#27 – Start-up and investment landscape in Europe – the good, the bad and … the reasons for optimism
We deep-dive into the nuanced – and somewhat less than stellar – history of Tech in Europe and how start-ups and investors are making up for lost time, leading to an ever maturing ecosystem, with significant reasons for optimism. Finally, we discuss the increasingly intertwined destinies of US and European Tech.
- Intro (01:33)
- Section 1: Framing the European start-up and investment landscape (02:20)
- Section 2: Investment Approach in Europe (17:18)
- Section 3: Movements from US to Europe (51:19)
- Section 4: Movements from Europe to US (59:02)
- Conclusion (1:05:39)
- Bertrand Schmitt, Tech Entrepreneur, business angel, advisor to startups and VC funds, co-founder at App Annie, @bschmitt
- Nuno Goncalves Pedro, Investor, Managing Partner, Founder at Chamaeleon, @ngpedro
Our show: Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news
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Nuno: Welcome to episode 27 of Tech Deciphered. We’re going to address the tech landscape in Europe, focusing on the investment landscape, as well as the startup landscape, we will go into the typical entrepreneurial approaches as well as investment approaches in Europe, the mindsets, the tactics, the profiles, as well as the typical exits, we will then deep dive into the present state of Europe and how we see it evolve over time.
Bertrand: Thank you Nuno, good to be here today with you and to discuss this fascinating topic for us, we are both Europeans. Obviously I’m French, you’re from Portugal. We have seen the European landscape changing dramatically over the past 20, 25 years. So that will be very exciting to talk about this.
Section 1 – Framing the European startup and investment landscape (02:20)
Bertrand: I guess maybe we can start about controversies that happened a few months ago in June when The Economist had a big cover on the state of the investment in Europe and how Europe was really not doing much in the tech industry. interestingly enough, there was a quick swift reply from the founder and CEO of Stripe Patrick Collison, who is not just running Stripe from the U S but he’s also a European citizen being Irish
Nuno: Yeah. His comment was basically saying, all of the points that you raise are great, I think you haven’t really shown the case for optimism right? Where there’s a lot of great successful companies coming out of Europe. He was mentioning a few that, are obviously runaway successes, like Spotify, Klarna, N26, UIpath, wise and a few others.
And he also obviously talks about Stripe and its role, although Stripe is more of an American company, to be honest, but Stripe in its role in working with very innovative companies in Europe as a counter position to the economists headline and main articles in that edition.
So to be honest, I think he is onto something in saying there is a case for optimism that wasn’t duly manifested in that edition of your magazine or newspaper as they call it. It’s very funny cause they call the economists still the newspaper, although it’s in my view of magazine.
Bertrand: Maybe you want to restate the position of the economist.
Nuno: Yeah. The position of the economist is that basically the U S has taken over, right? You have companies like apple that are worth more in their view than 30 firms in the German blue-chip Dax index combined. Obviously we have Amazon, we have Microsoft, we have Google all these are multi-trillion dollar companies now, actually.
And so their point is, in some ways, Europe has lagged behind. I think their point was very focused also on the old Europe and where, even the big emerging tech winners, like SAP took a long time to get to fruition, took a long time to get to a certain scale. Whereas it seemed like magically in the US, they popped up not just like mushrooms, but they also got to valuations that were ridiculous much faster.
So that was their position. I don’t think their position is totally wrong in some ways. And I believe it was an editor letter actually. So it was a letter to the editor by Patrick Collison, I guess if it wasn’t Patrick, they wouldn’t have published it. But it was a letter to the editor where he was saying well, you sort of missed the optimism case. And we will talk about it a little bit later in our section two and beyond, that there is definitely a lot of great stuff happening in Europe in terms of investment landscape ,startups swift changes in mindset from everyone concerned, all the key stakeholders around government, venture capital, private equity, the entrepreneurs themselves. So all of that I think is a case to be made.
So it was a little bit of a semi controversy because the economist’s obviously is incredibly well-respected, and rightfully so, publication, and Patrick is also a very well-respected entrepreneur, very smart, very sharp someone who’s blazed the nuances very well, obviously with a very successful company in Stripe.
But at the end of the day, I feel the case we’re going to make around the European landscape is a little bit along the side of Patrick, there was a lot of optimism to be had around what’s happening in Europe.
Bertrand: Definitely. And let’s not forget Stripe might be the highest valued private company in the US at this stage. I’m not sure what’s the latest private valuation, but it’s a biggest as far as I know. So he’s not any random entrepreneur, it’s not any random company. And for me it felt, what the Economist publish was a vision of Europe five or 10 years ago. It’s a vision you could have of China maybe in 2000. But without thinking, where is it going? And we will see the landscape in Europe has changed dramatically in the past five years. And it’s not coming from nowhere obviously there was a gradual buildup over the years over decades.
Let’s not forget how many engineers, scientists are trained in Europe. So there was a huge base of talent that was in Europe, but that was not directed towards entrepreneurship, towards tech. Europe is starting from I would say a very strong base and we will talk more about it.
But yeah, I think there has been a dramatic change in trajectories in the past five years. I am personally pretty optimistic about where this is going. And actually these are some data points where you could argue that Europe is actually is the next big thing after US, after China. It might be Europe that’s next in term of how many unicorns are being shaped. Obviously we don’t just want to go to unicorns, but to real exits. Be they IPO or acquisition. And that might be the one piece that’s still a bit missing from Europe, but we can talk more about that later.
Nuno: And dipping a little bit into the past. And I won’t go into the fact that I actually met John, Patrick’s brother, and still very much involved in Stripe at a panel many moons ago and failed to invest in Stripe. So that’s definitely very high on my list of antis. So I won’t go into that.
That’s still very sore but going into the entrepreneurial approach in Europe and what it has been over the last few decades, if we go back in time, Europe in some ways was built on small and medium businesses. If we look at the best of the best the real companies that are the backbone of Europe we typically talk a lot about the famous mittelstand companies in Germany, the sort of small and medium business of Germany that really fuel the economy and that whole engine that, obviously some of them are cyclic some of them are not so cyclic, but that of which stood the test of time, but rarely we’ve associated Europe with fundamental entrepreneurial behavior from a very high risk-taking perspective.
If we look at the origins of a company like SAP we see it as almost like an emergence of a really good software house that then at some point figured out that there was a productization around that they’re doing. And then maybe a couple of decades later just hit product market fit at a scale, probably never before seen in Europe and went to that next mile.
So this whole notion of very rapid growing tech companies, startups, is a little bit more recent. The entrepreneurial approach in Europe has been to businesses that are self-sustaining. Normally relatively revenue generating even from very early on in the development of the company, which is, we will go back to that when we talk about the investment approach in Europe in the past versus today, is very different from the U S so this notion that you start making money earlier, that almost you’re like cashflow positive earlier, that you need to generate cash earlier. And this is not only true in B2B. It’s also true in B2C, which has been actually a big issue in particularly in consumer plays in Europe, because there wasn’t that much of a focus on traction and retention engagement of users.
Actually very early on there’s a focus on monetization. And so the entrepreneurial approach has been very much around that, around building solid businesses relatively early on. And there’s nothing wrong with that. The problem is when you’re building very solid businesses early on, and you’re very focused on monetization and making the company profitable, you’re missing growth.
You’re not being as aggressive on, on growth as you should be for reasons maybe Bertrand you want to talk a little bit about, but certainly that is very different from sort of your classic, in particular Silicon Valley / Bay Area, company that thinks through growth in a very different way, thinks through profitability in a very different way.
Profitability is something that will emanate later on, product market fit is not always linked to profitability. It’s actually in many cases, rarely linked to profitability for its first stages.
Bertrand: Yeah. And to be clear, some of this is still there. Some of this mindset is still there in Europe with some companies, some entrepreneurs and again it’s totally okay. But typically at least in tech where competition is intense, that’s not really how you can build world-class companies, because there is a race when there is a new business model coming up, a new type of products coming up from all of over the world to raise, to build the biggest companies, most successful companies.
And for that, typically you would need venture capital to reach your objectives. So that has been an issue in the past, and I totally agree with you. I’m seeing companies who even today, or bankers, who make big claims that yes the company is profitable or would be profitable in six months.
I’m like if you have a great business model why would I care? I want you to move pretty fast and get more market share. That’s what matters. If your TAM is big enough why wouldn’t you keep investing in the business? So for me, we still have some interesting discussion, but obviously it’s changing. So I totally agree with your perspective.
I think that one of the issue has been for entrepreneurs and VCs alike, it’s some sort of you know what there is no real exit opportunities for me. I might find some seed capital, some series A capital, but beyond that, it would be tough to find growth capital to get very exciting exits in the billion dollar range.
So my expectation as an entrepreneur and VC, is that the best I can do is sell this business for 100 to $200 million valuation. And that’s it. So I cannot over accelerate. I cannot over invest. I won’t get investors to do more and actually by design as a result, I’m building a business that might scale from my home country, but is actually just focused on scaling to Europe so that when the big tech companies in US or Asia need to expand to Europe, I will be the logical acquisition for them.
And so my goal is just to be a small acquisition on the way of much bigger companies that are going to be global world leaders. And I think it’s this mindset both from an entrepreneurial perspective and from a VC perspective has been changing dramatically. Now entrepreneurs realize that they can find growth equity.
And that exits might be much more interesting than they used to be.
Nuno: And maybe let’s take again a step back into the past and understand some of the reasons why this was happening. On the entrepreneurial approach, the notion almost that you’re saying it’s almost like there was no focus on the exit. There was a focus on sustainable businesses. And sometimes there was almost a ridiculous focus on unit economics, more than anything else.
Unit economics were more important sometimes than actual product market fit at scale. And as you said, I can make my money locally. I don’t need to go to other markets, but then that’s not a very significant type of product market fit in some ways. But if we look back on entrepreneurs and how they acted and who they were, they were normally older and we’ve had this discussion before old versus young doesn’t really necessarily make a difference.
But what does make a difference is they were older entrepreneurs. There were people that had gone through big corporations. There were people that had an idea to go to the next level. There may be people that were stable in their lives that decided I am going to build my business. Obviously there’s exceptions to everything I’m saying.
But there were probably more in that camp. They young entrepreneurs, a more recent phenomenon over the last few years when, being an entrepreneur became sexy, Silicon valley expanded to the world that mindset. You know out of college, I will be an entrepreneur that was not true in Europe at least a decade ago, it was not cool.
Bertrand: Oh, I can tell you Nuno, myself 20 years ago, when I started my own business, during my engineering school during so last year. I was a total UFO. no one had done that in my school before. There was nothing to help me do that or to help me manage my workload for my studies or to organize.
They were friendly enough, kind enough with me, but that was really outside of any normal situation. Not only in my engineering school in France, but in most engineering schools in most European countries, that was totally atypical. Now it’s a world of difference when I’m talking to my engineering schools, people graduating there now, it’s a totally different game.
They have incubators, they have support, have small pre-seed venture funds. Everything is there. It’s just amazing difference.
Nuno: So point 1 is this profile of people, right? Point 2 that I would like to make around the entrepreneurial approach in Europe in the past is it was very much an entrepreneurial focused approach to the market that in some ways, felt like I will make this work and make this work in the market in the way that I know I can make money quickly.
The problem in most of these markets. And if I look back at Portugal, our gen one of big startups in the late nineties, It’s you end up doing services rather than products. And so that whole mentality of services versus products was very entrenched in sort of entrepreneurial activity in Europe for a very long time.
I want it to sell to European space agency. I wanted to sell stuff to Siemens, to the big corporations, I want it to fit into a value chain. And the problem with fitting into a value chain is you don’t disrupt it. You play the game. And once you’re part of a value chain, either you get acquired by the value chain or you get killed by the value chain, your upside is almost limited by nature.
And that, I don’t think was something that was very thought through time in particular by governments and how they give incentives to companies. But it’s sort of part of that old Europe, in some ways, in terms of entrepreneurial approach, the final piece I would highlight on the entrepreneurial approach, which is very important.And maybe it’s a really good segue into the discussion on the old approach around investment in Europe is the fact that you rarely had multiple startup entrepreneurs or what we call the classic multiple founder, or the classic serial entrepreneur, as we call it in the U S, the person that does startup after startup.
I actually, if I had to go back and sort of look at one or two generations older than me, the only serial entrepreneurs that I know were people that did services businesses, and they normally did either complimentary services businesses, or they did linear services business, where at some point they exited to a big service business that came into the country, again, very local approaches, and they started a new one on the side, or they found there was a new opportunity and they created a slightly different business on the side.
Again, the problem with that, that we don’t have a lot of sort of serial entrepreneur is related to two things. One is that then people would not go back into the market. We’ve talked about this in the past. What makes you know, Silicon valley work? We talked about it in our episodes around Silicon valley, this notion of the insecure overachiever that you lose your relevance in the market.
If you stop operating, if you’re not there anymore, that didn’t exist in Europe. And so what happened in some ways, as people would do their money, they would pick up their little money and they would move on with their lives and live very nice lives. But two things would happen. They wouldn’t start new businesses and they wouldn’t invest in new businesses.
And so you would lose two things, you’d lose the next company or the next startup, but you would also lose the angel investor. You wouldn’t have the angel investor. Again, we know that’s changing, but that’s the old Europe.
Section 2 – Investment Approach in Europe (17:18)
Nuno: And if we look a little bit into a segue into the investment approach in Europe, that also links really well I think with the VC infrastructure, the growth equity infrastructure and the private equity infrastructure in Europe. First of all, let’s start with profiles. What are the classic VCs in Europe and who are the classic investors in Europe? In the first instance, many of them came from investment banking.
There were deal makers, right? And we have nothing against investment bankers, right? They’re a significant part of our ecosystem. They have tremendous amount of value, but what that meant is there were very financially focused investors. And when you’re a very financially focused investor in a late stage company, that’s fine because you have P&L, balance sheets.
You have very good decisions that you can make as a private equity investor, as a late stage investor, even as a growth investor, to a certain extent, looking at unit economics. But if you’re an early stage investor, very focused on financials. you have a huge problem because first of all, when you invest, there is none.
Once there is some financials you’re going to start pushing for profitability very quickly when that’s the wrong thing to push for. And number three, the experience you have is not really as an operator of companies, it’s really as a banker and as a banker, you are part of a service provisioning bracket of the market, which is a significant one, but it’s not a builder of products.
And it’s definitely not a tech developer. So in some ways I think Europe suffered a little bit early on from the fact that there was a lot of dependency in terms of talent from the banking industry into venture capital, even early stage venture capital, just because in some cases, these were the people that were the most capable people to raise funds from limited partners.
They were the guys who had access to people to raise funds from. And so that made sense. They had access to capital and they started venture capital firms. Now to be very clear, some of these venture capital firms today are exceptionally good. They’re tier one. They compare to the best in the US. They actually compete in the U S but that was the beginning of venture capital.
And that mindset I think is still percolating. If I had to say, oh, it’s changed dramatically of all the things we’re going to be talking about, like exits, entrepreneurs, startups, probably the venture capital landscape in terms of talent is the one that is still changing in terms of mindset. In terms of profiles, that’s changed a lot, but in terms of mindset, it’s still changing a little bit slower than all the others.
And that for me is a little bit disappointing.
Bertrand: I agree with all your points, I will rebound first on your last point concerning the background of investors in Europe. For sure, being an ex entrepreneur or an ex operator has been the absolute exception in Europe at nearly every stage of the investment cycle, where in the U S, you can see, it’s not true.
You will see that especially early stage, you see a lot of ex entrepreneurs who understand entrepreneurs who understand what it means to start a company who have a good understanding of how you build a new market, how you disrupt new markets, and how you have to take risks in order to get rewards.
So of course it’s taking time for this to change in Europe, because I would say that new generation of entrepreneurs, builders in Europe that are trying to build big and go big. I mean it’s still brand new. So they have not graduated yet from entrepreneurs to go on the investment side. So they are still too few of them in the investment side in Europe. And as you say it’s especially a bigger issue early stage or growth stage. At much later stage, pre-IPO it’s a different story. It might not be as needed in term of background. So I agree with you.
The service mindset has be a big one. And I think that right now, I still see that as an issue from the sense that when you see the teams that are being built in Europe, they have trouble to find people who have a true product background. Finding product managers, CEOs who come from a mindset of building products, not building and selling services, it’s still pretty rare.
So they are learning, they are trying, but it’s not like in the US, or China where finding some X product managers, from Google, from Alibaba is relatively easy who is going to start a company or that you are going to recruit to join your startup. In Europe, you have much less of this type of profile because this is the type of profile and work that is typically done at HQ.
And having so few big tech companies headquartered in Europe. We don’t have a lot of these product management profiles in Europe or if they exist, they are not focused on real tech products that was not their background. And that’s obviously one issue european companies have to overcome, and it might be sometimes by bringing talent back from US and Asia who were from Europe and want to go back and now realize that, you know what, I might have the same opportunities back home.
I don’t need to stay in the U S to work on interesting business and to have great financial opportunities. So I think that the good news is that it’s changing. You could argue that with COVID this migration back might’ve accelerated actually. So I’m quite hopeful on that side that we’re going to solve that.
Nuno: And at this point, some of you might be thinking well, but I know a few exceptions to everything you just said and, as I always say rule is only really interesting if there are exceptions to it, because then there’s a potential for arbitrage as I always call it. And obviously there are some great cases like Atomico, which was started by Niklas Zennstrom who had done obviously Skype.
There’s a bunch of other great VC firms in Europe that were started with a very different approach by former entrepreneurs and have been around for a while and have changed a lot of the psyche I think of Europe.
Bertrand: To keep on that, take Balderton for instance who is managed by Bernard Liautaud from business objects’ fame acquired by SAP for 7 billion. We have, one of the firms I’m advising, Red River West, that has also been launched by ex-entrepreneurs. So I think there is a new wave, but as you say it’s the exception.
And even Balderton we’ll come back to them later was effectively the spawn of Benchmark, it was Benchmark Europe who turned into Balderton, so again, the approach came from somewhere else. All of this serve a little bit the past. We’ll talk about the future in just a second.
Just to finalize the framing on the past, because it’s very important to understand why the present and the future will be potentially more optimistic.
We are more optimistic about, and it’s more interesting.
We’ll finalize with the topic that you Bertrand mentioned earlier, which is exits. And the typical exit in Europe was simple. It was either there was no exit: companies just gave dividends or they generated money for their owners or they exited to the value chain that they were deeply embedded in.
Many services, businesses were bought as bolt-ons, as many of the large service providers were expanding into different countries. And so that was their local sort of capability building play? Not a lot of IPOs. There were not a lot of IPOs obviously we always had London stock exchange.
There was the whole push with AIM, which I think was marginally successful. We’ll call it like that. Obviously several local stock exchanges in Europe. Now, part of Euronext, there was a lot of things that happen, but IPO wasn’t a necessary condition to exit. It was normally a trade sales.
It was normally to a larger company. In many cases, it was a company that was in your value chain in many cases, that was also a company that might be already on your cap table. And so obviously that capped a little bit the exit size and obviously it capped the upside for investors. So this became, again, a chicken and egg issue.
In some ways the exit potential is capped. So the size of the company and where it can go it’s capped. So the money I’m going to put into is also capped. And for a long time, that’s the reality we lived in. A few extraordinary companies were created along that way. I talked about SAP and maybe, the words I used about it’s overnight success that took many decades.
Maybe they weren’t very kind, but it is an amazing success for a European software company. Even at a certain point in time, they decided that they needed to have dual headquarters, right? Germany and Silicon valley, because there was a need to go to the next level in terms of the points you were just talking about product management, growth mindset, people that were maybe more specialized around certain areas around software.
And it was difficult to find some of those skills in Europe, as well as the fact that many of their big clients were actually here in the U S so again, exits were limited and IPO was not only not a given as it was more of an exception than a rule.
Bertrand: Yes that was a tough place to be. And as a result, the whole ecosystem was organized around that You did not have a buildup in capital capacity and entrepreneurs were adjusting their expectations and were in a way cornering themselves. Around five, seven years ago there was actually a few governments in Europe, because a lot of things are government led in Europe, who started to realize it was a strategic issue for Europe. They cannot keep going that way. A strategic issue for a few reasons, as we just said, when just one US tech company, represent the total valuation of your top 30 or 40 biggest companies you realize you have a real problem, you cannot keep strategically running a country like this. It’s also a problem in term of job opportunities on the long run, of course, because then how do you make sure that your population is given the best opportunities if they cannot control their destiny step-by-step.
So I think there was a realization that they needed to do something and to make sure that there is a better investment climate at every level of the food chain to support entrepreneurs and basically create an environment that’s better for entrepreneurs. And also, I believe, especially coming from France, that in the past in France being an entrepreneur, if you are making money, you were corrupt, if you are having a successful business, it could not happen without exploiting your workers. That was the mindset 10, 20 years ago in Europe, if you can imagine. And they think this mindset has dramatically changed.
And I think it has come from multiple reasons. Maybe just looking at how positive the change was from the US, thanks to all this entrepreneurial energy. But it has changed. And I think we will see that in the numbers there has been a dramatic shift as a result over the past few years.
Nuno: And I think it is factually correct to say that governments have been an incredible catalyst to all of this on all sides capital that’s infused into the markets that feeds sometimes even vehicles that feed startups directly, that feeds venture capital firms, European Investment Fund, local initiatives in almost every country.
So capital is one, regulatory is another, how can you act? What sort of licenses you need to act? And under which perspective do you need to act? Laws in general, labor laws were greatly made more flexible in many countries, Portugal, France. We have probably two of the worst countries in terms of labor law in Europe and they’ve been made more flexible, not fully solved, but more flexible, much better.
Creation and liquidation of a company have been made also much easier in many countries. So there’s a lot of government intervention. I think that’s factually spot on, but also, and as we are changing a little bit more to the present, I think there was another effect over the last decade, which is Silicon valley I believe has made itself more known to the world.
And there’s a couple of factors behind that. Some of them we’ve already talked about sort of the new epic of venture capital, where you had VC firms that were traditionally very closed entities to entities that became branded that had marketing. The Andreessen Horowitz of the world, Mark Suster and Upfront, all these guys publishing a bunch of information, Brat Feld publishing a lot of information around entrepreneurship and how should you negotiate stuff? And all of that.
So almost taking this into pop culture type access.
Secondly, obviously journalism and other means of communication that have made this information much more accessible globally to everyone. There were huge asymmetries of information on how things were done. And those are symmetries some of them still exist, but many of them have been mitigated over the years. And that is a very powerful aspect of what happened. And I think all of these things together, and then the creation of this mythology of companies that go from zero to a billion – unicorns.
Bertrand: Zero to one.
Nuno: This was edified around all these myths around Twitter and Jack Dorsey and Mark at Facebook and Sergei and Larry with Eric at Google and all of this was made into pop culture in a way that it became totally news of the day and everyone consumes this.
So my hypothesis has always been that it’s not just the government led piece, but also it became cool to be an entrepreneur because everyone saw there’s something of an upside here that is incredible. And now I have more information about what it means, and I have more information on what venture capital is, and I have more information on how I should negotiate a deal, and I have more information on what it takes to go from one level to the other.
And that was not there maybe two decades ago. So definitely that is a big shift.
Bertrand: I agree with you. For sure, in the past, we still had the Bill Gates of the world. But they did not totally make it to the pop culture the same way in Europe, at least. But I agree with you the past decade has seen an opening up of information that was in the past more limited to a privilege few either in Silicon valley or more recently in Beijing maybe, and thanks to the bloggers YouTubers. And I think that has made a dramatic impact.
And also the fact that you can work so much more easy remotely from Europe to US and vice versa, organizing your big international corporates all over the world. There has been a wide transfer of information to European HQ of Google, Facebook, and others who started step-by-step to really invest and develop some products from Europe. So there has been a huge knowledge of transfer.
So it’s a pretty exciting time, and maybe you could argue that cloud computing has changed the game: cloud computing as make it easier to start a company and especially by European standards, not to over-invest too much initially. To be able to start relatively cheap, on great foundations in order to scale a business step by step, and you could combine that maybe also with the rise of, at least in the B2B space, with the rise of SaaS, software as a service, where suddenly the rules of the game are better understood quickly, and actually are connecting quite well to a prudent, but scalable and high growth approach to business.
Nuno: And in some ways, the scalability of businesses, everyone always used to make this joke that China, everyone was copycatting it was just a copycat of a taxonomy. Honestly, Europe was exactly the same. The tech companies that were emerging were copying what the American companies were doing, but it was the worst of both worlds.
They were copying what the Americans were doing and they were applying it to small markets, right? Where your largest market was 60 million or 80 million, right? Like Germany’s 80 million people. Whereas China was copying for a market of 1.4, 1.5 billion people. That’s significant.
So in some ways we always criticize China for this, but to be honest, a lot of the tech players in Europe were doing exactly the same at the smaller scale, because it’s just the scale of the country was smaller and that’s life.
Bertrand: And about, Rocket Internet in Europe was a perfect example for that copycatting approach. they tried to go beyond Europe to be fair to them not always successful there, especially in Asia, it was not always successful. They got some success in Asia.
But yeah you’re totally right. It was the worse of both worlds: copycatting and small market. But I would say now Europe is changing. Pick a company like Ledger, like a Sorare I mean, it’s totally innovating best in class world class products. They have not copied anyone and it’s European and it’s hundreds of millions of investment and billion dollar valuations.
Take in another industry, “buy now pay later”, you talk to people in the USA, they will all talk about, how affirm is great. Blah, blah, blah. Yeah, but guess what? Klarna is bigger.
Nuno: Yes. And that sleds to a gold rush in some ways in Europe in the current tech landscape in Europe, of growth in venture funding that is beyond almost belief, certainly in the first half of 2021. And Bertrand, do you want to go a little bit into that?
Bertrand: Yes. Sure. What’s for me exciting is that it’s not just the growth of venture capital in Europe, which obviously is great. It’s great to see multiples, we are talking about four or five X growth in venture capital over the past five years, maybe in Europe, but what’s very important is that the share of venture capital globally in Europe is growing. So it has been moving from a single digit percentage of investment of venture capital globally, going to Europe. We were talking about 13% in first half of 2019, 13%. Now we are talking about 20% of global capital being captured by European startups.
And I think we start to get into the right numbers.
Nuno: And it’s a much bigger pie just to be clear because the first half of has been silly in terms of venture capital investment around the world. So 20% of a much bigger pie.
Bertrand: It’s 20% of a much bigger pie, but for me, it’s important that it’s growing in proportion to the place of Europe in the world, in terms of GDP in term of population size, in term of funding power in term of engineering talent, scientific talent, it was totally disconnected to where it should be.
And I don’t know where it will end up being 25, 30%. At some point it will slow down, obviously. But that’s very exciting to see that because this stuff compounds, we might not see the consequence yet in term of successful exits: IPO, acquisition but definitely there is a huge buildup of very successful companies in the private market that are going to be more and more visible over the years and definitely in a decade.
Nuno: And we’ve had obviously a growing up in terms of funding across the table from very early stage to late stage, but obviously the late stage is commanding the big volume of investment. And we do think there’s a huge attribution to that, right? So if we look at late stage venture series C and beyond, we’re looking at a total of 41.4 billion piece of the pie into late stage investing out of a 59 billion piece of the pie, and this is for first half of 2021 on European startups. So again it’s a huge percentage of the capital is going to late stage which is for us series C and beyond.
Bertrand: And to have a focus on a specific market, I happen to know well, the French market, the changes have been pretty insane.
First, when you talk about France, when you talk about Germany, of course, you would be remiss not to talk about what happened with Brexit. Of course, Brexit has created fear, uncertainty and doubt, or FUD, as we like to call it in the software space. I think initially that was an acronym used to talk about Microsoft approach to the competition.
But interestingly enough, that’s something that played out because of Brexit. Suddenly successful continental Europe companies were not seeing as the next step either to move HQ to the UK or to find UK investors. Suddenly it was okay, we have to stay on our ground and we have to keep developing from where we are, find investors where we are.
So that has created an opportunity for the French and German ecosystem to develop themselves faster, and what we have seen in terms of metrics, and it’s pretty insane when we compare Q2 2021 versus Q1 2021, we’re talking about two X more fundraising in France. When we’re comparing the first six months of 2021 they have raised nearly as much as for the full year of 2020. So we’re talking about two X year on year or quarter over quarter.
This is pretty insane numbers, and we see also some very significant exit actually, some IPO on Euronext. So it’s more and more dynamic in term of what’s happening, and if initially early on during the pandemic the rebound was not as fast as American companies it has definitely happened in 2021 both in term of financing, but also in term of sales, revenues coming from Europe.
Nuno: Yeah, and what would you attribute that to? What were in your opinion, the reasons for that to happen
Bertrand: Again, I think Brexit has made things clear that you don’t just have opportunities in the UK and I would say the Royal path to grow in Europe is not anymore from a London headquarter. It can be from a Berlin headquarter, it can be from a Paris headquarter. Let’s not forget that both UK and US they have a huge talent issue. They are not making engineers anymore. They are importing engineers. They are not making them. It’s not a problem in continental Europe. It’s not a problem in France, not a Germany. It’s not a problem in Eastern Europe.
It’s not a problem in Russia. If I take an expensive view of Europe.
And so that notion that you have to go to the UK, or you have to go to the US to move headquarters, to fundraise, you know what, actually there are uncertainties in this world with Brexit and with COVID.
But now actually we realize, no we should be doubling down because we have an incredibly good situation for talent. It’s also a talent that is not just very qualified, but that is also cheap these days, related to the US, to China.
So I think a lot of investors are realizing it’s a great opportunity, and if you take France for instance, I was looking at I believe it was Q1 2021, all of the top five financing were from foreign investors, meaning investors from outside Europe, four were Americans, one was from Asia, from Japan.
And so my point is that I believe that we’re also facing a situation where investors from outside the EU are realizing that there is an opportunity in Europe that was missed.
Nuno: And the good news about that is if there are opportunities for great startups to emerge, then venture capital firms and other investors will also become more focused. We know that the whole notion of very focused and specialized VC firms was not necessarily a part of sort of the status quo in Europe.
So most funds were generalists and there’s nothing wrong with generalist funds, but obviously when you start having a lot of companies that do very well in the software as a service space, you start having funds that focus on software as a service. When you start having companies that do really well on the vertical SaaS or hardcore enterprise space, you start having funds that focus solely on that, when you start having companies that do really well in industry 4.0 / IoT, you start having funds that focus on that.
And that’s also part of the change in landscape that we observe in Europe.
It’s not just that we have more and more successful companies across the board, but also in areas where you start having critical mass, you start having the emergence of investors that focus on that area. And that is always very positive because then you have investors that understand your space, that understand what makes that ecosystem works, and also can give you more value in that specific space as well.
And so for me, that is the cool part of the whole part of the equation, which is the whole ecosystem grows as one of the pieces starts becoming, I would say more granular and more mature. And we’ve observed that in France, we’ve observed that, to be honest, almost across the entire European landscape, Germany, Scandinavia, even in my home Portugal where I would say probably we’re now a tier two country in terms of Europe, which is impressive for a country of our size.
There’s definitely a lot of things happening in that landscape that are very positive and ecosystems become, as I said, more granular, more mature.
Bertrand: And maybe to double down on the explanation, I think COVID was also another reason because initially COVID was a shock everywhere. Maybe even bigger shock in Europe. Companies, people took more time to adjust maybe and in other locations.
But for me, what was interesting is that in a way the regional investors in the US become national investors in the US “thanks to COVID” quote-on-quote because they could suddenly invest remotely.
And the national scale investors, in the US realized in a way, thanks to COVID, why limit ourselves to the US as our playground. Let’s try and kick tires and invest in Europe or in Asia, or in other places.
And I think that has been a pretty dramatic shift. It’s 6 hour time zone difference, but that’s probably about it. We can have a video call pretty easily.
And maybe another piece, I don’t know for Portugal, but for France. I have seen a dramatic shift.
People were not speaking very well English 20 years ago. Either younger people, as well as older entrepreneurs, but now they do speak good English the younger entrepreneurs, or the older entrepreneurs. So doing business with Americans with British firms has become much, much easier.
So of course it might come with issues because if suddenly you have a rush of foreign investors who don’t understand European culture, French culture, German, or rules, regulations, how business is done. That might mean trouble down the line. There might be a disconnect between expectations on both sides.
There might be misunderstanding, so I’m not saying it’s all good. But it’s definitely a big step in the right direction I believe.
Nuno: It definitely is. And it has led to a really good momentum. And you were talking about the speaking of English. Portugal has always been a highly benefited country because we never had dubbing. We always had subtitles. And so I’d say my generation, maybe one generation, even older than mine onwards, everyone speaks really good English, which is almost shocking.
Sometimes it was a little bit of accent, but everyone speaks really good. It’s one of the things we actually sell for foreign direct investment, et cetera, because we all speak really good English besides having amazing weather and great engineering talent. Following sort of the example of the French system of engineering.
And maybe as opposed to other countries that are a little bit more lax on what engineering actually means. And we’ve had obviously record fundraises, you’ve talked about Ledger ready. A lot of really good European companies raising a lot of money. We will talk about this movement of US into Europe in just a bit but just focusing for a second in Europe itself and its companies that also means that the valuations of European VC backed companies have gone through the roof.
And so the first six months, again, of 2021, there’s been records broken across the board on stages of fundraising, which is also not very shocking. I have shared this with you Bertrand and we just did a couple of episodes on the bubble. I do think there’s a little bit of a bubble there’s might be too much capital also now allocated to Europe, into European back companies.
We shall see where we will end up in some ways I’m now feeling there’s almost in some markets, more competition for deals in Europe, than in the US or even in Silicon valley, which is shocking and valuations in some ways might be even more extreme or there might be more overvaluation in some companies in Europe than I see even in the bay area, which is again, super shocking.
But certainly there is a positive signal to all of that, right? The positive signaling of a lot of players that are doing cross-market investment, German players investing in Portugal, French players investing in other parts of Europe. Players investing in France, France was always in some ways, felt always a little bit like an insular market, but it probably has outgrown that by now.
So there’s a lot of really positive signals. Obviously the stable of unicorns that we’re seeing in Europe now has gone through the roof as well, which again, is a new factor in a very interesting factor.
Bertrand: We are talking about 200 unicorns in Europe from, five years ago, it was maybe a handful from a handful to 200 unicorns in Europe in five years.
Nuno: 200. That’s incredible. And so all of that are very positive signals. We’ve talked a little bit about French the ecosystem. We know that the German ecosystem has been very strong, Berlin maybe one of the core tier one cities in terms of investment in Europe. We won’t belay too much on that, but again, just to finalize, maybe painting this image of the landscape of startups in Europe overall, very positive.
My final comment would be, I do feel there is a bubble. I do feel there’s a lot of overvaluation. I do feel there’s a lot of companies raising money right now. At different stages, not just late stage, but even in early stages that maybe in other circumstances wouldn’t be able to raise. Certainly wouldn’t be able to raise at the evaluations that they’re raising with very little economics.
So there’s almost a shift to the contrary movement that we talked about the past, where everything was about profitability, et cetera. Now it’s oh, your evaluation is 25 million, but you’re not making anything right. And there’s no revenue you are a SaaS company you don’t have almost any ARR and you were worth 25 million for reasons nobody really understand.
So I think we might be getting too much of that counter movement, a bit the contrarian view. There will be a realignment. There’s definitely something brewing here. That’s exciting for the landscape because you start having successes. You start having entrepreneurs that make good money and you start having entrepreneurs that then fuel that money back into the market as angels.
Some of their early employees make very good money as well. One of the issues we didn’t talk about is for a long time, actually having options in a startup that you worked for was not valued. It was almost like I just care about the salary, pay me maybe a bonus, right?
You gave me 1% of the company. I don’t know what that means right. In options. And even the option structures in many countries are very complex. So that is now changing as well as we start seeing people that have companies that are starting to do secondaries or selling or IPOing, where all of a sudden you have a bunch of millionaires overnight and people are like, whoa, wait a second this is happening in Europe as well. It’s not just a us thing. So all of a sudden that money not only is flowing back as angel investments or into new startups that get bootstrapped. But this notion of the option and of stock in a startup starts having a very different meaning.
Bertrand: Yes, and I believe that’s actually a true concern and obviously it’s moving in the right direction. But if you look a lot of European start-ups, it’s still, unfortunately very typical that only the founders have shares in the business, not even proposing any stock option plan to their teams or to have a very small stock option plan for execs, but no one else is in the stock option plan. Or really smaller stock option plans for employees.
And I think that’s a problem because competition is global. People will realize they did not got what they should deserve at least based on global peers. So I guess it will change. It will evolve, but it’s still not where it should be. And in some countries like Germany taxation of options I believe is a huge problem today.
Nuno: And one final thing that I would like to talk about. You talked about engineering talent and the search for engineering talent. It is at some point limited. And in some ways, one of the things that is highly complex about this, that does lead me to believe there is a bubble, there is maybe overvaluation, there’s too much capital being thrown around is you start seeing systematically engineers being paid more and more, very quickly.
In my home country, Portugal, I happened to be on the board of directors of a company there. And you see these cycles of people getting offered, double their salary, double their salary to stay exactly where they are. You don’t need to move anywhere. Your cost of living stays the same.
You just get paid double. And somehow my message certainly to the CEO of this company is always the same, which is I can not believe that’s the true value of that engineer. And so the question, the fundamental question is when will this stop? Because at some point there has to be realignment, right?
It can’t be that we keep doubling salaries on a yearly basis because nobody can cover that. Not even Google can cover that. So at some point, something has got to give and capital maybe disappears, and maybe we have the hard landing we talked in the last episode or the soft landing we had in that last episode, But things will need to contract or at least realign and become a little bit more stable for us to see that end view.
But the fight for talent right now in terms of engineering is incredible.
Bertrand: But, in a way, and I believe that engineer’s in Europe were too much of a great deal. From a global perspective seeing what’s happening in US in Asia, what was the latest I heard that some starting salaries in engineering at Stripe now are beyond 200 K. If you think about some engineers in Europe being paid 50 K
Nuno: But we’re not talking 50 K anymore Bertrand. I mean we are now just talking about people that are getting paid, people that are three, four years of experience, that are get paid ridiculous amounts of money in Europe.
Bertrand: I was talking about after school, but for me, I think there was too much a good deal. I think that the other piece again, is that especially in engineering in Europe, because Europe is not very remote friendly, even with covid, surprisingly.
But I think for engineering, this has changed in Europe over the past 18 months. And so what we see is suddenly, a European level competition for engineering talent and it’s even becoming a global level competition for engineering talent in Europe. I keep hearing about U S companies, no office in Europe, no real sales presence in Europe, hiring remote engineers and ready to pay US level salaries. So I think we are having that competition from these 200 unicorns we just talked about, who understand the value of getting the best engineers. It’s not service business like before, where they were not understanding the true value in a way of top engineers.
And we are having this competition, at least from some US firms to get global talent. COVID has really changed the rules of the game, especially in engineering and financing.
Nuno: At some point people will start going back to Asia and finding other sources of talent in Asia, and then Latin America, then Africa. And Africa there’s already been some interesting plays there as well. So anyway, there will be a truly global fight for engineering,
Bertrand: Totally I just feel that Europe was this, weirdly disconnected market where it was just an amazing great deal for years and decades in term of the quality of the talent, their availability versus their cost.
Section 3 – US movement into Europe (51:19)
Nuno: So, moving, maybe to what we’re seeing in terms of the U S movement into Europe. In particular, the investment movement of US into Europe. We’ve heard a lot of news, obviously Sequoia expanded into Europe.
So the first movement that we’re seeing of this investing from US to Europe is a couple of really big names like Sequoia expanding their activities into Europe, actually the latest announcement that referred about Sequoia having this Meta fund structure on top , which a lot of people like what is that thing?
And I was like that’s called a hedge fund, unless, I’m mistaken. It’s literally the definition of a hedge fund. It carries stuff in public equities and it’s carry stuff in this case, in other private equity funds, which are the Sequoia VC funds. We won’t talk about it today, but very interesting move that fund covers both the US and Europe. It does not cover India or south Asia does not cover China for Sequoia. But it does cover Europe and the US. Again, that expansion is very interesting. Accel has been in Europe for a long time and actually over the big sort of, I would call tier one VC firms, it’s been the one that I would say has probably been in Europe for a very long time.
Benchmark had a play in Europe that became Balderton, now, from what I understand, independent organization. We’ve had circuitous moves from the other side, like e.Ventures that have a strong presence in the us, but they were actually originally German, used to be the former Bertelsmann capital guys the BV capital guys.
Bertrand: Now they changed name, eVentures is now Headline
Nuno: Headline. So that’s a great name.
Bertrand: Great team.
Nuno: So now there’s definitely a lot of VC firms where you would talk to Silicon Valley, San Francisco based VC firms that would say we only invest within sort of 30, 40 miles then it was in the US, and now everyone invests everywhere that they want.
And in some ways that’s the exciting piece about this. We do have this movement of US investors being multi-region looking at Europe. Some of them actually, even looking at Asia, investing there and pushing sort of the flow there. So there’s definitely this view of the world that I feel, someone that’s been talking about being geographically agnostic for 10 or 11 years, like myself now, I feel vindicated.
Now when I talk about it, people are like, yeah, of course. 10 or 11 years ago when I said geo agnostic, people are like, you’re stupid. But apparently it wasn’t stupid. It was maybe a bit ahead of its time. And it’s leading to a lot of really interesting aspects. Like obviously if we look at, and this is a stat that you shared with me Bertrand, the top five deals in France, and you share some of this earlier by firms from outside of Europe, four from the US one from Japan.
You already shared this earlier, but four from the US, four from the US, in France, in a market that had labor laws that were draconian to say the very least where investors would just look at it as nah, too difficult. I can’t fire anyone really. And so all of a sudden, we have US investors playing in France, right?
That for me is always a test of, commitment to the European market.
Bertrand: Actually, that’s very interesting what you just said, because I remember pretty vividly some feedback from either great entrepreneurs here in the US or some great investors here in the US, and they were telling me how there is no way they would even have a subsidiary in France. Just because of also the labor laws and how they were scared about this.
And just by principles, they would not agree and commit to that.
And I’m talking about people who in some cases were enjoying their vacations in France every year, a month or two in the French Riviera. So very well connected to France, to the French culture. But when it was time to talk business were like totally against having any involvement in France.
So as you say, the tide has changed. I think the reality is that on the ground, the reality has changed as well in France, as you say it is more flexible. It is less crazy in term of how the markets are working, so that has helped. But I think there is also a new generation coming up who doesn’t have some old world view of Europe, but is seeing Europe for itself now and how it has changed and not coming with too many preconceptions.
Nuno: And for example, we created Chameleon. So my latest firm, and as we discussed in the last episode, did a close this year on our latest fund and our view from the beginning is that,
Bertrand: Congrats again.
Nuno: Thank you. Our view was, although the center of gravity of it is definitely the US and HQ is here in the bay area.
And we do estimate that a significant portion of our capital is going to be deployed in the US we estimate that the second largest bucket of capital is going to be deployed in Europe. And we have a significant office in Europe that actually in the end might likely be larger than the office here in terms of number of people.
And the validity of it is to your point, technical talent. We are a technically CLI led VC firms. So for us, it was important to get technical talent of the highest quality, certainly with a value for money, part of the equation, that it would be difficult to get in the bay area at this stage. It was interesting for us to look at companies in Europe because we see a lot of great activity in Europe.
So I believe there’s definitely a movement towards Europe. Some people disagree though our friend, Fred Wilson at union square ventures who disagrees.
Bertrand: Yeah, it’s interesting I think he’s pretty much the exception to the rule. He published an interesting blog on the internet, the globalization of venture capital investing and how they were doing more and more investment outside the US but that interestingly enough, where in the past decades their non US investment where mostly in Western Europe.
That was not the case now, since COVID. He’s meaning a lot of investment is now in Asia. So y