Europe v Silicon Valley: Why investors “need to get their hands dirty”

The investors behind four of the UK’s top venture firms; Balderton, Index, Accel and Passion Capital, discuss Europe’s funding scene and why London is an “amazing place” to start a business…

The Europe v Silicon Valley debate is one that often crops up in the investment world but, on the back of recent news that European start-ups have raised over $2.8bn in the last quarter of 2014, it would appear that Europe is now going someway to creating its own tech cluster to rival that of the San Francisco hub.

Given this growth in European investments and London’s evolving technology community, it’s no surprise that some of the biggest names in venture capital were keen to weigh in on the topic at this week’s inaugural TechCrunch Disrupt.

In a panel discussion which saw Passion Capital’s Eileen Burbridge, Index Ventures’ Saul Klein, Accel Partners’  Philippe Botteri, and Balderton Capital’s Daniel Waterhouse take to the stage, questions were posed in regards to Europe’s “incestuous” investment communities, access to talent, and, more controversially, what “went wrong with Wonga”.

Read on to find out what the UK’s key players have to say about Europe’s funding scene and why Saul Klein advises that investors “need to get their hands dirty”…

What’s your take on European tech start-ups- how is the eco-system progressing?

Saul Klein: “I think we will pretty likely see a couple of European $10m exits in the next two or three years. Europe is still a pretty young eco-system. The Silicon Valley eco-system is producing these $50, $100, $200bn exits but it’s 30 or 40 years old.

“The European eco-system is really only 10 or 20 years old so I actually think the fact that in the last 12 months we’ve seen about 10 multi-billion dollar exits coming out of Europe is an indication of the way that things are really starting.

“We’re [Index Ventures] very bullish on the prospects.”

Eileen Burbridge: “The eco-system is developing. We’re seeing more successes in the earlier stages than the big A rounds – it does take time to realise that kind of value.”

In Europe, the common problems are lack of access to capital and talent – how far are we from addressing these problems?

Phillippe Botteri: “We’ve made a lot of leeway. If you look at how the system is progressing, especially in tech and financial, […] we’re already seeing this flurry of exits […] I think its progressing quite fast.

“There’s a lot of fresh capital to be deployed in Europe”

“In the next three or five years we’ll see some very interesting things. Look at this panel there’ a lot of fresh capital to be deployed here [in Europe] so it doesn’t feel to me that there is a lack of capital at this point.”

Is the funding pool in Europe as widely distributed as Silicon Valley?

Klein: “I think that it is starting to change. I mean it’s a fair criticism of the first and second waves of European companies but I think […] when you start to combine the alumni that are coming out of the LoveFilm’s, the Skype’s, the Zoopla’s, the JustEat’s etc., it seems […] that today’s entrepreneurs and investors have a much more Silicon Valley attitude to options and the fair distribution of the rewards.”

Botteri: “It’s part of the evolution of the eco-system.”

Some of the most promising European start-ups either move to the US or build a large presence there, it seems like that’s an approach you encourage – is that a fair assessment?

Botteri: “It really depends on the type of company and sector. If you take a company like BlaBlaCar, the ride sharing platform, the company started in Europe but if you look at the US market it didn’t get going for different reasons and the driving is much lower so it made a lot more sense to expand in Europe and other markets like Russia, Brazil, India actually before the US.”

Klein: “I agree with Botteri, it depends on the company but I also think that historically entrepreneurs were drawn naturally to the Bay (Silicon Valley) area – ZenDesk is a good example, those guys started in Copenhagen and then decided that San Francisco, for a SaaS enterprise software company, was the right place to scale up their organisation and they pretty much moved there. Other companies in our portfolio like Sleep.io want to be close to the key platforms like Apple and Google and establish a presence there.”

“The Europe versus Silicon Valley issue is really pretty old school”

“My view is the best entrepreneurs nowadays go where the opportunities are and they’re often building organisations that are multi location. It happens that as companies evolve, even for the biggest European and US companies, the UK becomes one of their biggest markets such as Twitter, HP, Cisco, Microsoft, eBay – the UK is their second or third biggest market and their most profitable. This has an effect on what the eco-system in Europe is, we have great developer organisations and very important research and development going on in Europe so I think the Europe versus Silicon Valley issue is really pretty old school.”

Could you build a successful tech company entirely out of Europe?

Klein: “Like Skype?!”

Burbridge: “Yes definitely. Saul and I were involved in Skype, I know that that was 2003 so nine years old now but that company for various reasons specifically didn’t target the US and all of its growth is outside of the US. They never had an office in the US until it became acquired by eBay.

“Other examples include QXL and LastFM, both had really dominant presences in Europe.”

Could a US-based entrepreneur start-up in Europe first?

Burbridge: “Yes! Take Y-Combinator (YC) for example, a lot of entrepreneurs went over to the US for YC and actually decided to come back to Europe and London to start their companies. So 100%. It can sometimes make a lot more sense for people to focus on what they’re doing here in Europe without the noise, distraction and competing for talent like you might have to do in the US.”

“For urban and tech, London is an amazing place to start a business”

Klein: “It also depends on the sector and the market you’re targeting. SongKick is a good example of that. Seven years ago they were alumni of YC when YC was still in Boston and they came to London to start a company because they’re in the business of helping people to discover live music – London is the largest live music market in the world so why wouldn’t you be here?

“If you look at Citymapper for example which is about navigating and getting round cities, London is the number one English speaking city on Twitter and Facebook so for urban and tech London is an amazing place to start your business, same with financial services and I think we’ll see that more.”

Daniel Waterhouse: “There’s some great talent in Europe. Take Roli for instance, they’re a hardware company, and they can find scientists, software engineers, great developers, marketeers – a massive breadth which they’ve been able to get out of London.”

Burbridge: “I think it’s worth going deeper with some other examples such as Nutmeg , it got funding from US investors but launched in UK because the Financial Conduct Authority has a much more progressive view on regulation than the United States.”

Botteri: “For any start-up you want to be where the talent is and the talent in Europe is good.”

Klein: “Some of the biggest online fashion businesses are coming out of Europe, Asos, Netaporter etc.”

Is the investment community in the UK incestuous?

Burbridge: “It’s growing. I’ve been here for 10 years and invested for four/five years as an angel and I think it is growing now. We’ve seen 10 times the amount of investment in London just over the last four years.

“We’ve seen 10 times the amount of investment in London over the last four years”

“By nature and definition that means there’s probably two or three times the number of funds that were here five years ago It’s less the same people, fortunately the investors that have been successful are still doing it which is fantastic but we’ve got more and more new funds coming in every single year – Google Ventures EU being one of the latest.

“What’s good is that there is more choice for entrepreneurs and it’s bringing best practices to the forefront.”

When there’s more choice in investors, does that make your job more difficult?

Klein: “The best companies have a lot of capital available to them, not just in Europe but internationally and I think entrepreneurs really have not just choice, but we collectively see the best deals, we’re chasing the best deals and have to compete to get in tthose deals. Today capital is more or less a commodity, the tech stack whether it’s open source or cloud is relatively commoditised. Investors should work really hard to get into the best deals because they can demand a lot and they should.”

What’s the value add for start-ups using European investors?

Waterhouse: “It’s a bit about shortcuts. Entrepreneurs going on an impossible journey – they’ve got to overcome so many things and the more they can shortcut some of those challenges albeit leveraging our portfolio or experience, it’s really about avoiding mistakes.

“An investor needs to get their hands dirty”

Klein: In the last year I’ve started a company and it’s been an amazing experience to go back to the drawing board. In the last 12 months We’ve [Index Ventures] done 31 seed to Series A or bootstrapped growth rounds – an investor needs to get their hands dirty whether they’ve been an operator or not. It’s about getting involved in the team. […] Investors need to be in it for the long term game.”

Botteri: “We’re trying to bring Silicon Valley experience to the European eco-system.”

Two of the firms here (Balderton and Accel) invested in Wonga, was it a bad idea to invest in or was the execution of the idea flawed?

Botteri: “No comment.”

Waterhouse: “Wonga have come out and said they’re working closer with the FCA, they’ve been pretty clear about what they’re doing now and how they’re moving forward.”

Burbridge: “I know the least about this but I don’t think pay-day lending on the high street is a great industry right. I think there was probably a lot of education around that which probably didn’t get updated for that kind of transaction online. I can’t see how any investor or the founds would go in and try and take advantage of a situation and try and extract as much money as possible.

“Investors are looking at the long-term game”

“I’m sure it was all very well intended to bring efficiency to what is not a very perfect system to begin with. My observation is they’re trying to correct it – I think it’s very clear that investors are looking at the long term game, we’re interested in proving the economy, creating more efficiencies and creating value from that. That doesn’t mean trying to play certain industries as that would be very short-term.”

Lastly, what are the biggest opportunities going forward? Tech trends?

Klein: “Strengths in Europe are retail and financial services etc. One of the new things that I see is interesting is Deepmind Technologies which Google Acquired and Swiftkey is also really interesting.

“It’s […]the emergence of artificial intelligence (AI) and deep technology. Google has AI and smart tech in abundance – AI and natural language is really exciting […] really using data to find out information in new ways […] it’s going to make a big difference.”

Waterhouse: “Hardware is interesting in Europe as we have the talent and design skillset to build interesting stuff.”

Botteri: ” Already we’re seeing cloud computing, Big Data, cloud infrastructure and e-commerce enablement. The things that are more emerging are new competing platforms and devices, they’re evolving.”

Burbridge: “I’m really interested in information security and cyber security.”

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