European Venture Capital: the start-up trends you should know about

Live from SuperInvestor 2017, our panel experts share their views on the new themes emerging in the start-up world and discuss smarter ways to invest in European Venture Capital.

Perhaps one of the most exciting developments in European venture capital in the last few years has been in the start-up space.

Europe could now count on a really interesting cohort of serial entrepreneurs, according to Suranga Chandritillake, General Partner at Balderton Capital. “That makes a big difference - you learn so much from walking the journey the first time. To be able to short-cut to that is really valuable.”

Berlin was the most obvious example of a city that, within a decade, had turned itself into a vibrant tech hub and ecosystem. The start-up scene had brought a wealth of talent to the capital, making the European eco-system much stronger, said Nils Granath, Head of Investments at Telia Company.

R&D dollars didn’t necessarily mean commercial value realisation.

But that begged the question of whether there was enough capital within Europe for this to continue. Jo Oliver, Investment Director at Octopus Investments, said that, in the last five years, the increase in capital deployed had led to some massive success stories. This had built confidence among investors and had made the capital sustainable. But it wasn’t just the talent of entrepreneurs that was being recycled, it was talented capital as well – knowing where to put the money next.

But there remained a fundamental problem, according to Nils. “There are no acquirers in Europe. In the tech sector, they are all on West Coast.”

New themes

The VC panellists were cautious about some of the newer themes in the start-up market. In particular, AI and machine learning.

Christian Meerman, Founding Partner at Cherry Ventures, said that the AI and machine learning space had barely begun. However, it was difficult to think about the space without looking at what Google and others were doing.

Nils agreed, adding that, according to McKinsey, two thirds of all research was funded by giants such as Google. But Suranga argued that R&D dollars didn’t necessarily mean commercial value realisation: “Just look at Amazon, they made the most money out of the cloud but the research by Intel and IBM was what propelled the cloud,” he said.

He added that, while he believe in AI in the macro sense, it was also somewhat of a fad: “Every company claims to be an AI company, but very few actually are.”

It was a similar story with blockchain, although Jo Oliver said that there were possibilities here, especially with companies that were incorporating blockchain into an existing businesses.

Suranga felt that bitcoin was the most interesting thing about blockchain, particularly in emerging markets, where it could be used as an alternative to a volatile currency.

Aside from a few players who have demonstrated realized returns, the market is still developing.

Looking even further into the future, some of the most exciting disruption might well be found in health and gaming: “If you believe in the AI revolution, our children won’t work very much, they’ll be playing games,” explained Suranga. Anyone attempting to solve global mental health had Jo’s attention: “It’s a huge suck of productivity, let alone the impact on individual’s lives”

But ultimately, passion was the name of the game, according to Nils: “A passion to change the world. Not making a quick buck, but big vision, big dreams.”

How should LPs be approaching European VC?

While the last five years had seen real growth in regionally-focussed funds in centres of innovation such as Berlin, investors should still approach the market with caution, suggested Jason Andris, Managing Director at Venture Investment Associates: “Aside from a few players who have demonstrated realized returns, the market is still developing. There is a lot to sort through, and that means there is a great opportunity, but a lot of risk; you need to build a portfolio, not just have one or two.”

On the plus side, Europe enjoyed lower valuations than the US. But by the same token, Jason felt that you had to look hard at the added value: “You need to ascertain whether there is truly a revolutionary change underlying a company’s proposition,” he said. In addition, companies had to be looked at from a global point of view: “Some of Europe is doing the same as the US,” he said, “so you need to make sure the team is good globally.”

How to invest

Discussing what their preferred investment method was, Anselm Adams, Director, Senior Portfolio Manager at PECA Family Office, said that they had initially invested in Europe through a fund of funds strategy: “We were not equipped to decide which were the best managers to get access to,” he explained.

But now the scene had changed, it begged the question of whether to invest in a pan- European fund or a European fund of funds. A good European fund of fund is good for the eco-system, he argued. “It will bring the rigour to pick the right people and the right managers,” he said, adding that: “If you want to be head to head with Silicon Valley, you need to be giving the same tools to the entrepreneurs.”

Ultimately, the lesson, according to Jason, was to have an eye to the emerging manager segment, while recognising that “it takes a lot of work, and there is a lot of risk.”