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The ups and downs of investing in Europe, with VCs Saul Klein and Raluca Ragab

Date 26 May, 2024

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When it comes to the world of venture-backed startups, some issues are universal, and some are very dependent on where the startups and its backers are located.

It’s something we talked about this week in London, when TechCrunch took its StrictlyVC series of more intimate, more investor-focused events on the road. Sitting down with Saul Klein, the renowned founder of the seed-stage firm LocalGlobe, along with Raluca Ragab, a managing director at the growth-stage outfit Eurazeo, we hashed out with the two how alike – and distinct – the U.S. venture market is right now compared with Europe.

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Certainly, European startups and VCs alike have a lot to crow about these days. (The newest, Paris-based AI company to announce hefty funding comes to mind.) The continent is also facing obvious challenges, including its proximity to two ongoing wars and a continuing dearth of late stage capital. 

What the two markets have very much in common are a big fat lack of exits, which is less than ideal considering how much money VCs were stuffing into startups in recent years (money their limited partners would like to see back!).

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Below you’ll find excerpts from the start of our chat with Klein and Ragab, edited for length. You can also watch the full sit-down below. (Also, psst, our next StrictlyVC event takes place the night of Tuesday, June 11 in Washington D.C., where we’ll be joined by FTC Chair Lina Khan; famed investor Steve Case; Humane AI’s cofounders, in one of their first stage appearances; and former OpenAI board member Helen Toner — hope to see some of you there.)

There’s so much to be excited about locally, especially as it relates to AI. What is most exciting to you right now?

SK: Firstly, thanks for coming here. I mean [it’s been] four or five years since TechCrunch has done an event in London. So welcome back. What we’re all excited about: [from where we’re seated, in the King’s Cross district], I can look into the lunchroom of the Crick Institute, which is the Broad Institute of Europe. If you’re interested in computational biology, it’s literally right there. If I go in three minutes to the left, I’m going to bump into the global headquarters of Alphabet’s AI business, DeepMind and I’m also going to bump into the people who built AlphaFold [the AI program developed by DeepMind].

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We have four of the world’s best universities here. We are also literally at the heart of this five-hour train ride that we call New Palo Alto [encompassing Paris, Dublin, Brussels, Amsterdam and other entrepreneurial hotspots].

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RR: The question comes up many times as to what Europe has to offer versus the U.S. And I think we now have an edge in three major verticals or domains: 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 that we have one and a half times more STEM graduates in Europe than in the US.

I have to ask: what’s happening in terms of the Israel-Hamas war and Russia’s war on Ukraine? As an American, it’s hard to fathom how close [these conflicts] really are [to these hotspots].

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SK: Way to start with the easy stuff! The first one was the softball, and now you’re [getting down to business].

It’s hard to know the business impacts, based on the press that I read from California . . .

SK: Both of us have had — and do have — significant exposure and engagements with the Israeli startup scene. Raluca was one of the first investors in [the autonomous driving company] Mobileye when she was [previously a managing director] with Goldman [Sachs]. But I’d say on October 9 [when Hamas attacked Israel], when we looked at our portfolio and exposure that our portfolio had either to founders in Israel and Israeli founders outside of Israel, like in Barcelona, or New York or in London, the number of people who are working for them [was] about 90 founders and about 5,000 or 6,000 people working for them.

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What’s been incredible to see is that even though a third of their staff were on reserve duty, these companies have just continued to deliver and to grow. Capital continues to flow into Israel, not just from domestic investors, but from international investors. I think there are 65 cities in Europe or in EMEA that have produced a unicorn. But the two cities that have produced more than 100 are London and Tel Aviv.

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RR: From a business perspective, there’s minimal impact. The ecosystem is an incredibly rich one and is actually way ahead of Europe. They have been building globally-facing companies 10 years ahead of Europe. Where there might be an impact – and I think that we all have to watch it – is if this conflict spills into the domestic politics of each country and brings into power more right- or left-wing governments. You’re seeing this impact in the Netherlands. You’re seeing 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 just need to actually see how this plays out into domestic politics. There’s less direct impact from this conflict on business.

It’s not straining relationships, though. In the U.S., investors can’t really talk about it.

RR: No. No. We are much more able to engage in sensitive conversations in Europe . . .

. . . than crazy Americans. Fair enough. Another European-specific issue is the dearth of late-stage capital, a problem that has gone on for years. One investor called it the case of the “missing zero” in conversation with the FT last year.

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SK: It’s more than one missing zero. 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. So arguably, being at an equivalent stage as the Bay Area [with regard to early-stage dealmaking] means we’re going quite fast – like, we’re catching up.

When you get to the Series B and Series C stage – rounds of $100 million plus, we’re [funding just a quarter] of these deals, compared with the Bay Area, which is pathetic. If you’re just looking at the UK, there is a $35 billion gap between the Bay Area and the UK. We’re basically where the Bay Area was in 2014. There’s lots of activity from a policy side that governments in the UK and France in Brussels are [focused on] but at the end of the day, none of this gets solved by policy. It gets solved though great [regional] companies for people to invest in.

You’ve dodged a lot of bullets, though; if you think of all the money that was wasted by some firms that were investing in these $100 million rounds . . . maybe it isn’t such a terrible thing?

SK: I think what Silicon Valley really understands that we haven’t figured out yet is that a lot of the capital you deploy at late stage, you can kind of write off, [because] if you are in the companies that end up compounding at scale, you can get 20,000x returns in the public market. So I think we’ve still got a lot to learn from the Bay Area.

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RR: I think that there is something to be said about what you said. Because we have this [capital] gap effectively, European companies have to just deal with being more more lean, and I do think as a result that the European market has lower volatility. It doesn’t get overpriced and overheated as much on the way up and you know, on the way down, it’s symmetric. In fact, when you look at the risk reward, it’s actually a better market because you never end up with this massive oversupply of capital.

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