When it comes to the world of venture-backed startups, some issues are universal, and others are highly dependent on where the startups and their backers are located.
This is something we talked about this week in London, when TechCrunch took its StrictlyVC series of more intimate, investor-focused events on the road. We sat down with Saul Klein, the famous founder of startup company LocalGlobe, as well as Raluca Ragab, managing director of growth company Eurazeo, and talked with both about how big the US venture capital market is similar – and distinct. at present compared to Europe.
Certainly, European startups and venture capitalists have a lot to brag about these days. (Latest Paris-based AI company to announce significant 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 the two markets have a lot in common is a big lack of exits, which is far from ideal given how much money venture capital firms have poured into startups in recent years (l money that their sponsors would like to recover!).
Below are excerpts from the beginning of our conversation with Klein and Ragab, edited lengthwise. You can also watch the full session below. (Also, psst, our next StrictlyVC event will be 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, during one of their first appearances on stage; and Helen Toner, former OpenAI board member – hope to see some of you there.)
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There is so much to be excited about locally, especially when it comes to AI. What are you most passionate about right now?
Sask. : First of all, thank you for coming here. I mean (it's been) four or five years since TechCrunch had an event in London. So welcome back. What excites us all: (from where we are sitting in King's Cross) 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 to the left in three minutes, I'll come across the global headquarters of Alphabet's AI business, DeepMind, and I'll also come across the people who built AlphaFold (the AI program developed by DeepMind) .
We have four of the best universities in the world here. We're also literally in the heart of this five-hour train ride we call New Palo Alto (encompassing Paris, Dublin, Brussels, Amsterdam, and other entrepreneurial hotspots).
FR : The question often comes up as to what Europe has to offer compared to the United States. And I think we now have an advantage in three major 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 a very long time and we have one and a half times more STEM graduates in Europe than in the United States.
I have to ask: what is going on with the war between Israel and Hamas and Russia's war against Ukraine? As an American, it's hard to imagine how close (to these hot spots) really are.
SK: Start with the easy things! The first was softball, and now you get to work.
It is difficult to know the commercial impacts, according to the Californian press that I have read. . .
Sask. : We both had – and have – significant exposure and engagements with the Israeli startup scene. Raluca was an early investor in (self-driving company) Mobileye when she was (previously a managing director) at Goldman (Sachs). But I would say that on October 9 (when Hamas attacked Israel), when we looked at our portfolio and our exposure, either to founders in Israel or to Israeli founders outside of Israel, like Barcelona, New York or London, the number of people working for them was around 90 founders and around 5,000 or 6,000 people working for them.
The incredible thing is that even though a third of their staff was on reserve duty, these companies continued to produce 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.
FR : From a business perspective, the impact is minimal. The ecosystem is incredibly rich and is actually well ahead of that of Europe. They have built companies with a global vocation 10 years ahead of Europe. Where there could be an impact – and I think we all need to pay attention to this – is if this conflict spills over into the domestic politics of each country and brings more right-wing or left-wing governments to power. You see this impact 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 plays out in domestic politics. The direct impact of this conflict on businesses is less significant.
This, however, does not strain relationships. In the United States, investors can't really talk about that.
FR : No. No. We are much better able to participate in sensitive conversations in Europe. . .
. . . than crazy Americans. Fair enough. Another problem specific to Europe is the shortage of startup capital, a problem that has been going on for years. One investor spoke of the “missing zero” in a conversation with the FT last year.
Sask. : More than one zero is missing. Look, the 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. So you could say that being at a stage equivalent to the Bay Area (in terms of doing deals at an early stage) means we're moving pretty fast – like we're catching up.
When you get to the Series B and Series C stage – $100 million-plus rounds, we (only fund a quarter of) those deals, compared to the Bay Area, which is pathetic. If you look at the UK alone, there is a $35 billion gap between the Bay Area and the UK. We are essentially where the Bay Area was in 2014. There is a lot of political activity that the governments of the United Kingdom and France in Brussels are focusing on, but ultimately none of it matters. is resolved by politics. The problem is solved thanks to large (regional) companies in which people can invest.
However, you dodged a lot of bullets; if you think about all the money wasted by some companies that were investing in these $100 million rounds. . . maybe it's not such a terrible thing?
Sask. : I think what Silicon Valley really understands that we haven't figured out yet is that a lot of the capital that you deploy at a late stage, you can kind of amortize it, (because) if you are in businesses that end up accumulating on a large scale. , you can get 20,000x returns in the public market. So I think we still have a lot to learn from the Bay Area.
FR : I think there is something to be said for what you said. Because we actually have this (capital) gap, European companies simply have to deal with greater rationalization, and I think as a result the European market has lower volatility. It's not too expensive and it doesn't overheat as much on the upside and you know, on the downside, it's symmetrical. In fact, when you look at the risk-reward ratio, the market is actually better because you never end up with this massive oversupply of capital.
More below. . .