Christian Jantzen: Before the (American) Flood

Ten years ago, most investors viewed Europe as a desolate wasteland where startups would slowly suffocate either due to lack of capital, low ambitions or predatory investors.

For European entrepreneurs, the choice was clear: you either moved to the Promised Land of Silicon Valley to start your company or stayed behind, forever confining yourself to a smaller exit imposed by the European glass ceiling. For the Bay Area elite, the only investment in Europe worth making was a second home by the French Riviera.

Alas, ten years have passed, and the narrative has flipped on its head. Europe has moved from total desolation towards its own Golden Age, with companies like Spotify, Adyen and UiPath leading the way. Slowly, the non-believers of Silicon Valley have started converting. What began with the occasional Series C when companies needed to expand into the US, has steadily been moving upstream. US funds have realised that fewer European entrepreneurs are immigrating to San Fransisco early on, instead favouring to build their companies out of London, Stockholm and Paris (honourable mention: the tightening US visa policies).

Fast forward to today, and the floodgates of American capital are at a near breaking-point. While it was previously unheard of that a US fund would lead a Series A on European soil, this has now become a monthly occurrence. Examples from the past months alone include Utmost (Greylock)Tibber (Founders Fund)Attest (NEA)Inkitt (KPCB), and Duffel (Benchmark). Founders are no longer expected to relocate to the Bay Area – instead, the most prominent American firms are setting up shop in Europe. As an example, Lightspeed recently hired their first London-based partner while Business Insider last week reported that Sequoia is building a European team.

The Great Battle for Europe
While early-stage venture capitalists are celebrating the increased opportunity to share cap tables with the iconic brands we’ve idolised for years, later-stage woes are building up at Europe’s largest firms. A personal friend (who’s a partner at a major European firm) recently told me how their partner meetings have seen a significant rise of war room-esque discussions on how to strike back against the American “invasion”.

There’s a lot of reason why the battle is happening now. In recent years, Europe has proved that global category winners emerge here. At the same time, San Fransisco valuations have hit highs where even the gold-rushing venture capitalists are starting to become sceptical of its sustainability. Couple that with US firms needing to deploy more money than ever and you have the makings of a perfect storm. With fewer barriers between American and European business culture than for instance Asia, it’s my prediction that we’ll see a lot more than just a few top firms setting up shop here.

So far, the battle has been developing quietly behind the scenes, but in recent months it has slowly moved towards the surface. While we still see minimal public discussion on this topic (hence this blog post), it’s clear that measures are being taken to emerge as a winner in this new world. Just in the last seven days, three of Europe’s most significant funds (BaldertonNorthzone and EQT) announced +$1.5 Billion in fresh capital, bolstering themselves to give the Americans a run for their money. Similarly, every single major European firm has raised sizeable funds this year. But will capital alone be enough?

Who will Fuel The European Dream?
The inflow of US dollars into the European market doesn’t just result in more money going towards entrepreneurs. The American VC archetype is that of the aggressive deal-maker, taking bold early bets while pushing founders to “blitzscale” their way to world dominance at an ever-increasing pace. In contrast, the European venture landscape is less developed. Many funds have slower decision-making processes, a PE mindset when it comes to minimising risk, while not being acclimatised to the increased competition for deals (especially outside the main hubs).

I’ve heard multiple predictions on how this story will unfold, all from smart people with in-depth knowledge of the industry. The European optimists will hail their “local advantage” triumphing over the big oversees brands. Pessimists say we might as well roll over as the American deal-making train steamrolls across Europe, leaving no returns behind. While both are compelling narratives, they are simplified versions of a complicated story.

The notion of European firms having a sustainable competitive advantage by being local is intellectually flawed at best (outright silly at worst). If Sequoia was smart enough to fund Larry Page, Jan Koum and Brian Chesky early on, it seems foolish to believe they can’t figure out how to rent office space in London and find people to build out their European platform. Not to mention their recent $8 Billion in fresh capital ready to compete. At least being local is not a moat I would personally bet on as an investor.

Where pessimists are wrong is the view that Europe has saturated, becoming a zero-sum market. Although it sometimes feels like the rapid increase in available capital and valuations is turning the market irrational, it’s worth remembering the big picture. Europe is still massively underfunded compared to both the US and Asian markets. If the distribution of talent is anything to go by, Europe is still far from its ceiling when it comes to technology.

The Winners and Losers in a New World
In spite of Europe still having plenty of upside potential, there is no doubt that a massive American shakeup of European venture is on the horizon. It’s still too early to say precisely how the American flood will impact the scene, but here’ a few personal predictions:

Early Conviction Becomes King
With the increased competition for deals, the market will increasingly be shifting downwards (investing earlier) and outwards (investing outside main hubs) in search of opportunities. The increased competition means especially smaller funds will be forced to build conviction faster, with fewer data points than they might want to make their decisions. US firms still spend most of their time in London, Paris and Berlin (for now), which will increasingly push local firms towards the fringes in search of proprietary deal flow.

The earlier conviction building, means European firms need to start taking diverse venture talent seriously. Hiring a mix of former operators, technical backgrounds and people with a deeper understanding of specific industries (in addition to traditional investors) will be required to promote a culture of fast-to-conviction investing. Europe and especially London is still in the dark ages when it comes to hiring diversified people, with only 8% of investors having experience working within a growth startup. That statistic is in stark contrast to the +50% of investors having a consulting/finance background.

Verticalisation > Localisation
Your friendly neighbourhood VC is under pressure as the days of winning deals by being “the only gig in town” are dwindling. I remember starting my then Copenhagen-based firm in 2017 back when people were still talking about closing the Series A gap locally. Indeed, over the next few years, the gap closed; however, it didn’t close by raising larger local funds. Instead, London, Berlin, Paris and Stockholm based funds were the ones closing it. The same now seems to slowly be happening at the Seed stage. There’s no doubt that venture is transitioning from local to regional — and eventually global.

As a European investor you will be left with two options: face the US competition head-on, with more sizeable funds, stronger processes and earlier conviction – or specialise your way into the best deals of a particular vertical. While there is still significant space for more substantial generalist flagship funds in Europe, I believe the option most managers choose will be to specialise. Gaining an edge in a specific vertical is often more accessible with the funds being generally smaller and less challenging to raise.

Differentiate or go Extinct
Perhaps the most radical change will happen in the most crowded area of the market. Specifically, the funds that are not already in a leading position or challenging the leaders. Today, these funds are being kept alive by the continued under capitalisation of Europe. It’s still a feasible strategy to invest in companies not able to raise from the best funds and sometimes get lucky. As American funds are pushing the best local funds, they will eventually be eating into the market of this blurry group of generalists that are really hard to distinguish from each other.

Paradoxically, this group of funds seem to be the ones clinging to the old “US funds only do Series C’s” story the most. Whether this is due to complacency or just a general disconnect from the broader market is hard to tell. But know this: there will no longer be any free lunches in Europe.

European House Cats?
While the sentiment of the future of European tech is generally more bright than ever, there is a dystopian monster looming underneath the bed. Europe lost the first wave of “platform wars” which is why we book our getaways on Airbnb, order almost anything via Amazon, and answer our questions by Googling them. Some people still believe that we can build European versions of these products, but anyone with a more profound knowledge of technology knows that network effects decided that race years ago.

With the increased democratisation of opportunities by capital being available to European founders, the dream of more dominant platform companies being build on European soil is flourishing. Spotify led the way, with more to (hopefully) follow soon. However, the second platform war will not just be one of user counts and ARR — it will be one of ownership. With the rapidly increasing inflow of US capital, a large part of the European spoils might travel across the Atlantic, with Europeans once more being left at the station. This threat is especially concerning, as increasingly value accrues to private investors rather than public.

A less talked about (but equally important) development is how things are changing behind the curtain. Based on conversations with some of Europe’s most successful funds, it’s becoming clear that top firms are allocating more and more American capital. While governments still fund a large portion of European venture, the top 5% returners seem to increasingly pick their LP-base from American endowments and funds-of-funds. These LPs offer less bureaucracy, softer terms and longer horizons. In an industry where power laws are so apparent, this is a lot more critical than it seems at first glance.

Europe may end up with American capital converging from both LPs and GPs. As house cats in their own homes with 90% of the value of European efforts flowing to wealthy American universities rather than British or German pensions, except for a few founders and investors. I hope European funds will pick up their sword and fight. Equally, I hope the US-based investors will bring unprecedented opportunities to European entrepreneurs. May the strongest survive in this neo-European Darwinian game.

Disclaimer: most contents in this post are personal opinions based on anecdotal evidence from my conversations with some of the most influential people in European tech, as well as US-based funds investing in Europe. Whether you choose to take this seriously or brush it off as unscientific will be left up to you. I hope the piece will serve as a mildly thought-provoking conversation starter.

Remember, by the time you read about data points like these in official reports; it’s most likely already too late to act. Brace yourselves, winter is coming.