Europe has Major Bragging Rights

Yesterday, Atomico in partnership with Slush and Orrick launched the 2019 State of European Tech report.

Everyone’s talking about the report, and they should. It’s a fairly big deal. But I’m not going to regurgitate the typical stuff everyone’s saying. Yes, Europe raised a whopping $34 billion in capital this year, but we’ve been talking about record numbers for months. If you want a real analysis, you can go read the Report’s executive summary, or a real newspaper.

In true Seedtable spirit, I’m going to take a different route. But there’s one thing I’m certainly going to regurgitate: it’s the golden age for startups in Europe.

“It does feel like we are in a golden age for Europe now: the quality of talent, the level of ambition and availability of capital are at a completely different scale” – Sonali de Rycker, Partner at AccelHere

Some rough numbers you can take home and make sweet, sweet love to:

• In 2015, Europe had 22 $1 billion+ VC-backed companies. In 2019, the number of unicorns is now 99.
• From 2010 to 2014, tech startups raised a total of $34 billion. The 2015-2019 period saw a 3x increase to $113 billion, of which $34 billion were raised this year alone.
• In 2014, we had 9 $100 million+ mega rounds, versus 40 in 2019.
• From 2010 to 2014, venture capital funds raised $20.5 billion. From 2015 to 2019, that number more than doubled to $50.3 billion.
• Europe had 76 $100m+ exits from 2010 to 2014, but 148 from 2015 to 2019The report made one thing crystal clear: Europe now has Major Bragging Rights.

All this said, there are 3 specific angles we are not discussing enough, so naturally, I’m going to focus on those.

1. Europe’s growth trajectory
2. Gender diversity in European tech
3. China, the US and Europe’s role

Let’s dive right in.

Europe’s growth trajectory: upwards and onwards

The headlines are clear: Europe raised a record $34 billion. But unless you are Adam Newman, money doesn’t grow on Softbank-shaped trees. It needs to come from somewhere.

Startup raise money from angels and venture capital funds. In the same fashion, VC funds raise money from Limited Partners (or LPs for short). LPs are people with many doubloons (pension funds, Private Equity funds, family offices, government funds, etc.) that deploy a percentage of their money to tech VCs as a way to diversity their boring investments.

Why is this important?

Among all those up-and-to-the-right numbers I shared a minute ago, there’s one that especially important: the amount of money raised by European VCs from 2015 to 2019 was $50.3 billion, up from $20.3 billion in the 2010-2014 period.

2018 was another record year with European VCs raising more than $13B, and fundraising activity in the first six months of 2019 indicates that the full year total for 2019 could go on to surpass that level. Larger funds of greater than €250M represent over 40% of capital raised in 2018. There are a bunch of reasons why this is happening. But a pretty significant one is that finance and fund managers follow the money like bloodhounds.

Cambridge Associate data on VC returns shows that European VC performance is either on par or significantly outperforming indices for both US VC and, importantly, European Private Equity.

Suddenly, the data (and the general consensus) says that European tech is not a risky investment, but a “sure thing.” Local Private Equity, family offices and pension funds have woken up to the fact that European tech returns are actually quite good.

As a result, money is flowing to venture capital funds in bigger chunks than ever before. In fact, pension funds contributed just short of $1 billion to European VCs in 2018, “a material increase on the average commitment of just $395M per year for the period between 2014 and 2017.”

I guess reasonable valuations and not calling a $10 million raise a Seed round weren’t so bad after all.

Why is all this mumbo jumbo important? Because if European VCs raised a shitload of money from generous LPs who realized that tech isn’t such a bad investment after all, they need to deploy that shitload of money somewhere. And that somewhere is European startups.

As I said, up and to the right.

Diversity sucks, but it’ll get better

There are MANY things going well in European tech, but gender or race diversity isn’t one of them. Here’s Steve O’Hear, respected TechCrunch journalist being quote for the State of European tech report:

“What kind of progress do I think the European tech community has made towards increasing diversity and inclusion in the past 12 months? The slow kind.”

Not only I agree with O’Hear, but I also think that “the slow kind” is an understatement. Truth be told, the numbers haven’t changed a thing. The Diversity and Inclusion section of the report starts with: “Despite increased awareness a lack of diversity, the problem remains entrenched.”

That seems accurate to me.

Three things I think are worth mentioning.

First, making the diversity failure the sole takeaway of the Report like this guy who “covers Europe” did is idiotic. I couldn’t care less whether you are on the Left or the Right–just don’t have an agenda.

Second, it’s extremely important for us to fix this diversity problem but not because of quotas, equity, or diversity for diversity’s sake. That’s equally dangerous and defeats the entire point. If that pisses you off, you can unsubscribe.

It’s extremely important for us an ecosystem to fix diversity because not investing in women or underrepresented founders is just fucking stupid. That’s a good enough reason to me. But if it’s not enough reason for you, I also think that minorities target solve problems most people don’t understand and build companies that wouldn’t get built otherwise. And I’d like those companies to be built.

Finally (and most importantly) I believe diversity in Europe will better, in big part thanks to women founders and women-led startups.

One of the highlights of the report to me is that the number of women founders (compared to men) willing to go and start a company with zero or less than $25,000 in capital.

This means more women are willing to do what it takes to start a startup. That’s fucking ballsy. Taking responsibility and ownership for your own success regardless of the environment has my respect.

We are seeing the early signs of that change pay off. In quantum computing, for example, 23% of European quantum companies had a mixed or women-led founding team, more than double the European average of 13%.

And investors are (slowly, very slowly) waking up to the fact that not investing in women is stupid. Because they solve different problems, with less competition and are often underestimated, market logic says that women-led teams are a mispriced asset with a potential of outstanding returns and it will get fixed.

I’m not the only one who has this theory though. The proof of that are funds being started to tackled exactly this problem. Just this week, two diversity-focused funds were announced – Dutch VC firm Borski Fund raises €21 million fund to focus on women-led startups and Copenhagen-based Unconventional Ventures to back underrepresented founders.

Time will tell if this is a valid idea or not.

We need to play the China game

The foreword celebrating 5 years of the State of European Tech Report contains this seemingly forgettable paragraph:

“That said, we do need to make sure we don't fixate on the US or even China. We need to chart our own course and build our own tech ecosystem upon our own strengths and values. Our strong investor base, developing from seed to growth stage, has contributed to a real diversification of European tech. As you'll see, where once we were mostly consumer, we've developed a strength in areas like enterprise software and frontier tech too.”

I respectfully disagree.

Yes, Europe needs to chart its own course, but turning our back to political dynamics and whatever we want to call what’s happening between the US and China is idiotic and, frankly, irresponsible.

Many people think Europe should play a brokerage role and remain neutral. But as Matt Clifford mentioned in our interview, this favors China and the way Xi Jinping sees the world.

"At what point does it become a geopolitical strategic question for Europe about… does it pick a side? Does it continue to say it’s gonna produce local champions? Which as I said, I do not think it’s credible in the consumer internet space. Or does it somehow try and play a broker role? Which I think would be a strategic mistake. My view is that plays very much to the way China views the world.” – Matt Clifford, Entrepreneur First

China will do whatever it takes to win. It always did because it shares different values, and values inform priorities and priorities inform decisions.

Then the real question becomes: when one side of the fight shares isn’t constrained by Western value, how do we avoid a race to the bottom in AI, competition, ethics, etc.?

To be honest, I’m not sure the US can avoid it. The DiDi vs. Uber battle is a perfect metaphor on how.

1. Uber tries to land in China, investing billions of dollars in recruiting, advertising and subsidies.
2. DiDi tries to stop Uber not with a better product, but by playing dirty, committing fraud and infiltrating Uber rankings with DiDi employees.
3. Kalanick gets pissed off and creates a counterintelligence team to fight back.
4. DiDi wins anyway. Uber leaves China in exchange for a 17.7% stake in DiDi, but the counter intelligence team and “dark arts” spirit remains.
5. Shit blows up after the Susan Fowler debacle and, among other reasons, ends up contributing to Kalanick’s resignation. This is exactly what Europe needs to avoid, which turns itself into a geopolitical strategic question.

From my (rather ignorant) position, I think Europe should be the glue that holds the rest of the World, but mostly the West and the US, in check. This will, in turn, stop China from playing dirty.

There is one thing the West got right and we should never lose – the value of the individual. This is something that China woefully ignores. But something that China doesn’t ignore is money.

At the end of the day, China is (ironically) driven by dollar signs, and Europe has 740 million consumers, 629 of which are connected to the Internet. China doesn’t want to be in a position where it can’t access either the US or the European market.

I’m not saying Europe is going to do an A-level job. It tried to implement GDPR and hold the world accountable to privacy, and we know how that ended. But someone needs to set global standards and monitor compliance for what is acceptable in the World, and Europe is at the perfect place to do it.

We can’t be complacent

A while ago I heard this Spanish story about this guy who knocks on his son’s door. “Jaime,” he says, “wake up!” Jaime answers, “I don’t want to get up, Papa.” The father shouts, “Get up, you have to go to school.” Jaime says, “I don’t want to go to school.” “Why not? asks the father. “Three reasons,” says Jaime. “First, because it’s so dull; second, the kids tease me; and third, I hate school.” And the father says, “Well, I’m going to give you three reasons why you must go to school. First, because it is your duty; second, because you are forty-five years old, and third, because you are the headmaster.”

Of course, I didn’t personally hear the story, but it works better if I tell it in the first person. Still, it’s time to wake up. Europe needs to realize its forty five years old and start dealing with grownup problems.

From the report:

“However, we can't afford to be complacent - or to lose focus. Now that we've instilled the external as well as internal belief, it's up to us to shape our own destiny when it comes to the future of European tech. We hope this report provides inspiration and guidance: we need to address our D&I issues, acknowledge the importance of well-being, foster a generation of purpose-driven companies, reinforce the density of our networks of people and capital, and end the disconnect between policymakers and founders.”

Yesterday, Los Angeles-based Honey announced its 4 billion acquisition. Brian Norgard, formerly CPO at Tinder, tweeted this in respect to LA being an underrated tech hub.

Do we need a $4 billion acquisition by PayPal to realize we are forty five years old?