The Ins and Outs of Investing in Europe, according to VC Saul Klein

Connie Loises
Hi, I'm Connie Loises and this is Alex Gove and this is strictly VC.

Alex Gove
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Connie Loises
Hello dear listeners, how are you? I hope well, as I speak, I'm preparing to hop on a flight to Washington for our newest Strictly VC event, where we're expecting to see hundreds of you at the woolly mammoth theater. I've never been there. I'm excited to check it out for a night of drinks, networking, and great conversations, including with a lineup of speakers about which I am so excited, including FTC chair Lena Khan, the co founders of Humane AI, in one of their first stage appearances. Pretty sure. And on the heels of a pretty tough product rollout. If you follow the news, you know what I'm talking about. Also coming to spend time with us is Helen Toner, who was among the former OpenAI board members who ousted the company's CEO Sam Altman last fall over concerns that his approach to developing AI is reckless. She apparently has a lot left to say. And last but not least, we'll be sitting down with Steve Case, the famous AOL co founder turned investor whose firm Revolution generously offered to host us in Washington many months ago.

Alex Gove
It's really why we decided to head.

Connie Loises
There in the first place. Steve is a street shooter and a big proponent of making sure that entrepreneurship can thrive anywhere in the US, and I expect that that's going to be an interesting chat too. Again, super excited. But before that event happens, I want to introduce this week's podcast guest, who happens to have appeared at our last strictly versus event held in London a couple of weeks ago. And that is Saul Klein. If you live in the UK, really, if you live in Europe and you are part of the startup ecosystem, you already know Saul.

Alex Gove
If you don't, a little background.

Connie Loises
He oversees Phoenix Court, which is basically an umbrella company for a number of different funds, including seed stage funds that he operates under the brand local globe. And he's very proud to note local globe has backed 13 so called unicorn companies. He also operates two other vehicles. One is latitude, which invests in companies at the b and c stage, and it's solar funds, which are very late stage. And let Klein and his crew pour more capital into their breakout winners from latitude and local globe. It's all one happy circle of life. Basically, though, investors in Phoenix court will be even happier if the company's portfolio companies are able to go public or sell. As you'll hear in our conversation, the exit market, as in the US, is still pretty tight. In fact, Klein thinks that if the capital markets in Europe are smart. You know, in London and Amsterdam, elsewhere they will start taking public the companies that cannot go public in the US.

Alex Gove
Because the threshold is now so high.

Connie Loises
Anyway, hope you enjoyed that chat. I really loved talking to Saul and we'll see you soon.

Alex Gove
I just want to say again, first of all, thank you for hosting us in London. It was so fun. It was great to see you. Such a great crowd.

Saul Klein
It was brilliant that you guys were here and, you know, I hope it's the beginning of more frequent visits. You know, when you guys said it was the first tech ranch event for five years or so in London, I could barely believe it.

Alex Gove
I could barely believe it either. I mean, including because that five years went by so fast. But no, we definitely want to come back. So obviously what we talked about in London was what's happening in Europe and how the scene differs and is very much the same as in the US. I just saw a story in the Financial Times about creandom raising a 500 million euro fund and they said it was raised in record time, which I thought was interesting because it says in the same story that Atomico has been taking a longer time to raise a much bigger fund, 1.3 billion, I think they said. So that's a big question, but tell me what you're hearing from LP's there.

Saul Klein
Look, I think if I back up a little bit and think about how LP's have viewed Europe, the UK or the area that we call new Palo Alto, which as you know is this five hour train ride from. From where were based. The way I would characterize it is up until the last five years, if you were an LP or the CIO of a large institutional investor or the head of private markets, your investment strategy 1015 years ago or 20 years ago would have been us us.

Then it would have been us us China then it would have been us China, maybe India because its the next China and then maybe well throw in Israel because its a startup nation.

And Europe if you like, was not even an emerging market, it was a frontier market. And I think about five years ago Europe went from being a frontier market to an emerging market and I think were still seen by LP's as an emerging market because if you think about it, our venture ecosystem really is only 20 years old and it takes time, as you know, for the data to come through. But I think we're now at a point where the data shows that not only are we a very significant market, but arguably after the Bay Area, this five hour train ride from Kings Cross is the second best place to invest in, venture globally.

So I think weve come a long way in a very short amount of time. And all of the data in terms of, I think in the UK alone, the amount of venture capital has grown 950% in the last decade. Thats ignoring the two crazy years of 21 and 22. So I think were now at a point where LP's recognize that this is an incredibly important market to be investing in. And I think that has only been compounded by the fact that China really is a very hard place to allocate capital towards. So since while this geography was organically getting to the point where it had gone from frontier to emerging markets to now an established market that people will take a good look at, you've also had the impact in the last three to five years of people not looking at China as a place of putting more capital, but probably looking at China as a place to, how do I get my money out?

Connie Loises
Right.

Alex Gove
Also pulled back on Latin America. There was a big push there that it feels that LP's have sort of retrenched. And so maybe Europe is seeing more of that capital potentially.

Saul Klein
But I think just globally, we've all seen in the last decade that sort of global venture capital has grown as an asset class.

And people are looking for the fact that this is no longer just the Silicon Valley business, the Silicon Valley mentality, the Silicon Valley mindset has really been something that the world has taken on. And when you look at where are the places that have the highest density of capital, the highest density of talent, the highest density of outcomes, if you look at that as the three dimensions of an innovation economy, as I said, after the Bay Area, this five hour train ride from where we are now is the second best ecosystem globally to invest in innovation. I mean, then you get New York, then you get Boston, then you get London, then you get la, then you get Paris, then you get Tel Aviv, and only then do you get Beijing and Tokyo. So Europe, and particularly this part of Europe, because it kind of represents at least a third of sort of european capital and european outcomes, we've seen meaningful capital sort of swing in this direction.

Alex Gove
Where is that capital coming from? I mean, is it mostly us investors? I know for years the institutions in Europe were, you know, other than, I guess, the governments were very reluctant to invest in venture as an asset class. There was a lot of, you know, sort of risk aversion. Has that changed? I mean, if you were to guess at crandoms lp base or atomicos, would you think that it's 50% us investors. How would you break that down, honestly?

Saul Klein
I mean, the honest answer is I don't know. But the way I would sort of think about it is that actually when you look at Europe, probably, you know, as you said, governments in Europe, starting with the EIF, which is the European Investment Fund, that is European Commission funded vehicle, historically, they've provided a lot of the inception capital for funds in Europe.

Britain has its equivalents of that called the british business bank. That became particularly important post Brexit in 2016. So they kind of stepped in where EIF had stepped out. Id say when you look at institutional investors outside of government, arguably Scandinavia, particularly Sweden, has been one of the first places pension funds, large pension funds have started to invest. And actually I would imagine that both preandom and Atomico have benefited from that, just them both being originally swedish.

Nicholas is obviously swedish. Creandom started in Stockholm, at least in Creandom's case.

Spotify and Izettle were two of their major success stories, both swedish companies.

But I think in general, what youve seen in Europe is the first real wave of investors were us investors.

So us fund of funds that were looking outside of the US and outside of China for great opportunities. And I think youve seen the really good us fund of funds being active in Europe maybe for 20 years now, quite frankly.

And then you've seen some of the us endowments maybe 1015 years ago, although some of the more progressive endowments. And then over the last five years, I would say particularly given us funds like the sequoias, the lightspeeds, the general catalysts, the Bessemers all setting up shop in London and looking at Europe that has probably also encouraged their LP's to say, hey, this is a market that we need to be paying more attention to. You've had this evolution of the us institutional investor base, first through the fund of funds, then through progressive endowments, then through exposure through the major platforms that they're already investors in in the US. And then on top of that, youve had a lot of capital coming in from Asia, particularly over the last five to ten years. I think, again, if youre investing out of Asia, whether thats Singapore or Korea or Japan or historically China, again, you wouldve looked first to the US, you might have done something in Israel, but then you were going to start looking in Europe and you were going to start looking in London. So id say that at this point, London, Europe is sort of attracting capital from everywhere, domestically, regionally, from the US, from Asia, from the Gulf, etcetera.

Alex Gove
Yeah, thats interesting. I was wondering what your relationships with saudi investors are like. It sounds broadly like european vcs as US VC's are turning increasingly to Gulf countries. I think I'd seen somewhere that investment in european startups last year amounted to something like $3 billion from that region, which is like a five X jump from 2018. It's interesting because American VC's have become much more open and public about seeking money from the Gulf states. As other sources of funding pull back. Do you feel the same thing is happening in Europe? Is there any kind of hesitation or awkwardness in those conversations, or at least talking with reporters about it, or talking more publicly about it?

Saul Klein
Look, I think every firm looks at their LP base in a different way. And depending on the scale of capital you're looking to raise and invest, one has to look at your LP basis in a different way. So obviously alongside arguably the sovereign funds from the gulf, whether that's Mubadala and Adia from the UAE, and then funds from Saudi Arabia and other Gulf states have become very, very meaningful players both in terms of global private equity and global venture. And I think if you are in the business of raising billions of dollars in every fund cycle, and you look across the world and you say where are there proactive pools of capital that really want to invest in this asset class? Theres no question that the Gulf states have really put themselves on the map in the last three to five years in particular.

But if you look at the private markets, its plus or minus $10 trillion, and then you look at the sources of capital that one can raise capital from. And I think, again, it just depends on your fund and your fund strategy where you want to raise your capital from. So id say when we sort of left index in 2015 to establish whats become Phoenix court, we really, I would honestly say, didnt know that much about the LP universe. And no, I'd say in our 1st 2015 vintage, probably 70% of our LP's were from the US, either fund of funds or endowments, and then sort of the remainder were regional, so european or one from Israel. And in our next fund cycle, I think we made a very deliberate decision which is very much aligned with our purpose.

And we define our purpose as a business, to be a good long term neighbor and help people realize their full potential. And, you know, we are based in a neighborhood here in Summerstown that is one of the poorest neighborhoods in London. And you know, we really baked into the economics of our business, 10% of carry, sorry, 10% of profits from our management company 2% of carry in all of our funds go into our foundation, which we call Phoenix courtworks, and 80 grants of that foundation go into the neighborhood that is within a square mile of our office. So it's a hyper local set of grants. And the reason we do that is because although that side of our office, which is DeepMind and the Crick Institute and Google Universal Music, is sort of a glittering future, on the other side of our office is one of the poorest neighborhoods in London. And we really strongly believe that if innovation is going to really have an impact, it has to also impact society, not just investors. So we decided with that in mind that we really wanted to work with investors LP's who are very aligned with that mission. And what that meant was that we've spent a lot of time in the last five years working with both domestic and regional investors to get them to sort of understand the value in the asset class. So if in 2015, one of our top ten investors was british and it was a family office, in our last fund cycle, two, three years ago, seven out of our top ten investors were british and none of them were family offices.

They were insurance companies, they were pension funds, there were foundations, there were endowments. And I think the US has just done an incredible job of this in the last 40, 50 years. And Canada has done an amazing job of this with its pension funds, and Australia's done an amazing job of this with its pension funds, and Singapore's done an amazing job of this, where the beneficiaries of venture success are people who ontario teachers pension funds. So a teacher getting their pension or, you know, its underwriting someone who is a estate employee. And so those are the kind of investors that weve really focused on in the short to medium term. And so weve domestically really shifted, which really shifted our LP base from where we were initially to having a much more highly concentrated LP base that is made up of pension funds, insurance companies, foundations and endowments, where the beneficiaries, for want of a better word, are much closer to home. That is, we can be a good neighbor, too.

Connie Loises
That's great.

Alex Gove
And Saul, just to put a finer point on this, so you don't have money from the gulf?

Saul Klein
We don't have money from the gulf. We also don't have money from any european sovereign fund or directly from any british sovereign.

Alex Gove
I also love what you're doing for your neighborhood.

Saul Klein
Yeah. To be kind of more domestically and regionally focused, we do have some great LP's from Asia and we've been building out some of those relationships, you know, in future fund cycles, we've been exploring more european LP's, you know, some canadian LP's, some australian LP's. But yeah, to date we've not really, you know, worked with LP's from the Gulf. And as I said, you know, because our funds, I mean, our fund sizes are relatively modest compared to, you know, the big platforms, if you like. You know, we can be relatively focused in terms of where we've been fundraising.

Alex Gove
Right, right. Absolutely. No, but I was going to say the foundation piece I love, because, you know, when you call your mission kind of furthering, you know, the quote unquote, new Palo alto, it's, you know, similarly, people think of Palo Alto as this shiny place, but there is an astonishing amount of wealth disparity. Something like 23% of people in silicon valley live below the poverty line, which I don't think people outside of this region really understand.

Saul Klein
That when people visit our office from the Bay Area and I walk right with them outside of our office, I would say on the left hand side of the road is Palo Alto.

Here is this genomics institute with 4000 research scientists, four Nobel prize winners. Here is the national AI center. Here is a national.

Our version of DARPA. Here is our library of Congress. And literally ten yards on the other side of the road is East Palo Alto. And as you know, the dividing line between Palo Alto and East Palo Alto is 101. And if East Palo Alto side of 101, as you said, you're in one of the poorest, most dangerous neighborhoods in the US. If you're on the Palo Alto side of 101, you're in one of the wealthiest neighborhoods, not just in the US, but in the world. And we see that income inequality all over the world, but we have it on our doorstep here. And one of the reasons we chose to be in the location that we're in, and we say where you are says a lot about who you are, is because we do believe that innovation without more equal outcomes only really benefits shareholders. And obviously benefiting shareholders is critical because the shareholders are the founders and the shareholders of the capital.

But we also think we're in the place that we're in because there's been a less equal distribution of outcomes, particularly to neighborhoods that have gotten left behind, often on our doorstep. And, you know, the mission is another example of that, obviously, in San Francisco.

Alex Gove
Yeah, it's very disturbing, the trend lines. You know, I also wanted to ask Saul just really quickly about Norway, this poor guy who I'm sure you probably know, and I was, I was hoping to get him to come to the Nikolai tangent. I'm not sure if I'm maybe mangling the pronunciation of his name. The current head of Norway's $1.6 trillion sovereign wealth fund, this guy has been trying to show, shift more of their assets into private equity investments. And the country's basically saying no. I think, I mean, at least last I read about it, it was sort of saying, the government was saying that it should not be allowed to include private equity investments. Is this a story that you're tracking? Because that could equate to something like $80 billion for the industry.

Saul Klein
Well, I mean, I think the theme, it's definitely a theme we've been tracking. And as I said, if I looked at the five largest asset allocators in the UK, insurance companies like legal in general, Phoenix, MNG, Aviva Investment advisors, like Schroeders, those are five companies that between them have 2.5 trillion pounds under management. Theyre more than the norwegian sovereign wealth fund. And what they did last summer was sign an agreement which our chancellor, the us version of the head of the treasury, had persuaded these large asset allocators to sign an agreement, it's called the Mansion House compact. And they agreed, amongst others, that by 2030 they would put a minimum of 5% of their assets under management into alternatives, private equity venture infrastructure. So thats significantly larger than if Norway made the shift. But I think what youre pointing to is the fact that institutional investors who have typically not looked at private markets, private equity venture, are now starting to say we need some exposure. And one of the big things, though, that weve seen changing that attitude is not just the fomo of seeing what outcomes have happened in private equity and venture capital over the last ten to 15 years, but also the fact that venture capital is maturing. And what I mean by that is 20 years ago in our geography, there weren't really that many interesting venture backed companies to look at or invest in, because we were kind of in our 1970s, where the Bay Area was in the seventies, were now at a point where in 2023, just in the UK, there are 785 venture backed businesses that generated over $25 million in revenue.

And when you start to show institutional investors, like the norwegian sovereign wealth fund or like a big insurance company, whether its a british one or a french one or a german one, theres some big asset allocators in Europe. When you start to show them that venture capital isnt just about hype, hope and promise, but its also about fundamentals.

Companies doing over 25 to 100 million or companies doing over 100 million plus in revenue. All of a sudden they look up and they say, oh, why didnt you tell me that before? Why have you just been talking about these unicorns? What about these companies that are not just mythical beasts, but actually have fundamentals that I can look at and they have growth that I cant get anywhere else. So I actually think as we shift the narrative from just being about hope and promise to starting to talk about the fundamentals, more of these large asset allocators are going to be encouraged into the asset class. And as I said, even 5% of 2.5 trillion pounds, just with these five folks in the UK, that's a lot of capital. And it's obviously not all going to go to venture, nor should it. And it's obviously not all going to go to UK venture, nor should it, but a decent proportion of it will. And I think this is the first wave that we're seeing all very large asset allocators, who in the US have understood this for decades, starting to get the memo in the rest of the world.

Alex Gove
I think something that these asset allocators are going to need to see obviously, is exits. And things seem very stuck right now. I mean, according to the FT piece, maybe part of Atomico's problem in raising as big a fund as it hopes to raise is the fact that later stage companies are not going public right now.

Saul Klein
Look, I mean, I think we talked a little bit about it in London, is that there is definitely a challenge for global venture, not just european venture, in terms of the lack of public market liquidity. However, I think some of the structural changes that have happened in the industry in the last five years mean that actually we've got a much, much more mature asset class. So, for example, there's a lot more capital growth, equity crossover capital still in the private markets. And that capital is growing and is meaningful and that capital still allows, particularly now that I think pricing has normalized a bit for real investor appetite. So that's the growth of the private markets. The second thing, that private equity firms have become a factor in the venture capital landscape, particularly in the last three to five years. Partly because they need to buy growth, partly because they are becoming assets aggregators themselves, and are sort of looking to do venture growth as well as private equity. And you've seen many venture backed companies be acquired by private equity backed firms or invested in by private equity firms. So that was not part of the equation. Youve then also got the growth of the secondary markets. When I look at our LP base, I want to say we have at least seven LP's that have dedicated secondary funds.

And that just wasnt the case five years ago. So the secondary market is real and is only getting more real and more sophisticated. The other thing is that youve got these private to public pipelines that some of the capital markets, I think Nasdaq has been a pioneer here. The London stock Exchange is piloting something they call Pisces, which, in effect, is sort of a private to public on ramp that allows companies to get some more structured liquidity on their way to going public. And then finally, you got the public markets. Now, the big challenge I think the public markets have is that if I just look in our own portfolio, we have 26 companies that last year did over $100 million in revenue, and we have another 20 that did $25 to $100 million in revenue five years ago. Ten years ago, definitely 15 years ago, if I'd gone to an ECM banker at Goldman's, JP Morgan, Morgan Stanley, and said, hey, here's a list of 26 companies doing over 100 million in revenue. When do you think they should go public? They would have said two things to me. One, are they not already public? Or two, they should go public on Monday. Today a banker would say, until companies are doing half a billion in revenue, they cant really go public on the two big capital markets in the world. And the problem weve got is that the two big capital markets in the world are in one city called New York. One is called the NYSE, the other is called Nasdaq. And every other capital market is sort of a country mile behind. But if in Europe, we've got thousands of venture backed companies doing 25 to 100 million and hundreds doing 100 million plus, what does that look like in the Bay Area?

What does that look like in New York? What does that look like in Boston? So I would say, yeah, the lack of capital markets other than New York markets is a real problem because we're not in a good place economically. And I just mean this at a societal level, where you have to be basically a large cap that is doing half a billion in revenue to access the public markets.

That basically means retail investors have no ability to access growth companies unless it's being done for them by pension funds or insurance companies. And that is not a good place for us to be. So I suspect that is going to change because there can't be thousands of companies out there that are viable public companies with no place to go other than New York, where they need to be large caps.

Alex Gove
Yeah, I mean, it's very worrisome.

And given late stage investment has dried up. You mentioned private equity. There's other paths, there's secondaries, but it's sort of like this state of secondary activity can only exist for so long.

Saul Klein
I mean, I'm not sure I agree with that though, Connie, because these are now dedicated vehicles. I mean, to me, secondary we used to think of as one off transactions. They're just going to be part of the furniture going forward.

Alex Gove
That's interesting. But I guess still at some point, there has to be primary capital coming in. So I guess that's my point. I think these shares can keep trading hands. They can keep maybe secondaries or selling to other buyers and making money, and private investors are finding ways to make money off of the shares of these companies that are still private. But if they can't go public at some point, I'm not sure what happens to these thousands of companies that are stuck, I guess, is my concern.

Saul Klein
I maybe don't think of them as stuck. I think one of the things, as I said, we're maybe reaching a sort of a new point of maturity in venture backed businesses where there's not just a very linear path to the liquidity.

And that I would optimistically say the good news is that there is now structured, there is now a private equity universe of primary capital as well as secondary capital. Theres a much larger universe of growth and crossover equity that is primary and secondary capital. There are dedicated secondary vehicles that are only growing in size and becoming more part of the furniture. There are these private to public pathways, and then there are the capital markets. So in a sense, there are at least five ways that one can look to sort of grow and gain access to capital. And I know if you look at that as a sort of an evolution of venture, we're in a much better place today than we were 510 15 years ago, where it's kind of like IPo or bust.

Alex Gove
Three of those five pathways, though, feel to me like staging areas like these. Companies are growing, shares are getting traded, employees are able to enjoy some liquidity. The companies are maybe getting a little bit of money in order to potentially maybe acquire other companies. But it's still, the eventual hope is even if for private equity backed company or private equity owned startup to again go public. So I guess my concern is we've got thousands of companies stuck in this area, and then you've got more that are being funded and are also coming up. It just feels like there's a real bottleneck, which concerns me again, I would.

Saul Klein
See this as an opportunity. Its an opportunity for there to be a market, a capital market that serves a global investor base because capital markets are global. Now you can list in Amsterdam and youll have us investors, you can list in London, youll have us and asian investors. But to serve not just their domestic companies like british companies in the UK, but global markets like you have in New York, but serving these companies that are doing 100 million to 500 million and still going 40% to 60%. And when and if they want able to generate free cash flows. I mean, remember Amazon decided not to generate free cash flow for at least a decade or more from when it went public. So I think we have to, I see that third market, if you like, massive opportunity because its not as if these are not great companies. If all we were talking about were companies that had received a lot of funding and had super high valuations. That is the hope and promise of the last era.

Id say that was a real problem. Were talking about companies that have growth, have revenues and often are really completely reimagining the industries that they're in. And that is something that investors want to invest in. So for me that is, it's a problem that will be unlocked because you can't have that number of companies who are growing and selling things that people want enough to pay for and not have access to capital. And as I said, they already do have access to those four different means. I think the one bit that is really problematic right now is this public market piece. And I think someone will wake up one day and say, oh, if there are a few thousand companies that are doing $100 to $500 million in revenue and growing at these rates, why don't I take my public market, could be London, could be Amsterdam, could be Paris, could be somewhere else and say, I be the global market for those companies because you know what, New York isn't and it doesn't seem, well, you know.

Alex Gove
It'Ll be interesting to see. I mean, you know, I think sPacs are going to be tarnished now for, I don't know, however many, many years. I'm curious to see if some other mechanism gets dusted off to help some of these companies in addition to these potentially these capital markets, sort of saying, look, we'll take your $100 million revenue company and take it public. But there's, I'm waiting for the next mechanism.

Saul Klein
If I was to be a forecaster, I would say, you know, don't be surprised if you see some of those companies go public in the next three months and don't be surprised if some of them are going public here.

Alex Gove
Okay, great. Well, I'll be paying attention.

D
Thanks very much for listening. We look forward to seeing you back here soon. In the meantime, dont forget to check out our upcoming strictly VC event in Washington, DC this June. You can find out more about all of these great events@techcrunch.com events have a great weekend and we'll see you back here soon.

The Ins and Outs of Investing in Europe, according to VC Saul Klein

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1: Introduction

2: European Venture Capital Evolution

3: Investment Strategies and Challenges

4: Global Influence and Investor Shifts

5: Conclusion and Future Outlook

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