Europe Inc.: Investing in Europe with Saul Klein and Raluca Ragab | StrictlyVC London

Um our co-host and OG of the Seat it's better for the photos um so Good so good Smart Cookie um so ruca I Think some of you may know but maybe not Everyone uh joined uh EUR yio uh this Year as a managing director was formerly A venture partner with key1 ventures in Israel um and before that spent time at Vruan Partners here in London uh also a University of Chico Chicago graduate and Inad and uh uh spent a lot of years with Golden Sachs 13 and became a managing Director in 2011 so very nice to meet Meeting you and spending time with you Today very nice to be here um so guys I Thought just to start we could talk a Little bit about your favorite topic sa Which is why this area is so hot and Promising um there's so much to be Excited about especially as it relates To AI I just wondered to kick things off What are you know maybe a couple of the Things that you're most excited about Right now so I mean firstly thanks for Coming here and Mike I mean four years Five years since Tech runch have done an Event in London So welcome back thanks we're happy to um So what am I excited about right now um I guess just to sort of answer your Question about the place and also what I'm excited about the great thing Not just about this place but I think About what we're all excited about right

Now is if I look out of that window Literally I can look into the Lunchroom of the Crick Institute which Is the broad of Europe so if you're Interested in computational Biology it's literally right There if I go three minutes to to the Left I'm going to bump into the global Headquarters of alphabet AI business Otherwise known as deep Mike and I'm also going to like bump Into the people who built Alpha fold I Haven't walked for more than five Minutes yet five minutes more I'm on the Train to Paris which you know is on fire As well and you know we'll hear more About that you know if I feel like a Long trip I can go to Amsterdam which Where Aden came from and where you know If us companies are not looking to land And expand from London because they're not tax dodging In Dublin you know they'll be based in Amsterdam like Uber or Airbnb so you Know what I love about here is that we Are literally at the heart of this 5H Hour train ride which we call new Paloalto and after the Bay Area it turns Out that new paloalto is the best source Of Capital is actually richer in terms of Ip and talent because we've got four of The world's best universities here not Four of Europe's best universities here

And then you know on our doorstep is you Know Paris Amsterdam and Brussels just Within this 5 Hour train ride so I'm Super excited about the place but I Don't need to move more than as I said Five minutes to see computational Chemistry and Biology and the world's best AI Company and SOA you're based in Paris I'm based here oh you're based here okay We are French rooted with deep roots in France so it's as if I'm Bas there also Right right so you've been covering this Scene for a very long time what what Sort of new what's most exciting to you Right now yeah I mean look I I come from Having grown up in an American um Company right at Goldman investing at Goldman and I I studied my University Degree there and then I work there so I Think the question really comes many Times as to what does Europe have to Offer additional versus the US and I Think that finally I have a good answer I feel for that because I think Europe Has been investing in the right places For the last 10 15 years and I think We're seeing the results and some of the Results are exactly what Saul said but If I just kind of go high level we now Actually have an edge in three major um Verticals or domains which I think are Quite differentiated and are exciting One is okay we took it very far and some

People may debate how far we took it in Terms of security and privacy but that Actually does mean that you know if a Company that's you know born in Europe Um deals with security or privacy Globally it will have the highest Standards so it will operate at the best Standards um and and the best Innovation I think second is sustainability um Obviously Europe has benefited from Regulation and that's just uh a secular Wave that's just pushing companies up Companies have to adopt all sorts of Supply chain risk uh you know reporting Tools uh net uh Net Zero uh Decarbonization Etc um type of Standards Which again is really um you know Building an entire wave of companies That is dealing with what I would call Climate solutions that is a genuine Differentiation uh on a worldwide basis And then the third and probably the most Exciting one is deep Tech right deep Tech SL AI just when we think about true Engineering and a patentable sort of Knowledge Europe right now is actually The hottest place for it and you know This comes from the fact that Universities have been investing in Computer science degrees for a very long Time um the fact that we have one and a Half times more stem graduates in Europe Than in the US the fact that the six of The top 20 computer science degrees are

Now in Europe and six of the top uh Engineering degrees are now in Europe so You actually have three I would say Pillars on which I can finally say Europe is leading is differentiated and These are for the future so I'm excited To invest in this and we're seeing this I'm a growth investor so I obviously Start investing when companies hit Somewhere in the range of 10 million Annual recurring revenue and above so I'm quite later stage I I sort of follow A lot of the companies that you know SS Uh early stage team invests in and I'm Now seeing this way of graduating I'm Seeing these investors coming through These Founders sorry not investors but Founders coming through and actually Getting to that kind of stage and it's It's really exciting I can finally say That my trade of moving from New York to London in 2007 is now actually an Exciting one that's great it is really Incredible to me I mean I can't believe Especially it's happening in Paris I Just saw yet another Deep Mind Group uh Spinning off and creating a new startup Called that just announced $220 Million Worth of funding which is really Exciting um so so in California I guess One thing that I I wonder about just Specific to Europe and I want to talk About the elite stage growth stuff but Can I ask quickly what's happening um in

Terms of the Israel Hamas war and Russia And Ukraine I mean I think it's it's Hard as as an American to even fathom How close this stuff is is starting with The easy Stuff let's just dive in but I mean it's It's like like the first one was the the Soft bow now you're like yeah right Right in all right let's go but is it But is it I mean is there I Guess are you feeling impact it doesn't Seem like you are based on the both of Us have had do have you know significant Exposure and engagement with the Israeli Startup scene I think you know ruca Canon should say a little bit about Mobile ey where she was one of the First Institutional investors when she was at Goldman but you know within our Portfolio um I'd say yeah on October 9th When we looked at our portfolio and the Sort of the exposure that our portfolio Had either to Founders in Israel Israeli Founders outside of Israel like in Barcelona or in New York or in London The number of people who are working for Them so the founders I think I want to Say they about 90 founders ERS and about 5,000 6,000 people working for them and You know I think what's been incredible To see is that you know even though a Third of their staff were on reserve Duty you know these companies have just Continued to to deliver and to grow

Capital continues to flow into Israel Not just from domestic investors but From International investors we had Participated in a seed round maybe four Years three or four years ago early Stage company called Empathy uh fantastic founder Ron gura um And he I think he had Alf Michael Eisenberg and um and besser in his seed Round Adam fiser and then you know uh Danny at index just LED his series B I Think you know in the last month or two And you know this is one of several Israeli companies that is still doing Super well so you know the reason we Think about I mean there's new paloalto Which is hyperfocused you go further in Europe and you have you know Sweden Which gave us Spotify you have Berlin That's giving us companies like Raisin and then you know I think there Are 65 cities in Europe or in Amir that Have produced The Unicorn but the two Cities that have produced more than a Hundred are London and Tel Aviv so No yeah I mean I think that from a Business perspective there's there's Minimal impact um and I think investment Continues obviously and the Israelite Ecos ecosystem is an incredibly Rich one And is actually way ahead of Europe they Have been building globally facing Companies let's say 10 years ahead of

Europe so we're actually learning a lot From them um I think that where there Might be an impact and I think that we All have to watch watch it is how do These conflicts spill into domestic Politics in each country and do they Bring to power more rightwing or more Leftwing governments so I think you're Seeing this impact in Netherlands you're Seeing uh what happened in Slovakia so I Think we just need to actually see how This plays out into domestic politics so I think it's less of a direct impact of These conflicts um on business as much As we're all ultimately exposed to um You know the the geopolitics of of our Own kind of region and what type of Party that brings to power and these are Kind of divisive issues that I think Will be showing up in politics and in Elections in Europe over the next few Years it's just making people it's Pulling people apart so it's making People take stronger stances and we're Just going to see them roll into into Politics with people moving more to the Extremes but I assume it doesn't come up In conversations I mean so I'm also Seeing us investors kind of at each Other's throats you know they can't they Really can't talk about it I'm assuming It's Probably a little bit taboo here as well No no I think we are much more able to

Engage in ation in Europe the crazy Americ in in in sensitive conversations Yes well Put um so another very uh sort of uh I Guess Europe specific issue right now Seems to be this a dir of a late stage Growth Capital so you represent a firm That's you know actively investing in Later stage companies but this problem Has gone on you know for years I read I Guess uh in the financial times last June an investor called the problem the Are called it the problem of the missing Zero so um I'm just Wondering I guess it was for Simplicity Sake but um how how are we you know how What's what's changed and what do you Expect to change if anything look I Think the glass half full view of this Is that the Bay Area Silicon Valley Palo Alto the ecosystem there is 53 years old If you Mark the beginning of the Ecosystem in 71 and the sort of the Intel Microprocessor and our ecosystem is Maybe 20 years old so you know Arguably being at an equivalent stage in The bay as the Bay Area at early Stage after with 30 years less means That we're going quite fast like we're Catching When you get to the sort of the series B Series C stage we're still at like 60% Of the bay area and I'm not talking

About the US I'm just talking about the Bay area but when you get to the sort of The scaleup stage rounds of 100 million Plus we're at a quarter of the bay area Which is pathetic so basically if you're Just looking at the UK you know there is A $35 billion Gap between the Bay Area And the UK and 28 of the 35 billion is At this scaleup stage so you know we're Basically where the Bay Area was in 2014 So you could look at that and say that's Terrible you could also look at that and Say we're catching up quite Fast there's lots of activity from a Policy side that governments in the UK In France in Brussels are doing but at The end of the day none of this gets Solved by policy it gets solved by the Fact that there are great companies for People to invest in so you know some Surprising data that we uh We've we came Across recently is just in the UK there Are 785 venture-backed companies that Are doing 25 million revenue or More um and that's that's a pretty big Number for any Market not just a single Market and then you know again just to Sort of feel good about the UK here for A second you know the UK in terms of companies that are Venture back doing 25 million or more is France Germany Sweden and the Netherlands put together so the UK is a Third of

Emir in companies of that scale and These are not companies that are hope And promise mythical beasts you know These are companies that my grandmother And my 9-year-old know if you are Generating Revenue you're selling Something that people want I mean I Don't know if it's Neurotech or beauty marketplaces doesn't Matter it's revenue and I think you know We're moving into a new era now all over Global Venture where it's not just about Hope and promise anymore it's about Fundamentals well also you dodged a lot Of bullets candidly I mean if you think About all the money that was you know Wasted by some firms that were investing In these hundred million doll rounds Tiger uh Insight Ventures many more that Have downsized their funds um you know Maybe wasn't such a terrible thing that But but I think just the you know the History of Venture is is that it's about the Outliers so if you look at what Amazon's Revenues were when they went public Amazon was doing $146 million in Revenue In 1997 which I'm old enough to Remember um and when Jeff Bezos wrote His letter where he said the same thing That Ben Graham did in 1949 the market Is not a voting machine it's a weighing Machine like stick with me the Enterprise value of Amazon at the time

Was 6.4 billion it wasn't even a decer COR if you'd invested a Dollar in 2000 three years after Amazon Had gone public that dollar would be Worth $20,000 Today that is Venture scale returns Three years into the public market so I Think again what I think Silicon Valley Really understands that we haven't Figured out yet is that you know you Miss a lot of you a lot of the capital You deploy at late stage even in the Public markets you can kind of write off But if you are in the companies that end Up compounding at scale you can get 20,000 x returns in the public Market so I think you know we are we We've still got a lot to learn from the Bay Area sure I do think that there is Something to be said about about what You said about the fact that you know Because we have this Gap effectively European companies have to just deal With you know be more be more lean and I Actually do think that I think of the European market as being like lower Volatility so it doesn't get overpriced And it doesn't get overheated it as much On the way up and you know on on the way Down it actually kind of it's a kind of Asymmetric it kind of corrects quite a Bit so in fact when you look at risk Reward is actually a better Market I

Mean if you actually were to think of Israel that's such an incredible Concentration of Founders especially a Lot of multiple time Founders which Obviously deserve completely different Kind of multiples that you actually have A very specific Supply demand situation That creates extreme volatility and just Extreme overpricing at moments of Heating up I actually think Europe is a Very very nice risk reward for an Investor because you actually never end Up with this kind of massive oversupply Of capital this Gap in a way ensures That valuations stay decent that rounds Are not $400 million rounds even in the High of the highs and that you actually Have a bit more displine so I actually Kind of quite like the European setup as An investor as a risk reward in terms of Like where I'm getting in and getting Out in Europe so I I do think it helps And by the way this Gap so I think There's the Gap and then there's Actually you have to look at how we Filled up the bottom part of the Gap What's really interesting is that in That you know how we fill it up what we Actually do get to fund at the scale up Phase you actually have a Disproportionate percentage that's still Foreign Capital um so you actually have European so I think seed to um to kind Of series D the the the the metric is

37% is actually uh non-european Capital You actually shift that to CDE so kind Of growth and that percentage really Really increases in deep Tech it's 74% Non-european Capital that's actually Plugging the Gap so you kind of have two Different gaps there's kind of we can go More with local capital and then we can Go a lot more in terms of just funding Right and yeah there are a lot of policy Initiatives but they're moving slowly to To to close these G well and a lot of American firms obviously have shown up Here and are are taking a big bigger Bite of those companies General cataly Anderson herwitz um I also just wanted To ask you know the bigger question I Guess is globally is Venture in trouble Um VC's raised so much money I think in 2021 it was like 350 billion dollar um Nobody can get returns right now I mean The IPO Market is still pretty dead in The US you mentioned $25 million in Revenue here which is like you said Substantial there you have to make you Know 300 yeah half exactly to even Consider going public so I am kind of Wondering what's going to happen and I Guess you know so is it in trouble and Also what are you doing about your Portfolio companies are you are you know The secondary Market is thriving in the US is that is that happening here as Well yeah look I think there is

A global liquidity Challenge for Venture portfolios And you know I know if I just look in Our portfolio we got 24 companies doing Over 100 million in revenue and 20 doing 25 to 100 million in Revenue if I'd sat Down with you know the head of capital Markets of Goldman's five years ago JP Morgan 10 years ago 15 years ago and Said to them here's this portfolio of 24 Companies when should they go public They probably would have said Next Monday or aren't they public Already so I think there is a an overall Challenge that we are now in a world Where there's Basically two Capital markets and They're both in New York and then There's kind of everything else and that Is a major problem I don't think just For Venture I think that's a major Problem for economies because if you're Not creating sort of liquidity in the Capital markets you know has a KnockOn Effect to economies to retail investors Having exposure to you know having Agency in terms of they saving and Investing so I think it's a big problem Obviously a few things are kind of Stepping in temporarily I think and Structurally one is sort of massive Growth of secondary second is sort of NASDAQ and London Stock Exchange having Private to public Pathways London Stock

Exchange has something called Pisces I'm Not sure what the NASDAQ one is called And then you've obviously got PE firms That are just like sitting on tons Of money that also need to buy growth But also now they can buy growth in Companies that have real metrics so I Would say not only is Venture not in Trouble actually Venture is Graduating from the sort of The second age of venture which I would Term as Netscape IPO to covid to the Third age of venture where there is Enough Venture back companies in the World that are mature enough to actually Be Real and you combine that with the hope And promise which by the way you need For those 20,000x Returns and then you've got much more Structured liquidity and capital around Venture including late stage private Including secondary Including private to public Pathways you Know if people are thinking in hedge Fund years or PE years we're in trouble If people are thinking in Venture years Which are decades we're good it's going To be a tough ride the next year or two But we're good I do want to address the Secondary point because what I'm seeing Now is I think that we've gone through I See a lot of cap tables that are

Misaligned you BAS basically have Businesses that have grown up so I'm Again I'm talking about like later stage Businesses who had expected it by now They may already have an exit an IPO and It's just simply not happening um Because you know the metrics required About a public market the scale you need To have are just higher so before a bank Would have told you you hit 150 million Of annual recurring Revenue you're good To go as a software business you can IPO This is not the case anymore because you See we see them in the public markets They're orphans right no trading uh Liquidity no no trading volume um you Know businesses all over the place is Still very volatile they don't have Enough visibility into the business to POS this kind of predictable returns That the public market demands so They're kind of like sitting there as as Complete orphans um you know at very Poor valuation so I think people have Learned a lesson you need a completely Different predictability and scale in Your business to to be a public company So what do we have we now have a bunch Of businesses that are in this 100 Million plus kind of Revenue range where You have a very very kind of Deadlock Cap table because they've been a lot of Them inefficient because they've gone Through the 2020 21 22 type of years so

They have really big kind of like They've uh funding kind of rounds that They did so they brought a lot of Capital in and you have very early stage Investors that by now they're actually Doing fine at whatever price you're kind Of like considering and then you have Very late investors um that came in at At just completely unreasonable Valuations and you basically have the Early stage guys have monetization Pressure in the earlier funds because They expected this exit by now the L Guys are just burning because they just Don't see how they can make returns and The correct thing for the company would Be to just give it lengthen that Investment Horizon give it another three To five years to grow into the right Scale they've all reset their cost base In the last year or two so let them now Regrow off this new kind of cost base And actually deliver on the invesment Case but you've got LPS that are telling You until you're kind of creating Liquidity in the earlier you know in the Funds of 2017 or so I'm not putting any New money into the next fund so kind of The tourist yeah but but we have we have Lot of tourists we have a lot of Tourists in the I mean this entire Industry is a lot about I mean I think One should step back and think it's just All about people's behavior and how

Predictively irrational actually it is Right but you know so I think a lot of Secondaries do have to happen to Actually give these companies a real Chance take out a lot of the early stage Investors that may have pressures some Are able to be there for the longer run But some are unable to extend that Investment Horizon and take take those Investors out and then actually rewrite Right and that has to become the role of These pees that are sitting on quite a Bit of capital as these businesses have Transitioned most likely in the last Year to being break even and starting to Post some profitability because before There were nowhere close I think they Now become actually investable for a ga For a KKR for whatever might be so um I Do think that this is happening and We've been seeing a bunch of 100 million Tickets coming in Europe um where you're Seeing some of this Movement we nowhere Like near scratching the surface of what Has to be done yeah um because and right Now I think that These boards are short selling the Future of the companies because they Have very conflicting kind of they're Misaligned and they need to realign to The a true investment Horizon for the Companies absolutely 100% um and I think Um so we're definitely seeing that so That they can live live to see another

Day but we we are seeing a lot of Companies obviously I'm sure it's Happening here too a lot of funds going Out of business I think I saw one Prediction that maybe half will be gone In five years okay I know I've got to Turn it over I wanted to ask you one Other quick question Saul because this Is is also very much happening in the Bay Area lots of people started when you Did in the 90s um and they are kind of Reluctantly transitioning out of their Firms right now you're obviously very Involved uh in your firm I'm just Wondering how are you thinking about Succession if you're thinking about it At all and is that sort of like a a Trend here where you're seeing some of Your peers trying to figure out that Question yeah look you know when I was At index you know where I was from 2007 To 2015 you know OB we started to talk Then about succession and transition and You know when I with my dad in 2015 when We institutionalized Phoenix Court in Local Globe obviously given that my dad Was in his late 60s at the time you know We had to think about transition and Generational planning and so I mean four Or five years ago in in our business I Kicked off a process um you know which We called project NextGen and you know in our last LP deck There was a slide of 10 of our uh senior

Leadership team team members and you Know when I spoke to one of our LPS last Week you know she said you know I I Noticed you weren't on that slide and I Said yeah you know because we're Building a great team and I think that's What you do in any business uh if you Want to be sustainable so yeah it's Definitely something we think a lot About because you know we think the next 20 years are the most exciting years in This ecosystem I'm 54 I love doing what I do but it would be like a real shame If I was still running this business Five or 10 years from Now um so guys I think we have time for A couple of questions I don't know where The microphone is oh Great oh we've got a First time call over There Hi yeah thank you for that um just Curious about any thoughts you have on Perhaps like regulation in um Europe uh Specifically in maybe AI as well um but Also kind of going over to maybe the Adobe figma deal um where a lot of like Late stage Acquisitions get really held Up I believe in that case it was the UK That took like an outrageous amount of Time to come back then ultimately stop The deal I could be wrong there um but Just yeah really curious on on that Based on what you were saying

Before I mean I'm happy to to take a Crack at that and I will just Say um you know in full Disclosure I've been on the prime Minister's Council for Science and Technology for four years and I've been A non-exec in the department for science Innovation and technology for a year so You know those are the sort of the the Kind of the government and policy hats So I'll try answer these those questions With that in mind but also try to give You my kind of coldface perspective on The second point about kind of m&a and Regulators it sucks to be living in a Liberal democracy where we have Independent Regulators doesn't It and now I'll answer the first Question Uh the first question was about AI Regulation I think if you ask me on a Personal level The only positive Dividend of Brexit that I can think of is the fact That we get to actually be agile with Regulation which by the way you have People like Mark Zuckerberg and Sam Alman going to Congress and saying Regulate me regulate me my technology Impacts iy at scale regulate me we have The chance in a G7 economy to have a Grownup conversation between early stage Businesses late stage businesses and Policy makers so I think in the case of

AI you know the UK which is like Shameful and ridiculous put 100 million Pounds on the table and created the World's first safety Institute for AI That's really scary that a 100 million Mattered for AI safety and Alignments and you know created a global Conversation around putting safeguards And guard rails around you know not how AI is going to be used to sort of for Jobs for insurance but like biot Terrorism I'm really happy a government In the world said 100 million pounds is Worth putting some guard rails around That you know I think if the US had done That they wouldn't have been able to get China to the table at Bletchley um so I think that's that's Good good news and then you know the UK Has also been very clear that they don't Want to over regulate AI because the Opportunities health Education transport climate are so vast So I think we're actually in a really Nice position where you know we're Relevant enough as a G7 that the US they Don't listen to us but at least they Kind of know we exist and then as far as Europe goes we kind of get to do our own Thing so it sucks from a remainer Perspective but you know it's okay from A policy perspective and I I do want to To say again because I think this is a Silicon Valley Trope that is really

Unhelpful is that if you want to live in A liberal democracy you need to accept The fact that Regulators are Independent because otherwise you're not Living in a liberal democracy Y thank you Mr butcher you never clapped When I've said anything I've known you For 20 Years um I think we are out of time Unless anybody else has a burning Question No great uh well SAA thank you so much Really a pleasure to talk with you both