“You could take half the late-stage money out and still have more than enough for all the good companies in Europe”
Why Saul Klein isn’t worried
When I first tell London-based seed investor Saul Klein (disclosure: A Pando investor) that we are doing a special report about Europe, he rattles off the pros: You mean tax avoidance? Economic crisis? Debt?
Then he proceeded to give one of the best articulations of why Europe – a greying market that pales in demographics next to the sexier emerging world – is stronger than it’s ever been…. at least, when it comes to tech startups.
In short, he makes a great case for why Europe matters.
In the following Q&A we get into the differences between the four main ecosystems: London, Berlin, Stockholm/Helsinki, and Tel Aviv; how Europe has become way more self reliant in the last five years; why the amount of late-stage capital could decrease by half and Europe would still be just fine; and who the single best entrepreneur in Europe is.
SL: What is Europe’s relevance in the tech world right now?
SK: Well, I mean, start from the fact that outside the Bay Area and China, London has produced more billion-dollar companies in the last 15 years than any other location, globally. London is basically Sand Hill Road for Europe.
We now have a critical mass of capital, of customers, and of talent that really makes building a billion dollar company not just a theoretical possibility but a reality that is happening frequently.
We’ve had massive, massive exits out of Europe. King most recently. Just Eat if you compare it to GrubHub is significantly larger and more valuable. We have Rocket and Spotify and Klarna and TransferWise. We have SoundCloud.
There is just sort of a critical mass now and a wave that has been building over the last five to ten years. These are becoming very important, significant companies. So if you start from the fact that London is the third best location in the world to produce unicorns, that makes us very relevant.
SL: And that’s a pretty meaningful stat, because it’s a much smaller market than the US or China.
SK: If you are in China or the US, you can create an enormous company just by serving your home market, but the largest companies are global too. In Europe you have to be multinational from the get go. Arguably that DNA is something more natural to Europeans and not natural to American, Chinese, or Indian entrepreneurs.
No single market in Europe even approaches US, China or India. Nigeria has more Internet users than the UK or France at this point. But still, the value of these [European] markets is significant.
The entrepreneurs that come out of these markets, more often than not, are building international businesses. King, Supercell, BlaBlaCar are now in 19 or 20 countries. Many aren’t in the US, but they are in plenty of others. I think the DNA of the European entrepreneur is well-suited to where the Internet is now. We are living in an Internet of three billion people, and it’s going to be six billion. An international mindset is extremely valuable if you want to create something really big in the world.
SL: You mention the DNA of the European entrepreneur. What’s interesting to me is how diverse that “DNA” is becoming. London has been augmented by a surging Berlin and several hubs in Scandinavia.
SK: And Tel Aviv…
SL: Yes, if you consider Israel part of Europe, which most researchers do. But that’s been a strong one for a long time. You know all of these markets well, what strengths to each of them bring?
SK: London is an incredibly international city. Entrepreneurs from all across Europe are coming to London to build these companies. In the case of TransferWise, the founders are Estonian and they chose to base the business in London. People have often said Valley strength is attracting people from all over the world, and that diversity breeds innovation. We have some of that same secret sauce in London.
I think Berlin is a different phenomena. There’s that German heritage of operational excellence. In a sense it’s not surprising that you have companies like Rocket emerging. But at the same time, Berlin is a relatively cost-effective place to be in terms of rent, housing, and the workforce. You have that Eastern European work force. You have people like Alexander Ljung and Eric Wahlforss from SoundCloud, who are both Swedish and came to Berlin to start their business. It’s also a city that historically is one of the cultural capitals of the world and celebrates art and innovation. I get that a company like SoundCloud is there at the same time as a company like Rocket.
And then you look at Scandinavia. Stockholm and Helsinki – for 1,000 year since the Vikings – these guys have it in their DNA to be some of the greatest explorers the world has ever seen. There’s an aesthetic and a focus on quality that is grand like Ikea and H&M. Affordable quality made globally famous. You can see why companies like Klarna, Spotify, or Supercell can come out of these geographies. Where relatively small teams can create products that people all around the world want to consume. You don’t see that outside of the Bay Area or China; people being able to produce consumer services with that global appeal. The Scandinavians have this aesthetic and heritage of making cool stuff and taking it all around the world.
Tel Aviv, well, you’ve written a lot about that market, and that story has been told.
SL: The interesting thing to me about Europe is that venture investment is really healthy and yet the most active investors are not Silicon Valley VCs. They are mostly European VCs. That seems to point to more strength in the ecosystem than in the past.
SK: I think there is a lot more capital in Europe than five or ten years ago. Funds that were getting started five to ten years ago were still pretty young – like Index and Accel. [Note: Accel’s European fund is run as a different partnership than the one in the US.] Now they are hitting their stride. Not just in Europe but internationally. You also have new funds that have been created in the last three to five years. We’ve seen this in London, in Scandinavia, and in Israel.
These funds are typically led by people who were VCs in other funds, and they’ve really established themselves. On top of that, there’s a total explosion of microfunds and seed investors. A lot of European countries have a lot of incentives to encourage angel investing.
The UK also has one of the most progressive regulatory environments for crowdfunding. Then you have things like Seedcamp and Techstars. You have a whole funding ladder from accelerators to pre-seed to series A and beyond. It’s really humming and well-established, especially in London.
SL: What’s been the key to that finally happening? Is it as simple as time?
SK: Partially, it’s time. I think it’s also people’s realization – including the governments’ – that tech and startups are fundamental growth engines. I was joking at the beginning about the financial crisis, but one thing that stimulates innovation and entrepreneurship is a lack of resources. There just aren’t as many jobs as there used to be, the public sector is shrinking, and European established companies are not firing on all cylinders.
If you are educated – and a lot of the European population is – you have to start thinking about becoming self-reliant. Starting a company is not just a real possibility, it is what some people need to do. A lot of people are now viewing startups as a legitimate career path.
SL: OK, but given that, are you surprised that we aren’t seeing economies like Greece and Spain playing more of a role in European entrepreneurship?
SK: What’s really interesting is what’s starting to happen in Portugal or Spain. I think we’re starting to see some of it. In each country – Amsterdam, Italy – you’ll find some of the strongest startups in Europe merge out of these cities, just like in the US you find great companies coming out of Cincinnati or Chicago even if the reality is still the US is a story about San Francisco and New York.
I don’t think Europe is any different. Europeans have the ability to live and work anywhere. That’s why you’ve seen a massive exodus of talent to London and to some degree to Berlin. There are real aggregations of customers, talent and capital in those places.
They see what’s possible now. The thought of a $100 million round in Europe five years ago would have been nuts, but now it happens every few months.
SL: In the past, when Silicon Valley caught a cold the rest of the startup world caught the flu. Are you worried how a potential pull-back in funding here could hurt Europe? Or do you think local capital is driving enough you might be more insulated than in the past?
SK: There is a lot of US money in Europe. Which is great. Sequoia has made several investments, Andreessen Horowitz has made two in London, and Union Square Ventures… Well, Fred Wilson has been very open about the percentage of European deals they’ve done in their most recent fund. KP has companies in Stockholm and London. Benchmark is investing in European companies.
SL: Certainly, Valley firms are still investing, but they are mostly cherry-picking winners.
SK: Yeah, they are cherry picking, but when the companies get to a certain scale these guys are very active.
SL: Point taken. But back to this idea of a pull back and how it may impact Europe. Because Europe has been seeing the same trends in terms of the rise of mega-deals, with increase in dollars but a decrease in deals. Do you have the same worries investors have here? If a correction hits in the US, will it be worse in Europe as it has been in the past?
SK: I don’t think so. You’ve been watching these cycles as I have for the last 10, 15, 20 years. You reach high-points and low-points, but the mid-points are always the ones where good companies can raise money. We have local capital, but we also have a lot of international capital. And I don’t think you can entirely discount crowdfunding. There are a lot of options to people.
Slowdowns typically affect the companies that don’t necessarily have a great chance of surviving anyway. They are often artificially propped up by way too much money in the ecosystem.
I feel that way about late-stage as well. You could take half the late-stage money out and still have more than enough for all the good companies in Europe.
SL: Let’s talk about what you are doing. You left Index a few years ago to work with seed companies again.
SK: That was in April!
SL: Wow, that tells you I am running a startup and raising two kids. Things that feel like they happened two years ago actually happened two months ago and vice versa.
SK: I know that feeling!
SL: So I know you wrote about it at the time, but what lead to that decision?
SK: The primary think for me is that the thing I love doing the most and the thing I spent the majority of my career doing is starting companies or being involved at the inception stage. That’s just in my DNA. When you are a partner at a fund with billions under management, investing in 20 countries and 39 cities, from seed to early stage all the way up to growth, it is very, very hard to focus on company-building at the inception stage.
I am getting old now. I just turned 45. And I just felt that Index is on a tear and it’s been an incredible eight years, and a lot of the folks there are not just my partners but some of my best friends. But what I want to do every day is help start companies.
What my dad and I have been doing together for about 15 years is seed investing. Together we have invested in 130 companies and seeded three of these London unicorns. We just sort of felt it was an easy opportunity to formalize that. We raised a fund over the summer and got a small team working with us. We are just doing what we’ve been doing for 16 years now, but with more focus and capital behind us, and a team.
SL: Back when LinkedIn was going public, I wrote a post about how Reid Hoffman – not Mark Zuckerberg – was the entrepreneur that Silicon Valley entrepreneurs should aspire to be like. It’s not a dig on Zuckerberg, at all. But he is such an outlier. Hoffman, on the other hand, grinded and never stopped believing, and LinkedIn was never a sexy company until it went public. Is there someone like that in Europe – the entrepreneur that European entrepreneurs should aspire to be like?
SK: To me, it’s obvious. And I didn’t invest in his company. It’s Daniel Ek of Spotify. I mean, he is just off the charts incredible. He is one of the best product people I’ve ever come across. It’s a tough business and people who are both amazing human beings and incredibly successful are very, very rare, but he is one of those people. He’s gone up against all of the odds in a business where pretty much everyone is looking for you to fail. He just keeps growing. And he’s still really young.
Just this week they announced their new policy for parents. They are giving six months of leave for men and women at any time in the first three years of your kids’ lives. On every level, he is just building something really, really interesting. He also has that determination where you basically feel like this is absolutely a business he is building for the ages. The great entrepreneurs like Reed Hastings, Mark Zuckerberg, Gates, these guys are just on a mission and nothing is going to get in their way.
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