The ups and downs of investing in Europe, with venture capital funds Saul Klein and Raluca Ragab

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

It’s something we talked about in London this week, when JS took over Strictly VC series of more intimate, more investor-focused events along the way. In conversation with Saul Klein, famed founder of seed-stage LocalGlobe, along with Raluca Ragab, managing director at growth-stage organization Eurazeo, we chatted with the two about how similar – and different – ​​the US venture market is. now compared to Europe.

Certainly, both European startups and venture capital firms have a lot to crow about these days. (I’m thinking of the latest Paris-based AI company to announce significant funding.) The continent also faces obvious challenges, including the proximity of two ongoing wars and a persistent shortage of late-stage capital.

What the two markets have in common is a major lack of exits, which isn’t exactly ideal considering how much money venture capital firms have poured into startups in recent years (money that their limited partners would like to see!).

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

There is so much to be excited about locally, especially when it comes to AI. What is most exciting for you right now?

SK: First of all, thank you for coming here. I mean [it’s been] four or five years since JS hosted an event in London. So welcome back. What we are all excited about: [from where we’re seated, in the King’s Cross district]I can look into the lunchroom Crick Institute, the Broad Institute of Europe. If you’re interested in computational biology, this is literally there. If I turn left in three minutes, I’ll come across the global headquarters of Alphabet’s AI company DeepMind, as well as 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].

RR: The question often arises what Europe has to offer compared to the US. And I think we now have an advantage in three key verticals or domains: security and privacy, sustainability and deep tech. This stems from the fact that universities have been investing in computer science for a 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 is happening in terms of the war between Israel and Hamas and the Russian war against Ukraine? As an American, it’s hard to fathom how close [these conflicts] be real [to these hotspots].

SK: A way to start with the easy stuff! The first was softball, and now it’s you [getting down to business].

It’s hard to know the business implications based on the press I’m reading out of California. . .

SK: We have both had and continue to have significant exposure and involvement in 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 Goudman [Sachs]. But I would say on October 9th [when Hamas attacked Israel]When we looked at our portfolio and the exposure that our portfolio had to founders in Israel and Israeli founders outside of Israel, such as in Barcelona, ​​New York or London, the number of people working for them was [was] about 90 founders and about 5,000 to 6,000 people working for them.

It’s incredible to see that even though a third of their workforce was on reserve, these companies have continued to perform 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.

RR: From a business perspective, the impact is minimal. The ecosystem is incredibly rich and is actually far ahead of Europe. They built globally focused businesses a decade before Europe. Where there could be an impact – and I think we should all take that into account – 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 a populist sympathies toward the Kremlin was elected prime minister for the third time in October]. So I guess we’ll just have to see how this plays out in domestic politics. There is less direct impact of this conflict on business.

However, it does not put pressure on relationships. In the US, investors can’t really do that talk about it.

RR: No. No. In Europe we are much better able to engage in sensitive conversations. . .

. . . then crazy Americans. Reasonable. Another specific European problem is the shortage of late-stage capital, a problem that has persisted for years. One investor, speaking to the FT last year, called this the case of the ‘missing zero’.

SK: It’s more than one missing zero. Look, the glass half full is the Bay Area – Silicon Valley, Palo Alto – the ecosystem there is 53 years old, and our ecosystem is maybe 20 years old. So perhaps at a similar stage to the Bay Area [with regard to early-stage dealmaking] means that we are going quite fast, for example we are catching up.

If you reach the Series B and Series C stages – rounds over $100 million, we are [funding just a quarter] of these deals, compared to the Bay Area, which is pathetic. If you just look at Britain, there is a $35 billion gap between the Bay Area and Britain. We’re basically where the Bay Area was in 2014. There is a lot of activity from the policy side that the governments in Great Britain and France are working on in Brussels. [focused on] but ultimately none of this is solved by policy. However, it is resolved wonderfully [regional] companies that people can invest in.

However, you dodged a lot of bullets; when you think about all the money wasted by some of the companies that invested in these $100 million rounds. . . maybe it’s not that bad?

SK: I think what Silicon Valley really understands that we haven’t figured out yet is that you can write off a lot of the capital that you deploy at a late stage. [because] if you are part of the companies that eventually compound at scale, you can earn 20,000x returns in the public 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. Because we have this [capital] In fact, European companies are faced with having to be leaner, and I think as a result the European market has lower volatility. On the way up it doesn’t get so expensive and overheated, and you know, on the way down it’s symmetrical. If you look at the risk reward, it’s actually a better market because you never face a massive oversupply of capital.

More below. . .