E290 | EUVC | The Evolution of European Venture with Yaron from Target Global, Kerry from IQ Capital and Chris from Isomer

0:00Welcome everyone to today's roundtable on the evolution of European venture. I call this the OG roundtable of the year. And I do so because we're joined by the most esteemed panelists I think we've had for a long time. I am Andres. I'll be your moderator for today's roundtable. Not in any way an OG. With me, I have a good friend, Gabriel Shin from Carta. And we are just about one month into the year. So I think I can still call this a fresh time and a fresh year for us to really sit back and think for just an hour about where we're coming from as a European venture ecosystem and where we are headed.

0:42As I said, today we're joined by some of the founding figures of the European venture scene, so I cannot wait to dive into this. In academics, you always say that we stand on the shoulders of giants, and today we will be talking to them. They are all three industry veterans. They've not only witnessed, but they've also helped shape the evolution of the European venture sector. And as such, I am absolutely certain that today we will get some insights that provide unique perspectives to our own day-to-day work in the European venture ecosystem. But Gabriel, maybe would you take it over from here?

1:19Sounds good. Thanks, Andres, for letting me co-host this with you. I'm really excited to be here today. So let's meet our panelists. So first we have Jaren Waller, who's the founding partner at Target Global. Target Global is a pan-European investment firm. He's invested over 25 years investing in companies like Revolut, BFOX. We also have Chris Wade, the founding partner at Isomer Capital, a fund of funds, also an experience of 25 years, was a venture partner at Octopus Ventures, Entrepreneurs First. And we have Carrie Baldwin, founding partner at IQ Capital, early stage deep tech venture capital investor.

2:03Again, just looking through her LinkedIn, another 25 years of venture experience in the UK and Europe. And she's been nominated for a number of awards. Can't list them all. But the most recent one was being a winner at GP Bullhound, all-stars European investor. So very exciting to have you guys here. Thank you. So we'll just kick off and, you know, venture capital is an interesting asset class. It's relatively new relative to other asset classes in comparison to, let's say, the public market, which has been around for thousands of years. I'd love to hear from you guys, you know, from your experiences, how venture capital in Europe has changed through your experiences.

2:47So Yaron, we'd love to hear your insights on this. So I'll try to give a broad European experience. As you may know, I spent 10 years in Germany before moving to the UK. And from Germany, I tried to invest in various European countries. And the evolution of European venture capital has been very interesting. It came into its own, I think, quite late. It started becoming a real viable asset class that had a substantial trading volume, probably later than other markets. I'm guessing somewhere between 2005, 2010, we started seeing more viable, bigger companies coming from the continent and also a more balanced ecosystem on the continent.

3:37And so this was the first thing that made investing in Europe interesting from a venture capital standpoint on a bigger scale. And then throughout the last decade, we've seen another evolution. If the early German startups, the ones that I invested in in 2008, 2009, 2010, were mostly around business model innovation and mostly copying models that were performing elsewhere, mostly in the States, this also changed. We see a slew of very innovative companies now coming from Europe, companies that are inventing markets, It's companies that are developing new technologies. We see it in quantum, we see it in AI, we see it in software, we of course see it in the medical field.

4:33So first of all, the asset class became a viable asset class. And second, the ecosystem became a much, much more interesting ecosystem and a more cohesive ecosystem that encompasses not one specific country, but rather is an ecosystem that plays well and meshes well across geographies. That makes a lot of sense. This asset class is quite unique and to be in the industry for a very long period of time. Kerry, how have you seen this kind of evolve and where do you kind of foresee it coming into the future? Yeah, very much agree with Yaren. I think what sat back in my desk in 1998, looking at a venture and I was in a deep tech fund in 98.

5:14in the olden days, you wouldn't actually be able to see me because in those days, a founder would send in seven copies all printed of their massive IM about this thick and you wouldn't be able to see me because business plans were everywhere. So digitization and really understanding how to interact with venture capital has really, really changed from the founder's perspective, from my point. Lots of funds. So you've got the generalist funds, You've got the really specific funds. Those have really come through. Obviously, the fund sizes have grown throughout Europe over time. And of course, a lot of government intervention.

5:49So in the UK, we've got the fantastic work the BBB did, the British Business Bank, really spawning a generation of venture capital funds with their ECF program and then more latterly with their British patient capital doing this growth stage. That made such a difference to the UK ecosystem. And we were able to get larger funds, lots of experience and really investing in bold founders. But for me, the founders back in the 90s still had those massive, bold visions and those ambitions. But what has changed, certainly in that early 2006 sort of time, is founders became slightly more introvert and data was driving decisions.

6:30There was a lot more ability to go to market strategies and really digitize and really learn with your engagement from customers to really be able to get scalability, repeatability in your sales processes. Founders and the ecosystem share so much now from diligence on funds to I've got this problem. How did you overcome that? So it's a really vibrant community. And we didn't have that back in the 90s. The people investing in the funds back in the 90s were mainly investment banks and a few family offices. And now you have such a broad and rich, diverse range of investors, which is probably a neat segue to Chris.

7:11Well, let me be additive to everything that's been said. Yes, there were a few VCs, but we were all trying to figure it out. But, you know, I remember Herman Hauser saying that back in the 90s, most of his entrepreneurs in Amadeus were first-time entrepreneurs, whereas today you back serial entrepreneurs. VCs were trying to figure it out. I'm on record of saying that venture capital is like the road to enlightenment, to be a Buddhist month, because you're continually learning, you're continually making mistakes, you're continually evolving. And we're at the beginning in the sort of, you know, in the 90s.

7:59We're all trying to figure this out. We've learned many lessons the hard way. We've learned to become better entrepreneurs. we've learned to become better VCs. And perhaps I'll close in this little bit and say, what's really happened in that relationship between entrepreneurs and VCs is that I've witnessed, because in the 90s, I was an entrepreneur, is that I see this huge shift from the partnership between VCs and entrepreneurs, which perhaps was more formal, shall I say, in the very early days. Today, where it's a very cohesive partnership, we're on the same side, where when we go to a boardroom, metaphorically, the VC board member and the entrepreneur is on the same side.

8:49What do they want? To build something amazing and create a tremendous difference to society and the world. Yeah, I just wanted to give a slightly negative perspective of what's happening in the market as well, because I think it's also important to remember that the overabundance of capital in the market, especially in the last decade, caused several very dangerous things. First of all, it caused a misalignment of interests between entrepreneurs and VCs or entrepreneurs and investors many times. It accentuated the importance of secondaries and they developed it as a tool that is really creating a substantial bias or a substantial skew in the alignment of interests.

9:42But what I found to be a much more dangerous phenomenon, and that's the phenomenon that fit a lot of these things, is the entrance of people who are strictly money managers and do not come from the technology side into VC. A VC has to be a combination of someone that enjoys and understands technology and is a money manager. By having too many investment bankers and too many unrelated, I don't know, asset allocators and money managers and you name it, into the industry in the last decade, this created not only a flux of capital, but it created very, very negative phenomena. A lot of companies that shouldn't have been funded got funded with too much money at ridiculous valuations.

10:30And we see that as soon as the heat goes up in the kitchen a little bit, these people run away. And then they cause a crash. So it's a very unique industry in the sense that it's not strictly a money management business. It's money management with a vision. It's money management that is trying to create something bigger for society, for whatever, and not just a financial return. And the people that invest in venture capital should be aware of it and should be ready to accept that risk. I think you're absolutely right. I mean, the key difference is you're a money manager trying to help create something that doesn't exist.

11:19And that requires understanding what it is you're trying to create and how you're trying to create it. And yes, I would like to keep the heat, Jaren, slightly on in the kitchen for a very long time. Because I tell you, it's a much more sane world today than it was in the last two or three years. I would agree. As it was in 1999 and 2000. I'd love to ask you all about this cyclical nature of venture, because that is something we all read and hear about. But certainly many have not gone through more than one cycle.

12:06And we probably all agree that we've just gone through one. So now everyone who's in it and survived have gone through one and seen that change. But I'd love to ask the three of you, because you've seen at least three or four, the booms and busts. So I'd love to ask you to an audience that likely have less experience with managing through cycles. and what are the key things to understand about navigating a cyclical nature industry like ours? So reading signals and reading market signals. So I sat at my desk in the late 90s. A lot of investments taking place. We were always deep tech. And then you started to get a lot of the internet companies coming in trying to get capital.

12:59and we'd met a founder and they came in and they said oh we've got a business plan but we haven't got anything else underneath it um and we're going to sell beer um out of out of a van really they didn't have a van I'm sure they had lots of beer but they didn't have a van and uh we were saying what are you even thinking it's not deep tech we're not going to look at it but they phoned up that afternoon and said, we've just got our 25 million from an insurance company. And that's what it was like. And we all sat down at that fund and we just went, right, this is it. It's happening. This is the toppy nature.

13:38This is it. So we started to look at all of our investments and manage them appropriately, extend runways and get through. And we, in fact, had a really, really successful fund, predominantly because we were investing in deep tech, but we were able to do that. So it's reading the signals. And then obviously the financial crisis was a different type. That was a sudden shock to the system. But in venture, a lot of our investments, we were working in a very strong governance way, how they were managing their deal flow, their runway, sorry. And we were able to work through that. But after both of those cycles came really, really interesting entrepreneurs, because they'd moved out of sectors they were in, and people started to take the risk again.

14:22And you saw some really bold plans coming out in those periods and really, really successful companies that many of you have backed and we've backed as well. So for me, it's reading signals and speaking and being very close with your team to signals in the market in terms of how your customers are operating. Because cycles, you can say it's financial. You can take a big macro as a signal nature. You can take individual sectors as a cycle, for example, cyber all buying now. So another sector not quite buying so much. Everything is cyclical to that founder and they've got their own DNA. And you have to read all of the signals around each individual company and what's cyclical to them and really base your work on a very individual basis with that company.

15:10Unless you're a fund that only invests in SaaS companies that look like this, doing HR, solving, you know, or something like that. But for funds like ours, we have to really, really work on the cycle of both the fund, the macro cycle, and obviously the fundraising cycle, which we're in a little bit at the moment, but I'm sure we'll speak to you later. You know, a fund can decide its investment thesis and can stick to it and therefore could decide that there is a valuation beyond which they're not prepared to do. Of course, life isn't quite like that because you'll have a portfolio company that you love, that you want to put more capital in and stuff like that.

15:54But I do think a lot of the more experienced VCs in the last two or three years, because they were more disciplined, do not have some of the real difficulties that less experienced ones have. So I think there's an internal discipline. in. We, as a venture capital sort of community, are not going to stop the behaviors of insurance companies and the behavior of tourist investors coming. They will come, and I dare I say it, we just might take advantage of them occasionally. That's me saying that, not you. But I wanted to say a couple of other quick things um the serious lps the lps that are committed to this space because of the wonderful returns it produces are investing in every vintage and in every cycle up and down and the final thing i'll say is now is a beautiful time to invest in venture if i may add one thing about the similarities and the differences between these three crises that we've seen.

17:12So, 1999, 2008, and now the current one. The one in 1999 and the one now, the one in 2000 and the one now, are more similar in the sense that there was a growing discrepancy between the belief in the value of companies between the belief in the value that they're creating, the size of the market that they're serving, and the actual financial results of these companies. If you look at 1999 and 2000, the infrastructure was just not there. You know, a great company or a great idea, not a great company, like Webvan, if you remember them, couldn't have been, you know, it took another 20 years for DoorDash to realize that vision or for Deliveroo to realize that vision.

17:58so it's a question of having the right infrastructure and having the right demand and sometimes you have a bubble that's created because the people that deal with tech or the people that deal with entrepreneurship are a little bit too much forward thinking they see the world as they want it to be rather than it is sometimes and that creates this discrepancy and then if you combine that with an abundance of capital because of low interest rates, because of other things that are happening, that is a perfect storm. That creates the background for a crash. 2008 was completely different. It wasn't our thing.

18:42We were suffering from it or benefiting from it in some cases, but it was unrelated to tech. So less relevant things to learn probably about valuations. from that crisis. The only thing that I did learn from that crisis is cash management. One of my companies bought, raised$40 million, bought AAA bonds of a big bank. I'm not going to say which one, but you can imagine which one with the$40 million and lost everything. And the company went under. When you go into a firing range in the army, there's always the same sign. The safety instructions are written with blood. So also in VC, the safety instructions are written with a lot of money maybe not with blood but with a lot of money i think that's a very good good point and i i think i'll i'll leave this topic there and then i'll go to the topic of of geography um and and i'll just just to the audience to refresh um we have of course chris wait from icemacable they do lp investing all across um all across Europe and have done so right from the beginning.

19:54They do follow-on investing, co-investing with their portfolio and then they do secondaries as well. Then we have Yaron with Target who have done pan-European investing right from the inception as well and do so directly. And then we have Kerry with IQ, who have always been the premier deep tech fund in London and the UK area. Full stop. Full stop, yes. And then, but Kerry, now you've started to also look more across the pond and look to mainland Europe. So I'd love to ask all of you to give us your perspective on the pan-European ecosystem, but also each geo or each continent, but each region.

20:51And Chris, I'll ask you to go first, because I think that you're probably the one here that's thinking the most about this on a day-to-day basis. Well, it's something we're very passionate about. I'm going to list a bunch of names, and I'm sorry I haven't got your favorite one, Kerry, and you're on here. Spotify Sweden, Wise Estonian, Deliveroo Germany, Monzo UK, Blah Blah Card, France, Supercell, Finland. And that is Europe in a nutshell. It's 50 micro Silicon Valleys, all with slight differences, but one huge commonality, a growing venture ecosystem around them, and amazing talent coming from entrepreneurs.

21:43The remarkable thing that has happened in the last 20 years in European venture is most people want to be an entrepreneur. And luckily, we back a few that are really good at it. Now, I will conclude by saying something quite slightly contrary. Venture capital is not a national sport. It's a global sport. we build amazing companies in Europe because we're all come from relatively small home markets and we have to build our companies outside of Europe and in the rest of the world and we see companies starting in Sweden then coming to London then going to the US or going direct to the US these this is a movable thing so I get really frustrated when you hear politicians saying you know we are going to build X countries.

22:40I was going to say France, but I won't. And it's okay. It has its place. But when we will build, as time will only tell, we will build the next generation, not of European leaders, but global leaders, they will have probably moved several locations before they end IPO-ing in some marvelous way. I want to share an anecdote to highlight one aspect of what you said. I was very fortunate to be a seed investor and delivery hero. And we took a survey shortly after the company started. Germans were not even the largest minority in the company, which is crazy when you think about it. It's a company that we started in Berlin, ran by a Swedish CEO.

23:30and Germans were not even the largest minority in the employee pool. Just to build on that, Chris, you were talking about, you know, Europe is a bunch of micro ecosystems. Micro Silicon Valleys, I said. Important. Micro Silicon Valleys. How do you guys see, you know, like regulators and the public government institutions and how has that changed over the last maybe 20, 25 years? Do you think it's a hindrance or do you think they've helped enable the venture capital ecosystem? I'd love to just kind of pick your brain on that. Okay, we're probably all going to have very different views on this one.

24:10As I mentioned earlier, for the UK, the government setting up the funds for British Business Bank and really investing into funds and talent at venture capitals. And we had a wide variety of funds that set up then. You had the ex-operators coming together, such as the brilliant firm Notion. and you had experts like Dawn coming together looking at fintech. You had the deep tech from Ike Capital. And you had all these experienced funds learning, as you say, about venture capital and working really collaboratively together. So by now, you know, a good 15, 16 years on, we were all on our fourth, fifth, sixth fund, lots of experience, experts in our field.

24:50So I think the government in the UK played an invaluable point there. And it was a brilliant decision to actually fund the fund managers, because in turn, we attracted more angel investment alongside us. We've invested in lots of companies. Not all the companies have gone on to be billion dollar companies. But exactly as you say, you know, those founders have come back out and become second, third time founders. We're beginning to get that generation of third time CMOs, third time go to market experts all coming out and doing this quickly, which is making this generation, this cohort right now, really, really getting to market faster and understanding the signals when they're trying to move from a proof of concept onto a full-time contract.

25:33So we've had some really, really good advances there. And obviously, recently, the government has, obviously, we've always had in the UK things like R &D tax credits. We've had the EIS ecosystem, which has been a really, really invaluable, and the VCT ecosystem in the UK. And now, last July and in October, we've now had the two mansion house compacts, the mansion house and the venture capital one, which is marrying the pension houses and that massive untapped potential there alongside the venture and growth equity and really seeing what barriers do we need to break down. Some will be regulatory, some will be non-regulatory in order to get that massive DC money into the ecosystem, which creates larger funds, which enables us to back our investments just a little bit longer for those companies to really grow into those bold ambitions and become those truly global international companies.

26:24So from my side, I see government really strong. And they've also engaged really, really well with the founders and listened. They can't solve everything. Yeah. But they have definitely listened to founders and they've understood what the blockages are. Regulation? We'll find out. You know, a lot of regulation coming through in Europe at the moment, especially on AI. Is it too far? Those are things that we can discuss later. But in terms of the UK, the government intervention has really been invaluable, I think, to setting us up as the leader in Europe. How about you, Jaron? Do you have any opinions on the European regulations and how it's impacted venture over the last 20, 25 years?

27:08So let me touch the funding side for a second, because I fully agree with Kerry. And I think the same thing is true for Germany. I don't know France as well, but I'm hearing sort of similar noises. Government intervention in tech in Europe, for the most part, has been very, very positive. I'll give you one example one of my pet peeves semiconductors the UK had an amazing semiconductor industry which deprioritized and destroyed completely Germany is now building a semiconductor industry in order to tackle the challenges with Taiwan so consistency and building these industries across several decades, probably the only comment that I would make.

27:59Once you start investing in them, you need to be consistent. It feels like a quantum now. Because in AI, the development cycles are much faster. But take things that take decades to develop. People have to be consistent. And this is the role of governments. I can say, or fusion. For example, anything that merits real research. and here I'm very envious of carrying the projects that she's doing because I think to an extent this is where taxpayers' money needs to go. If it goes into an e-commerce startup the impact on the economy, the long-term impact on the economy and the creation of a sustainable competitive advantage for your country is not as high.

28:51Whereas when you invest in semi or in quantum, you do create a very sustainable competitive advantage that can last. I mean, you know, I'm sitting in Israel now. Look at Israel, at what it created around semiconductors, just by being consistent. So I just wanted to add that what we've heard about Germany and what we've heard about the UK is pretty consistent across the whole of Europe. And it's based on a really simple idea, And that is that governments understand that the economic powerhouses of their countries are not going to come from today's businesses. They're going to come from new businesses.

29:31I would also say that these government entities that have been investing for many years have actually become very sophisticated LPs. They have their regulation. their regulation, they have their need to address various political economic factors, but they've done a lot of venture capital. If you get back to something I said at the beginning, you know, venture capital is just a collection of painful learnings. Well, they've had lots of painful learnings and they've become extremely good. I'm very excited about what's happening in the UK about pension funds, because actually, we need to move on.

30:15We actually don't want long-term government money. We want private sector money, because private sector can make great returns. That's a long-term vision that I think we all should have. Just one point that I would add, something that struck me when I came to Europe, and the same in the UK, by the way, is how approachable senior politicians are. I have nothing but compliments, both in the UK and in Germany. If you want to talk to the Minister of Finance or the Chancellor, it's achievable. It's achievable, and I'm not sure it's that achievable in other places. So the European political system has been able to set itself up.

31:01you know politicians probably have I guess have egos as well but you know in my interactions with them almost without ego very approachable, very willing to help really very positive role there's something I'd love to pick up on there Jan because it's something that I often think about and that is the role of VCs in policy making or even future making because we invest and spend all our time thinking about what's coming next. And we all see, it stands so clearly in my mind when we did our AI panel and how AI will impact venture six months ago. And I asked the question, how do you think that AI will impact society?