. If you think about all the money wasted by some of the companies that invested in this $100 million round . . . Maybe it's not that terrible?
SK: I think what Silicon Valley is really understanding, that we haven't figured out yet, is that a lot of the capital that you deploy in the later stages can be sort of offset. , you could get 20,000x your return on the open market. So I think we still have a lot to learn from the Bay Area.
RR: I think there is something to be said about what you said. I believe that because this (capital) gap is effectively created, European companies have to be more lean and as a result European markets are less volatile. It doesn't get too expensive or overheated on the way up, and it's symmetrical on the way down. If you actually look at the risk reward, it's actually a better market because we don't end up with this massive capital glut.
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