The European Startup Scene

0:00Europe's startup ecosystem is maturing rapidly, with companies like Revolut, Lovable, and Lagora demonstrating that world-class technology businesses can be built and scaled on the continent. While the US remains the dominant force in venture-backed software as home to the largest markets, the deepest capital pools, and the most ambitious exit culture, a growing number of European founders are choosing to build at home. Edward Keelan is a partner at Octopus Ventures, one of Europe's largest and most active venture capital firms, where he has spent over 16 years leading the B2B Software and Enterprise AI Fund.

0:37His portfolio spans seed through Series C, with a focus on European founders building in AI, vertical SaaS, and enterprise software. This long-view experience gives him a rare perspective on what it takes to build enduring technology companies in Europe. In this episode, Edward joins Elena Baroda to discuss what separates great founders from the rest, how AI is reshaping the software landscape and threatening established players, the state of the European startup ecosystem and what it needs to compete globally, and what engineers and founders should be thinking about as the industry enters a new era.

1:16Elena Baroda focuses on GTM for developer tools and AI startups, with experience in observability and building tools for MCP servers. She is based in Berlin.

1:39Welcome to Software Engineering Daily. Today's guest is Edward Keelan, a partner at Octopus Ventures. Great to have you on the pod, Edward. Yeah, thank you so much for having me. It's a real privilege to have been asked to be on the podcast, but also really nerve wracking as well. I feel like, I don't know, a few people sort of frowning at VCs already and engineers wondering what it is that we actually do. So I'm, yeah, I'm slightly nervous because we're going into different worlds than I'm used to. I think you'll be great. We already had a short chat before. So for those who don't really know Octopus Ventures, can you tell, give people a bit of background?

2:16You're a very active, one of the most active VC funds in Europe. You are also one of the largest VC funds in Europe and you deploy around like 270 million USD. So for you, it's in pounds, 200 million pounds a year because you're based in London. So tell us a bit about that. You've been there since 2008 and you've been leading the B2B Software Fund. Tell us about yourself, what got you into VC and what is Octopus about? Yeah, I won't cover all 18 years, otherwise that will probably take the entirety of the podcast and nobody needs to hear that. But yeah, so Octopus Ventures, we manage around about one and a half billion dollars.

2:55We're part of the Octopus Group. The Octopus Group is a B Corp. And sort of our purpose is really to invest in the ideas, industries and people that are going to change the world for the better. So that was kind of the overarching ethos. We do that in all sorts of ways. Lots of people know us because part of the Octopus Group is Octopus Energy, which is the UK's largest energy supplier. Interestingly, we actually started as an investment company, not an energy company. So I've actually been working at Octopus for a lot longer than the energy company was set up. But it's been a huge success. And so many people know the brand for the energy company.

3:26But Octopus Ventures is completely separate to that. And as I say, we invest everywhere from sort of first check fund all the way through to series C. And we do that across Europe and also Australasia as well. So we've got investments all over the world. My personal focus, so I look after the team that runs our software fund. So we have a, it used to be called a B2B software fund. We're sort of going through a kind of branding crisis. So we probably call ourselves B2B Software and Enterprise AI Fund because most of what we do now is Enterprise AI. It's a 600 million pound fund, lots of dry powder, super active.

4:00We're trying to do a deal every single month if we can and trying to find the best opportunities that are out there. So any engineers or founders out there that are looking to raise, love to talk to you. We do everything from kind of late seed in my team through to Series C. So checks from sort of two to 20 million pounds. Fantastic. And where do you look for founders? Like, can anyone apply from anywhere in the world or are you geographically quite constrained? No, absolutely. Anyone can apply from anywhere in the world. I mean, for my fund in particular, really is partly because of the expertise we hold.

4:32It generally has a UK angle. So there has to be generally some sort of UK angle. It doesn't necessarily mean to say the head office, but where the companies are expanding into the UK and they've got UK employees and revenue. I think that's really where we're best positioned to help companies as well. So we do have companies in lots of other jurisdictions, but we do have this kind of prominence to the UK. But anybody can buy, please do. Probably get, I don't know, 10 pitch decks a day. I love talking to founders. I love finding out what's out there. And sometimes I think VCs can seem like a bit of a black box, but the most important part of our job is finding the best founders.

5:07That is literally the point we can make our most critical decision is the point in which we invest. And so origination of founders is basically critical to being a good VC. And how do you define what is the best founder to you? You said it's all about finding the best founder. Yeah. And, you know, my, the human side of me really struggles with this because I'm not somebody that likes to judge other people, especially on early judgments. I always find that really, it's a really weird one in my outside of work life. I think I'm a very, I like to hope I'm a very nonjudgmental person, but then obviously in my, my working life, that's kind of part of the gig.

5:40So for me, there's kind of a number of things. I think number one is like, why this founder for this problem? You know, why is this founder the right person to solve this problem? I think that's a really interesting question to ask. Number two, maybe the most important of all of them, do I think they'll motivate both employees and customers? And a lot of the time, that motivation comes from their ability to easily explain things. If I think back to like my worst investments I've made, there's probably where a founder has come across so bright and so intelligent and throws tons of stuff at me. And I'm like, I don't understand what this company does.

6:15But like that guy or girl clearly knows more than I do. And therefore, I'm going to back them. I need to find that the trouble is no customers understand what they do. And the employees don't necessarily fully understand the direction they're going. And so for me, communication, they'd have to be like the kind of archetype founder that sort of all extroversion. You can have very introverted founders, but with a very clear purpose and explanation of what they're trying to do and the problem that they're trying to solve. Because if they can't explain it to me, chances are they're not going to be able to explain it to their customers and future employees.

6:46And then just like my final point would be somebody that I can trust. I like to think that for my founders, if things go wrong, I'm the first call they make, not the last. That's the relationship that I want with them. Because the worst thing is, is where you've got a founder who basically is trying to sugarcoat everything to you. Because as an investor, you can't then try and solve those issues. And are there any specificities, anything that is even different when it comes to technical founders, where you think this makes them the best? I think, as always, we like to put things in boxes, if that makes sense.

7:19We like to say, this is a sales type founder, this is a finance type founder, this is a technical type founder. And some of the best commercial founders that I've come across are actually very, very technical because they deeply understand the engineering problems potentially they're trying to solve and what they're trying to do for engineering teams potentially. So I'm always careful not to kind of box off them, but it is true and it's a bit cliche that with an engineering finder, they're obsessed about product and not thinking about the commercial opportunity. That can be really problematic.

7:50And we see that quite a lot, especially with kind of university spin-out founders where maybe there is a research product, they're trying to do something really crazy with, I don't know, we got it a lot, actually got it we got a lot during the metaverse kind of phase i feel like but there's loads of people that were doing lots of research around how the metaverse can be used for this and that and you like the practical application of that and actually whether that's solving a real problem i think is generally where you've technical founders struggle they start from the product and not the actual problem i do think that however it goes in waves and right now we are in an engineering uptick wave it's the engineers who are dictating to the people if you like the wider people, like what the problems are that are now going to be solved by AI and how those application layer products can really kind of change the way in which we work.

8:37I think it's almost a very weird world. It's a very different world to say the world of vertical SaaS, which we were in just five years ago, where actually engineering was not necessarily the game changing thing because everyone knew what a vertical SaaS solution looked like, knew how to develop one, etc. We're in a very different world now where the premium on not just engineers to build, but engineers to help the rest of us understand means that if you're not backing founders that have a strong leaning toward product and the kind of more technical side of the development, then you're going to lose quickly.

9:14and are such founders and engineers ample in europe like do you have enough of them or is there a shortage of certain types of founders engineers that you like technical people either as founders i don't really have the stats on that but i haven't necessarily seen that you know i wouldn't turn around and go the biggest problem here is that we don't have great universities and we don't have great research i think where the uk and i'll talk more for the UK are probably less tapped into the kind of wider European ecosystem. But where the UK I think has failed with universities is that, and again, this is probably a whole podcast of thought, so we're going too deep, but where we, I think we have failed in the past is we have not been able to take university spinouts and really kind of develop them into super large companies other than in sort of maybe deep technical stuff like biotech.

10:07I think what we've seen with this wave of AI is it's really pushing universities to say, actually, it's not good enough to just have these little incubators where people do some research and we get one or two firms that specialize in university spin outs, like the universities now, the students are coming out there going, no, I want to build the next application layer for health tech or for manufacturing or for whatever. And the universities, I've really seen the step change over the last year, the companies coming out are much more commercially minded with this technology than historically, as I said, which would be more like deep research-based type companies.

10:43Universities like Oxford and UCL and Cambridge are just seeing like much more of a... So I think we absolutely have the people. I think what we really need is the flywheel. And by that, it's amazing to see how many founders come out of other great companies and not necessarily even come out of, but see, visualize other great companies. So if you look at, and this is where like Sweden is like absolutely i mean spotify i think not necessarily through the spotify teams but just having spotify has i think inspired lagora and lovable you know it's given those founders like just because i'm in sweden doesn't mean to say that i ain't going to build something like spotify or something like clano like really game-changing companies and we really need them like we really really need those kind of foundation businesses i always sort of talk about i think scotland's really interesting Obviously, Skyscanner comes out of Scotland.

11:38Everything, when you talk about Scottish entrepreneurship in tech, often points to the Skyscanner, kind of like what happened there. Yeah, I really hope that through the success of Revolut and Monzo and other great sort of UK-based businesses, that we can hold and frame those ones because that's what's going to inspire the next layer as a founder is either coming from those leadership teams or actually just saying if they can do it, why can't I? where do you see kind of the hubs of like really this engineering talent problem like if you want to speak obviously about europe feel free to or just point to the uk yeah it's everywhere i wouldn't necessarily say some of our companies have got fantastic development teams across eastern europe but that's been a trend for a long time i think the near shoring obviously with what's going on more geopolitically that has become more difficult but engineering talent is everywhere we've got a lot at the moment in Portugal, in Spain.

12:33Like I wouldn't, if I think I wouldn't say there's like, oh my goodness, if you want the great engineers, they're all coming out of whatever. So yeah, I couldn't be specific. And obviously within the UK, it's the normal hubs of engineering, the triangle. It's quite distributed, right? When it comes to engineering talent, so it can be anywhere. And would you also say it's possible to build a company from anywhere in the UK in Europe yeah do you have to go and move to London and you have to move to Paris and you have to move to maybe Berlin well I think everyone should always move to London because that's where we are so please come and join us look I can only talk about my experience and how I've invested so I'm careful to not frame this in a kind of like a researched way like from my research I find this but I'm just talking from like personal experience really but from my personal experience is that London is a great place to start companies, not necessarily because that's where the engineering talent is, because I actually think you can have the engineering talent, you can start the companies anywhere.

13:34But like it or lump it, London is in the English language, and the biggest markets in the world are in the English language. There's not a huge call for like people building companies in the UK saying what we really need to do is get ourselves into this French speaking world. They want to keep in the English speaking world. And that ease is it's just that much easier when you're in London so does London benefit from engineering no I wouldn't say so not I think it's got particularly better for engineering talent but does it have other tangential things that are really important and why it's such a great place yeah and it's a fantastic stepping stone over to the large US market which is kind of the mecca of all software companies really you know there's a reason why the likes of Lagora are throwing the kitchen sink at 11 labs, whoever it is, throwing the kitchen sink at getting into that large US market, because that's where you build really big businesses.

14:25When you look at where is the constraint, you said in Europe, the constraint is not necessarily when it comes to technical talent. Is there a constraint when it comes to kind of capital density? Is there a constraint when it comes to the speed of iteration in some way or form? It might be a bit controversial in this. I don't actually think there is a particular a shortage in capital in Europe, great companies will get funded. Just look at the big companies that have been built, like the Lagoras and the Levin Labs, and they're not struggling for funding. So I think the biggest problem within Europe is our ability to take early stage kind of startups that are scaling, keep them in Europe, and then build them out bigger, and turn them into the next Spotify.

15:09And actually, I think that is changing. I think companies like lovable for example would have been like in years gone by may well have been sold like very very quickly to a big american you know anthropic or something and i think it's our ability in europe to hold on to the ownership of the companies that we can then build them much much bigger such that they build those beacons for other entrepreneurs to not sell early to carry on clearly the restructural disadvantages in europe around the fact we don't own large language models and we don't own the chip manufacturers and we don't do these things.

15:43But I don't think necessarily that should prevent us from building some really big companies. So I don't know if that's a good answer, but I don't think it's a capital issue. I think it's a kind of ambition to build really big. So you see the constraint with the ambition to build big at times? And risk appetite and to keep following that risk appetite, to keep pushing. like once you get to a certain size i think we'd probably and again i don't have the data on it to hand but i think we probably european founders will tend to exit much quicker than say a u.s founder and that's a cultural thing that's a cultural thing i think so yeah confident maybe maybe i don't know but i mean if you just you know you look at the big the big seven they're all u.s companies there's no european companies in that big seven we haven't built those and so there is obviously something going on because i don't think it's talent maybe it's the way in which we kind of spread around Europe.

16:36There is too many constraints, regulations, I don't know, but actually I think there is a bit of a cultural thing going on there as well. And I think that's changing. As I said, I really think that's changing. I really feel like we're seeing a step change. I think there's a desire for European founders now to build much bigger, and we're seeing that. Turbo Puffer is how companies like Anthropic, Cursor, Notion, Atlassian, and Ramp ship their most ambitious search features. Turbo Puffer is a serverless vector and full-text search engine built on object storage. It's up to 95 % cheaper than traditional search databases and just as fast.

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18:38That's not a modeling problem. That's a pipeline problem. Estuary gives you CDC, batch, and streaming in one platform. 200 plus connectors, live in hours, not weeks. Your AI is only as good as your pipeline. estuary.dev so that's kind of interesting because like it seems that ai is really accelerating obviously how fast you can build something what team size you need to build something in engineering and yeah that also fuels ambition yeah right absolutely i say i've i've been around for a while because i'm quite old i mean i was in san francisco during the first.com and the old saying that history doesn't repeat necessarily but we can kind of learn from it it replicates.

19:23And so the dot-com boom was very, very different to the current AI boom, because in the dot-com boom, I was there, there was loads of crazy companies that were never going to, like, they were never revenue generating, and the unit economics made zero sense, and all of this good stuff. So when the money stopped, the companies all stopped, because they didn't generate any revenue. The AI boom is completely different. It's completely different. These companies are generating revenue really quick. We're investing into companies, you know, likes of Definely, and sales ape and heels good and like they are they're real revenue generation and it is growing rapidly so it's like these are not companies that are just kind of in hope value you know getting eyeballs on things they're actually generating real tangible revenues if i look back over the last 10 years of like hype cycles around the metaverse and hype cycles around crypto and blockchain none of those felt that exciting if i'm honest it's not like some people thought it was being very changing i wasn't sure solutions looking for problems that is not the case with ai like this is an industrial cycle generational that is completely going to change the game i think and i think we very much believe that because we're seeing it play out just very very quickly and i think the people and the founders that are leading into that that brings huge amounts of opportunity because there's tons of stuff that hasn't been invented yet you know let's say take a blockchain you know when blockchain kind of technology everyone's trying to i'm going to build a blockchain for oh i don't know supply chain management and do we need that i don't know maybe we do it's like with ai it's like i'm going to completely change the way in which you create presentation materials or i'm going to completely change the way in which you test products is it's like everything is being recreated again and therefore as a european ecosystem it's on us to make sure that we're at the forefront of that that we're absolutely building into it and we're we're the ones as well they're building it and this is moving so fast by the way that if we haven't started doing it already then we're too late our biggest fear probably our biggest fear as a team is like and we've been investing in ai pretty hard now for a couple of years but like are we too late have we missed the boat already which might surprise some people but that's just the kind of way we feel is that also like let's say if you are looking at founders or very successful like engineering hires at companies at successful companies that you invest in do you want people who are ai native is that something you really really expect people to be and what would that actually mean yeah i think so you know i can't be like obviously given the confidentiality i can't be specific about the companies but like we've literally removed a cto from one company who is probably more of the old school an old school managerial type cto and move somebody who is absolutely at the forefront of the world of ai because it's like if that is not where your brain is, that's not what you're thinking about, then you're going to very quickly lose.

22:13You know, you're going to be overtaken. I mean, the way in which we see the competition of AI, I can go into if you want, but like, if you're an existing software company, and you are not pivoting and turning and thinking about this, you will be destroyed quite quickly, one way or another. So there has been what public markets are called soft margeddon, which basically meant that there was like many public companies whose stocks crashed because of you know caught with new tools tools came out and we can also go into the details so that actually happened to monday.com so what happened is that was basically back in february where it's like ancient history it happened like two weeks ago and it's like everyone's now like That was really, really interesting.

23:04That really spooked kind of also this AI eating software narrative. And separately, there was a CNBC reporters with zero coding experience and used Claude Code to build a working Monday.com clone in under an hour for very little money. In compute credits, it was like five to$15. dollars and that went viral obviously and hammered the stock even further yeah so it's kind of interesting to look at that and is actually ai eating software and how does it affect your investment thesis yeah i mean this is literally our conversation probably every other hour of the day we flip into this conversation and trying to work out what software is safe out there is the big topic of the day when we're looking at we're looking at stuff um i mean i'll my hypothesis changes on a daily basis about this so i'll be i'll be careful but if it's okay i'll sort of double click slightly into this it might take a couple of minutes to sort of explain my thinking but i think first of all you can sort of split the world into things that were built pre-ai you know pre the big 22 chat gpt bang and ai native software i think if we're looking at ai native software and generally when we're thinking about new investment we're talking about ai native software.

24:18That really, the big question for me there is, can you replicate that software using an LLM? And that's, you know, like Anthropic go, hey, we've got a new legal plugin. All of a sudden, you know, legal tech, even native AI legal tech, unless it has a very specific purpose, and we're invested in Definely, a legal tech tool, which we believe does have that very specific purpose that can't be replicated by LLMs. But the generic ones, there's going to be a huge amount of pressure. There's like, why do I need to buy Harvey if I can just get Anthropic's plugin to do this at a tiny fraction of the price.

24:48And I liken that to the kind of the spell checker world of software. Like back in the 80s, it was like 35 spell checking companies. And then Word just put a spell checker plugin in and all the spell checking companies died. So the same sort of thing could repeat there. But AI native companies that have a very specific purpose that aren't going to be disrupted by the LLMs, that makes much more sense. That's kind of like where we're thinking we're going to invest into. So we just did invest into Heelsgood, for example, which is using AI to disintermediate agency from healthcare. It's like Anthropic is not likely to build the application layer to disintermediate healthcare resourcing.

25:24It's just too verticalised for them. That's AI Native. If you then think about the older softwares, the mondays.com, I think they fall into some broad buckets of companies where you go, are you kind of an old school creation tool? Are you building stuff on a platform manually? They're dead. I mean, creation tools are dead. lovable replet they're building products ai native tools like that they're just building product really quickly and i think those creation tools are going to really struggle if they can't switch and all of this is if they cannot then switch themselves over and they can't tilt into that kind of ai world you've then got like discover what i'd call discovery tools so things like data analytics tools or penetration testing tools and things like that i think that all becomes about the data like if you're a discovery tool that really owns its own data and it owns it has that flywheel then you you may be safe but if you're just picking up third-party data from here there and everywhere and then presenting it to people or you're that type of thing then i think you're in trouble because it's like ai agents can go and get that data and they can present it much quicker than you and then the sort of the final category and the one that's more complex would be around system of record and workflow and then with system of record and workflow so i'm talking about your kind of vertical SaaS ERP systems, your CRMs, those types of products, your accounting software or whatever it might be.

26:45It's like, first of all, can your workflow tool be easily built by AI? You might say this is like a monday.com problem. And it's like, yes, it can. Like AI can just build what you've got. You're stuffed. You know, like you're going to be in trouble because companies will probably build a lot of that type of basic workflow stuff themselves using AI, because why wouldn't you? It's free. You don't have to have headcount. And then you get on to like, if you're a system of record, will there be naturally an AI native competitor? And if you're a workflow management tool or a system of record where actually right now there isn't one, there isn't any AI native competitor, maybe it's an accounting solution or something like that, you're probably all right for a time.

27:24You recently said, growth at all cost is out. Metrics like profitability, burn multiples, gross margins, and rule of 40 now matter immensely. can you explain what you mean and what is a change for who gets funded for engineers is that again driven by ai that it's really about growth at all costs being out i don't know when i said that is probably like a few weeks ago which makes it as we've talked about immediately out of day right now what we're getting we are in a massively polarized world so you've got ai native businesses that are growing at all costs still and nobody cares about buying multiples no one cares about that stuff.

28:02It's like, if you're growing super fast, and the funny one is no one cares about gross margin anymore. I listen to podcasts and listen to hear about businesses that are growing super quick. They're the darlings of European tech, I won't name them. And then they're like, oh, what's your gross margin? And they're like, well, I'm happy to tell you my top line ARR metrics, but I'm not going to tell you what my gross margin is. It's like, people just don't care. It's like, at some point, we'll work out the token costs and whatever. But like, that kind of scares me. I'm probably not brave enough as an investor to just dismiss the fact that you're losing money every time you win a customer.

28:34So yeah, you've got this world where these types of companies over here will get funded on the basis of their growth and the burn and all the rest of it is just not important. But on the other side is, if you're not kind of hyper growth, if you're not super growth, then you're still in a world where metrics really matter. So if you are a kind of vertical SaaS solution that's leaned slightly into AI, you know, you've got a bit of an AI story, probably still fundable. But if you're like growing 100 % a year, so take a company going from a million to 2 million ARR and your recurring revenues sorry so talking financial terms the million pounds worth of annual recurring revenue to 2 million pounds worth of annual recurring revenue and you've burned 10 million pounds to get there so you're like you're at what they call a 10 burn multiple you're not getting funded you're like you're not getting funded you're not growing quick enough as an AI native company you're still in that kind of vertical SaaS world and therefore you need to basically have a burn multiple of like one or you know maybe one and a half so you're basically saying like if you're adding a million pounds worth of ARR most you can really afford to burn is a million pounds at this stage and you might get away with that and even that's high I think just uh and I don't have going off on a tangent here but one thing that's quite interesting about the whole like death of software and uh sas topics or whatever they called it there's so many factors that are coming into this so retention for a lot of these products is still very high and it will remain high for a while but seed count is going down so because like people are hiring less people and therefore they require less seats.

29:59So on one hand, there's like revenue pressures coming down on these companies as a seat count comes down and growth is harder. But on the other side as well, like you see with Block, I mean, like people are firing people, like the numbers of people that are required to be in these companies from the sales and marketing and day-to-day analyst teams and all this like are coming down as well. So theoretically, EBITDA margins should also be coming up. And so when you're looking at the kind of earlier stage versions of these companies, you're like, actually, this is not 2020. It's no good to just hire like endless engineers anymore.