Saul Klein, Founder of LocalGlobe (and investor into 13 Unicorns at Seed)

0:00Saul Klein:Saul, welcome very much to Scaling Europe. I'm thrilled to have you here. Great to be here. Great to be here. Firstly, congratulations on the results. Obviously, the Deal Room report came out with a power law ranking, the thoroughbreds top 100. Phoenix Court, consisting of Local Globe, Solar and Latitude, came out as a top investors across EMEA. How does it feel? You know, you and I have talked about this before. You know, the amazing thing for me, having been at this for a very long time, is how far, you know, the part of the world that we're in has traveled, you know, 20 years ago. If you'd said to me that there would be five or ten venture-backed companies doing over$100 million in revenue, you know, when we were at Skype or at Love Film, I would have said, wow that's so cool you know and I think what's really interesting about the dealroom report is you know there are now 700 companies in EMEA doing over a hundred million in revenue and you know if people didn't realize it before you know that tells me and I think you know it should give everyone you know in Europe in EMEA in the UK or in what we call new Palo Alto just an incredible sense of like, wow, look how far we've come.

1:23And if you look at that cohort of, you know, 700 thoroughbreds, you know, how big some of these companies are going to get, you know, we say a lot in our, in our business, you know, the last two decades have been getting to the starting line, and it's the next two decades where it gets really exciting. So I mean, I think it's just an incredible milestone and i'm really grateful that you know we now have evidence and we now have data to you know say uh to show what you know many of us have been talking about for years but you know to me the fact that 700 companies make up the thoroughbreds list and obviously there's more to come is just super exciting yeah absolutely and the impact that they're having is

2:12Saul Klein:phenomenally. I think part of the report said that for those top 100, they've generated, created 360 ,000 jobs, enterprise value of nearly$700 billion. And obviously, Phoenix Court was ranked as the number one investor. And the first question I really wanted to ask is, what has Phoenix Court done so well to enable you to kind of be the top of the leaderboard? Well, look, I think what the leaderboard reflects, and I think this is why it talks about being a power law ranking, is that the earlier one is able to invest in these cults, these thoroughbreds, and these unicorns, obviously the earlier it is, the harder it is, I guess, on some level.

3:05And, you know, we've been really fortunate that, you know, you know, this year marks our 10th anniversary that, you know, for colts at seed, for thoroughbreds at seed and for unicorns at seed, you know, we were ranked number one. And that means that I think, you know, across the portfolio, you know, we now have 54 companies that are doing over 25 million in revenue. I mean, collectively, they would be generating over 10 billion in revenue. There's average annual growth rates of 40 percent. You know, you talked about jobs. You know, those companies, just the thoroughbred companies in our portfolio, and then 27 of them, you know, represent 40 ,000 jobs.

3:57And I think, you know, it's just really great, you know, in our 10th anniversary to be able to sort of reflect back and say, you know, not only have we been lucky enough to be involved with some of these companies from the seed stage, but we've really seen them go through early growth, which is where we have a fund called Latitude. And then eight of them now at the scale up stage as well. And that's our solar fund. And what we always really believed in was that this was an ecosystem that was going to produce over time outsized returns because you know we were going to be able to invest in at the earliest stages amazing businesses and I think you know it's only really in the last five years that we're starting to see that play out at scale and you know what's exciting to me is you know what is going to happen at least you know just looking at our own portfolio to these 54 companies doing over 25 million in revenue because you know many of them will cross the hundred million threshold 27 already have many of them will then cross the half a billion threshold you know many of them have many of them will cross the billion dollar threshold and then all of a sudden you know you're really looking at not one-offs but you're looking at a sort of a sustainable flow of companies and this is just within our portfolio obviously if you look at the at the total list, you know, it's sort of a mouthwatering situation, I think, you know, for this ecosystem.

5:40And, you know, one that's taken, as I said, you know, a lot of time for a lot of people working together to get to. But, you know, I think everyone should feel pretty good that, as I said, you know, there are 700 thoroughbreds in EMEA at this point.

5:55Saul Klein:What it is, is it's really exciting because it gives you an opportunity to look into the future to see the next generation of these European tech giants, which don't necessarily have the valuation news or the hype or the unicorn status just yet, but you can see that path that they can go down. What do you think about the shift from focusing on unicorns and valuations to the fundamentals and to revenue? Do you think that's something that we as an ecosystem need to focus more on? Look, I think the secret over time of Silicon Valley is it's not just the hope and promise of unicorns. And we should never lose this idea of hope and promise because that's what's so exciting about the innovation economy is that we're always early.

6:43There is more growth ahead. But at a certain point in time, fundamentals matter. And when you can combine the hope and promise with fundamentals, then you get champions. And I think, you know, what's really, really interesting is that, you know, we know that the science base, the technology base, the engineering base in the UK, in New Palo Alto, in Europe, in Israel is world class. That's never been a debate. What we're now seeing is, you know, the hope and the promise of all of that innovation is now turning into businesses that have strong and solid fundamentals. And I think the combination of these two things is what creates the magic.

7:32But when you have cohorts this big, you know, at the thoroughbred stage, you know, in the cults range, the 25 to 100 million range, and at the unicorn range, you know, you can see a bright future ahead. And it's not just in one sector and it's not just in one region. It's cross sectors. And, you know, it's across the region, across EMEA.

8:00Saul Klein:When we talk about fundamentals, do you think that like annual revenues goes far enough? You know, we're seeing a lot of AI companies hit kind of ARR milestones faster than we've ever seen before. Companies doing 100 million in 12 months, but whose kind of like fundamentals are not quite there yet. that they're seeing much lower margins because they're built to the application layer and they have to pay a huge amount of their revenue to the models themselves. So do you think that revenue doesn't go far enough? And perhaps maybe we need to go even deeper to fundamentals to really talk about whether these companies have solid foundations.

8:34Look, I think the power law is just an incredibly powerful concept. And I think the thing we need to remember is that only 1.3 % of venture-backed companies ever become thoroughbreds. 1.3%. Only 1.8 % ever become unicorns. So to hit these thresholds, you are already an outlier company. the fact that we are now debating whether a hundred million is a good threshold or not to me you know as i said having been in this business for decades it's just incredibly exciting because you know we're basically saying oh you got there too fast are your margins strong enough you got there too fast what's your churn going to be all of those are fantastic questions but they're questions where people are challenging fundamentals.

9:33They're not just challenging hope or promise. And I think, you know, this is what's really exciting. It's not about, you know, valuation is the only yardstick because, you know, what is valuation? Valuation is completely subjective. It's in private markets or in public markets. It's a consensus amongst investors, either private or public. Fundamentals, whether it's revenues, margins, cash flow, etc. All of these things are incredibly valuable ways to assess or analyze businesses. But the fact that this is where the discussion has got to tells me how far we've moved. And that the thresholds we're talking about is 100 million is incredible.

10:17Saul Klein:Yeah, I know it's definitely Something to celebrate in itself, of course. I mean, 700 thoroughbreds is absolutely phenomenal. I want to talk also on your local Globus. I think the more well-known brand behind Phoenix Court is the one that's been incredibly successful backing these thoroughbreds, cults, unicorns at the very earlier stages. Lots of guests that I've had on the show have talked about the problem in Europe being late stage growth, late stage capital. Can you talk a bit about the role of both solar and latitude and trying to fix that problem? and what the vision is fundamentally for those kind of funds going forward?

10:52Every single investment strategy that we have from Local Globe to Latitude to Solar has started with us investing our own capital from our own balance sheets. And, you know, we started off, my dad and I, as angels, and that evolved into a seed fund, Local Globe. we started to notice that some of our best seed investments like Wise were getting into the early growth stage. And when you see month after month, quarter after quarter, double digit growth, you're like, oh, this company still got a lot of room to run. And so initially Latitude was something we created, you know, as SPVs with some of our LPs.

11:41And then, you know, instead of it just being one company like Wise, it's like, wow, there's a big cohort coming. We need to institutionalize this strategy. And that was the birth of Latitude. And we're now on sort of fund three of Latitude. And then, you know, I mean, now you get the story. All of a sudden, you start to see, oh, there are 54 companies doing over 25 million in revenue. they don't stop being great companies when they hit 100 million in revenue they keep being great companies like we should have a vehicle to invest in them at this scale-up stage so you know now with local globe at seed with latitude at early growth and with solar at the scale-up stage you know we have a set of uh of funds that allow us to sort of match the evolution of the ecosystem that we're no longer an ecosystem that just starts up.

12:38We're an ecosystem that can scale up. Now, it doesn't mean we have the necessary capital yet in the ecosystem at the scale-up stage, and this has definitely been a big focus of mine, at least from a policy perspective, over the last four or five years. But, you know, I think the good news is that the evidence is now there that demonstrates with 700 thoroughbreds, you know, these are great investment opportunities. No one is asking pension funds, insurance companies or governments to do charity here. These are great investment opportunities.

13:19Saul Klein:and are you investing solely in the companies that are coming through local globe or are you looking at other opportunities as you're right there's 700 of these thoroughbreds there's massive amounts of opportunity across the continent are you looking at doing investments across you know companies that haven't come through your other funds yeah i mean but to you know So one of the nice things about LocalGlobe is that there are 4 ,000 active VCs in EMEA. And if you're looking for a high signal-to-noise ratio for follow-on at the early growth stage, LocalGlobe is number one picking unicorns at seed.

14:01It's number one picking colts at seed. And it's number one picking thoroughbreds at seed. So it is a very, very good high signal to noise ratio for latitude and solar to pay attention to. But, you know, that probably makes up, I'd say, 80 percent of our investing. You know, we definitely don't see everything. And, you know, we are very, very happy to invest alongside folks at the latitude and the solar stages in companies that we think are going to be great businesses. And, you know, we've done that frequently across EMEA. You know, we've also had a, again, this has been from our own balance sheet, a program that we call Basecamp, where we are an angel LP in, I think now, 70 or 80 emerging managers, 45 % in the US, 45 % in EMEA, 10 % in APAC.

15:07and actually on a look through basis, I think Basecamp funds would be number four globally picking unicorns at seed. So I think between Local Globe and Basecamp, we feel like we have a very high signal to noise ratio at that very early stage. But obviously, we want to be able to see those companies that we still believe, you know, at a latitude stage, and then at a solar stage still have a lot of upside. And I think, you know, the thing that we've all noticed in the last five to 10 years is, you know, companies don't stop growing, they don't stop compounding, this is the great companies, you know, when they are at the scale up stage, or even when they've gone public.

15:59And, you know, this is definitely something we wanted to participate in, you know, through solar, especially when you've known companies for years.

16:09Saul Klein:And so to that point, you know, is there a last stage that you will get involved at or are you looking to invest in companies post IPO? We've not done post IPO investments, but you know in situations where we feel that a company still has a lot of growth ahead of it, you know we've invested into the IPO. So you know Raspberry Pi is a good example of that. You know I knew Eben maybe 10 or 12 years ago when at Cano we were probably the first OEM to use a Raspberry Pi. and you know fast forward 10-12 years you know he'd built a company that was generating hundreds of millions in revenue tens of millions in profits 95 percent of the business was outside of the of the uk he'd done this with a primarily an engineering organization and you know we felt that this was an early stage scale-up.

17:18Raspberry Pi, I think, after Apple, is the second most followed tech brand on Reddit. And these guys are selling semiconductors for$10. And if you ask Eben, which I did in the year before his IPO, what really motivates you? He said, I love making chips and you know that's the kind of thing you want to hear from a founder and you know this is something i still love doing and i'm early and i think you know you don't have to be at seed to be early but obviously our dna you know and this is uh you know uh i i think you know the power law ranking demonstrates is our DNA is at that seed stage with Local Globe, but we wanted to be able to create a business with Phoenix Courts where in the early growth stage with Latitude and then in the scale-up phase, we can keep working with these companies.

18:20And again, another example for me would be Wise, where obviously we were investors in the seed rounds with Local Globe, and then we were able to invest with Latitude, but But we invested into the direct listing with solar. And I think that was four or five years ago. And we're still holding our solar shares because we think there's a lot of upside in WISE. Most people are just realizing they're FX rails. They're not just an FX service.

18:52Saul Klein:Yeah, amazing. OK, so I guess you're leaving the option open to invest wherever you think that you may still be early and wherever you think there is upside to be gained. Early is a state of mind. It's not a stage. Yeah, got it. OK. You also mentioned that you've been working and working with governments or working on policy about late stage growth capital and kind of pushing to get more capital invested at the late stage. we're seeing a lot of noise in both politics and the tech communities. And I think Elon Musk has been a driving force in the US around getting tech figures, tech entrepreneurs more involved in government policy and having to shape government policy.

19:33Saul Klein:What role do you think, you know, senior VCs, serial entrepreneurs should have in shaping and defining government policy? I've always believed this to be true. And, you know, it was not a popular opinion. 10, 20 years ago is, you know, if innovation is a fundamental part of society and is going to be part of, you know, every sector and people's daily lives, you know, we need to have grown-up conversations with policymakers and regulators, and we need to have that at the earliest stages. And I've always believed that one of the incredible attributes of London, of Paris, of Brussels, is that we're close to policymakers, I mean physically, and that there are much more opportunities.

20:31And I've definitely experienced this very much in the UK over decades, not with one government or another, is that there is an understanding that innovation is key to economic growth. But, you know, innovation without principles, without values, you know, can have some very bad unintended consequences. And I think, you know, we've seen that with Silicon Valley. and I think you know we talk about this idea of a new Palo Alto and people like oh you know does that mean you want to be the next Silicon Valley it's like no we want to be a different Silicon Valley and the difference is that innovation without values might not be worth you know very much other than sort of economic gains that go to a very small number of people and you know if innovation is really going to serve society it can have positive impacts as well as positive economic impacts and I think it's one is able to do that when one is in a sort of a diverse and mixed economy like we are in London like we are in Paris like we are in Amsterdam like we are in Brussels whereas in the US you know you have these very specialized economies.

21:49You know, San Francisco is a tech economy. New York is a finance economy. You know, LA is an entertainment economy. DC is a political economy. And, you know, we may not have the scale of the US, of course we don't. We don't have the scale of China. But what we have is like incredible diversity and interdisciplinarity. And I think, and you know, this is our bet for the next two decades is those things are going to matter and they're going to matter more. And this new Palo Alto, which is already, by the way, the second best innovation cluster in the world after the Bay Area, is going to produce companies that don't just create massive economic value, but also create very, very positive social outcomes.

22:41Saul Klein:Amazing. Yeah. And I spoke the exact same thing about Barney from Clio two weeks ago, who's got very strong opinions on promoting British and European tech, but almost doing it in that sort of way that incorporates the values that we're really proud of in Europe. I'm very delighted to have backed Barney both through LocalGlobe and Latitude and look forward to doing it through solar as well. Yeah, an amazing company. So we're out of time. But look, thank you so much for joining. It's been an absolute pleasure to have you. Congratulations again on the rankings. It's a great validation of what you spent, you know, 10 years building, but I guess even longer building before that.

23:22Saul Klein:So thank you and let's stay in touch. Thanks. Thanks a lot.