Introduction 

Summary note of the MJ Hudson Live Discussion on “European VC: Strengths, mistakes and opportunities”. The format was an interview of Kjartan Rist, Founding Partner of Concentric. This note lists certain key points. For more detail please listen to the recording of the Live Discussion, which is available by registering with this link: Click to listen to the interview recording.

The purpose of the MJ Hudson PE Live Discussion Series remains the same – to share intel with principals in order to help the market make better / more informed decisions. This is the twenty-sixth MJ Hudson PE Live Discussion since the crisis started.

European VC and Kjartan Rist 

Good morning, good afternoon and good evening.  Wherever you are, welcome.

European VC just won the greatest race since the race to the moon. And it came second place too. Yes, the vaccine. BioNTech and Oxford AstraZeneca respectively. There have been many other wins too. Europe produced more tech IPOs than the U.S. in the years 2012 -2018 and VC deal value in 2019 hit a record-breaking EUR 110bn invested in European start-ups, across 48 countries, over the last five years. But European VC is not without its critics. The following statements are often made:

1. Europe cannot produce big winners
2. Europe lacks innovation and talent
3. US VC is superior to European VC

Are these myths or truths? We will explore these statements today. Today, we are talking about all things European VC, a sector which has grown beyond recognition over the last five years, taking its cue from Silicon Valley, but developing as an independent eco-system this side of the Atlantic. So: What has it done right? What has it done wrong? And, where do we go from here?

I’m joined by my colleague Harriet Dedman, a rising star in the MJ Hudson VC team, who will be fielding your questions to our guest later in the session. This interview, as ever, is off record.

Over 2018 and 2019, saw a year-on-year increase in both VC capital deployed and deal value within Europe. The expectation was for that trend to continue well into 2020.  But, Covid-19 forced the world to re-focus, and VC was no different. Fundraising, particularly for emerging managers, was tough and remains tough as we head into 2021.  We saw many launches delayed or postponed indefinitely.

Whilst, VCs have been keen to stress that they remain ‘open for business’, what we are seeing – across Europe at least – is caution and a shift in focus away from deal-making towards supporting existing portfolio companies. In any given year, this trend is perhaps not surprising in an eco-system which is increasingly vocal about developing a ‘founder-friendly’ environment. Learning from the mistakes of the ‘sharper end of the market’ in the US, the new cohort of European VC funds and investors have, by definition, leaned heavily on the idea of sustainable partnerships.

A cynic might suggest that’s purely driven by accelerating competition vying for a smaller pool of investments on this side of the Pond. Perhaps a fairer assessment is that European VCs are consciously trying to ‘do things differently’ here.

Kjartan Rist and Concentric are no strangers to these ideas. They describe themselves as ‘activist investors’ and are firm believers that the venture capital industry must be ‘more than just capital’.  But, Kjartan is not just an activist, he’s also an advocate.

With China scrambling to fix its venture infrastructure, and with the U.S. (according to Kjartan) overwhelmed by its own success, Kjartan heralds that the time for European VC investment is now.

Concentric & Kjartan Rist 

Concentric was launched by Kjartan and Denis Shafranik six years ago, with a focus on early-stage tech across Europe. They have made investments all over the continent, from the UK to Estonia, via the likes of Germany, Denmark and Norway. In addition to investing in technology driven companies, such as Pockit, Coindirect and Wheely, they have also built up a stable of investments and relationships with VC incubators, accelerators and start-up generators, such as Entrepreneur First and Antler.  As a result, they’re plugged into Europe’s start-up landscape and are helping to build out that infrastructure in order to generate more companies, ideas and European success stories.

Prior to founding Concentric (who are in the process of raising Fund II), Kjartan help found the venture fund DN Capital and the merchant bank Korral Partners. If that’s not all, Kjartan is also a regular contributor to Forbes, where he writes about the rapidly evolving VC scene in Europe.

Hailing originally from Norway and not even close to 50 years old, Kjartan is one of the UK’s more successful imports. A graduate of the University of Bath and Imperial College London, the UK is now his home with his Danish wife and son. A family man, he’s into sport and travel (albeit with the latter on lockdown for all of us right now). He’s a Liverpool supporter, but we can probably overlook that.

The name Kjartan is a boy’s name meaning “sea warrior” which is also the Irish connection to our guest this week. Kjartan is an Old Norse name derived from the Irish Muircheartach anglicised as Murtagh “sea warrior”.

For 20 years this warrior of the sea has been a founder, advisor and investor.  Kjartan – welcome.

You grew up inside the Arctic Circle – what was that like?

Yes, I grew up in a small town called Kirkenes – deep inside the Arctic Circle – 2km from the Russian Border and close to the Barents Sea. We had dark winters and bright summers – it was a good place to grow up and a good place to enjoy a range of sports (such as skiing) and other activities.

I understand that Kirkenes was strongly impacted by the war: only 13 houses survived World War II. It seems your parents or grandparents grew up in a warzone?

The northern German fleet had a base in Kirkenes and they were attacking the Russian Empire while the Russian Empire was bombing the town. Kirkenes was the second most-bombed location in Europe during World War II, after Malta. There was a lot to rebuild afterwards.

On the VC industry: I mentioned, before, some of the myths that we hear a lot about this industry. The first being that “Europe cannot produce big winners”. What is your take on that – do you think this is true or false?

I think it’s important to point out that Europe missed some of the waves that we saw in the US. For example, the proliferation of technology, the software wave and then the internet wave.

This is not because we don’t have the talent – we have all the skills and the talent, and we have the resources to produce the skills and the talent. But, we just didn’t have the capital or the people who were willing to set up and build such companies here (they typically travelled to the US to do so).

Probably starting around 15 years ago, with Skype, we have been able to produce these sorts of companies – the frameworks are better now, the culture is improving and access to capital is growing. We are also now able to attract capital from all over the world and there are many European investors being trained in this environment who are making great investments now.

Is that the basic proposition of Concentric – the sense that in previous upcycles, Europe has perhaps missed out but now there is a sentiment to not allow this to happen again?

I think there are quite a few drivers behind Concentric’s thinking. Our thinking is that digital transformation is taking place in all traditional industries. Technology addresses automation and efficiency and we think that we can pick the right companies to provide these solutions.

As we have seen over the last 10 months, the pandemic has driven this acceleration even further and digital transformation has accelerated by 3 -5 times from what is normal. And there is still a massive amount of room to create companies that address the real problems in these traditional industries.

You mentioned Skype as one of the first successful European VCs. Remind me – who was it sold to in the end?

Yes. Skype was originally sold to eBay and then it was taken private by Silver Lake and then Silver Lake sold it to Microsoft. So the technology from, say, Teams comes from Skype – but they run that different branding.

When you look at Skype, you think that was ahead of its time but it didn’t seem to generate the returns that you may have expected from technology of that nature.

One of the other myths that’s mentioned is: “US VC is superior to European VC” – is that perhaps a historic statement given what you’ve just mentioned or do you think there is still truth in that today?

I would say the US venture capital industry has about a 50-year head-start on Europe – their market is more mature and more sophisticated in the way that venture capital firms conduct themselves and the way they are being funded. We have to keep in mind that it takes time to educate a venture capitalist – you need to allow that person to go through all the phases from sourcing to investing; from portfolio management to exit. That whole process takes about 7 years. You need to allow a significant period of time.

I feel that the start of the venture capital industry was around 2000 in Europe while in the US, they probably started not long after World War II.

There have been many US VCs landing on the shores of Europe – what’s your view on this?

I think this is testament to the European landscape developing nicely. We are seeing talented entrepreneurs staying in Europe, building companies locally (without the need to go to Silicon Valley or New York, or even London or Berlin – they can stay in places like Bucharest and build their companies). In addition, there is a massive valuation gap between the US and Europe – recently, it’s been said that venture valuations are 70-80% cheaper in Europe than in the US. We also see that we have capital efficiency in Europe where we have managed to build companies up – there are now over 200 unicorns in Europe.

What portion of these companies are in the Nordics? The Nordics appear to be performing better than most other parts of Europe – is that correct?

The Nordics are definitely punching above their weight. I think this is mainly due to the well-structured societies – digital-adoption is very fast and there is a prevalence of computer scientists. There is also a mentality when building companies to go outside your own market and you therefore have to work hard to build it and go international beyond the, say, 5 million or so inhabitants of Denmark or Norway. This contrasts from building a company in a large market like, say, Germany where you know you have a good enough hallmark to justify staying put. So, there are many cases of companies originating in the Nordics and then successfully building out further afield.

You write very well and regularly for Forbes and your most recent note was about the European Investment Fund – would you like to explain more about what’s happening there for those who haven’t been following?

Yes. So the EIC have enlarged an existing fund with up to €3 billion to go directly into European tech companies rather than through venture funds. The procedure for getting the funding is looking to be quite complex but my point is that the EIC shouldn’t be spending those resources on creating a “competitor” to venture funds in Europe and rather should help to continue the trend of building venture capitalists in Europe and encourage private capital (coming from pension funds, endowments, family offices etc.) to join the venture capital space. That is the best way to build a strong and successful venture capital franchise in Europe.

If that trend continues, what is the end-game? Will EIF eventually just invest directly and not via funds – do you see that happening or is that too extreme?

I don’t think that will happen. I think EIF will still continue to go through funds but I think the point is that there is no need for that friction. They should continue to facilitate and encourage innovation and entrepreneurship. EIF should continue to be involved in early-stage and pre-seed rounds but when it comes to venture capitalists commercialising entrepreneurs and products, this is when EIF should take a step back.

Before we move on from EIF, could you give us a sense of how much money EIF invest in the European venture industry?

I don’t have the exact figure but I know that they are the largest investor in European venture capital funds. I think a few years back, the public institutional funding of venture capital funds in Europe was close to 50% and I think that is now down at around 30-35% today and a large portion of that comes from EIF.

So: you meet a lot of start-ups. How many businesses get in touch with you every year (looking for funding)?

Roughly 2,000 a year.

And what is the main process you use to sift through these?

So, there is a funnelling process. If you ask any venture capitalist, that is probably the biggest headache – making sure you funnel down the number of companies approaching you and get this 2,000 figure down to maybe 200, which is actually manageable. You then do some in-depth research on those 200 and short-list this down further by having meetings with around 60-70 companies. This then results in 6-8 investments per year.

That must feel great to have that number of companies interested in you.

There are some start-ups listening in. What are the main errors, in your view, that people make when looking for capital (on the initial approach)?

Because we get so many approaches, we always like it when there is some context around it. The best way to make contact is to do the research and find out if there is a good fit here and then explain in a succinct manner the problem that needs solving and then how they will build the company to solve that.

The main problem is therefore where people don’t do the research and therefore don’t understand where we invest and what our areas of interest are. Many entrepreneurs don’t do their homework.

I think some VCs don’t take meetings unless they’ve been introduced to a particular start-up. So, they only meet a business that has been introduced to them by a third-party.

Yes. But we also need to keep in mind that some entrepreneurs are not born fundraisers – they don’t have the network and don’t have the experience. So, perhaps we are excluding someone who could bring us an amazing new deal but it has to be a balancing exercise because in the same breath, we don’t want to be inundated by half-baked ideas and people taking chances. We need to be good at filtering.

Given that you meet all those businesses and see all those proposals, what is the most interesting trend or new investment dynamic that you have seen recently in terms of technology? What was the last pitch you saw where you thought it was definitely going to be the next big thing?

There is actually one we are reviewing now. They have developed a tool that allows companies to handle crisis in a better way – in terms of communication and addressing key issues in the business. It surrounds risk and business continuity. You would be amazed how many companies do not have this in place or if they do, they just have it in a book or spreadsheet somewhere. I’ve been through this process before with companies – the process is simple, though very cleverly engineered.

Can you please explain VC “activism”?

Absolutely. So, this is about being involved, and being hands-on – providing support every day of the year. We are of the opinion that you cannot be an early-stage tech investor if you are passive. There is a fine line between not stepping on the entrepreneur’s toes but also providing and facilitating support. We do a lot of thinking about this. Entrepreneurs come in all shapes and sizes. If you have managed to build a company, you are bright. But despite however bright you might be, there will still be skills that you are lacking and networks that you are missing. We can provide that. But, no two entrepreneurs are the same so we need to take a tailored approach in supporting each of them in various ways. This is what we try to do through “activism”.

I’m more from the private equity world where the phrase “activism” has a different meaning. It can be seen as trying to take control. I wonder whether “proactivity” is a better term here.

So, for us it’s about facilitating, supporting, communicating and helping in all aspects of an entrepreneur’s or a company’s issues and challenges. This captures commercial aspects, personal wellbeing and a need for mentorship.

Moving on to returns: in your world, what does a good venture capital return look like – either in terms of IRR or a money multiple?

Our expectation is a circa 3x return. The returns expectation now is probably higher because of the stock market returning ridiculous money year-on-year, but this balances out. Venture capital is a long game so if you can consistently produce a 2 – 3 times return on the fund, you are doing well.

Certainly, in the private equity game, most PE funds wouldn’t get close to that return after fees. I think that no KKR fund, since 2000, has done more than 2x.

In terms of the long-game, what should peoples’ holding periods be in funds – should people hold on to the very end? Would your advice to LPs be to stay in the fund for as long as possible?

That has been developing for quite some time and has been the case in the US for a while. And here in Europe, the secondaries market is piquing. Most funds are 5 plus 5 (investment plus exit period) and that is probably the timescale that you need to expect in a fund. The best-performing assets will probably be those that are exited in 6-8 years.

There can also be some leftovers. For example, DN Capital’s first fund had Shazam as an asset. This fund was a 2000 vintage and that investment was exited in 2018. Though that was an extreme case.

Going back to the broader point and the European industry generally: what do you think are some of the issues the industry has had in the past? You mentioned some key trend waves were missed. Are there some structural issues that you can see that have historically been an issue in European venture?

Structurally, European VCs have traditionally consisted of ex-bankers, consultants and accountants. Unfortunately, some of the work done was focused on small issues rather than the big picture when trying to build a company. What I think is changing now is (using a metaphor I often use to explain this): it’s not what happens in a board meeting but what matters is what happens between board meetings. It’s the voyage rather than the harbour that is important. Also, in Europe, too many funds have been hands-off and not “activist” and the main motivating factor has been having a job (a salary) rather than creating strong companies.

I think European VC is changing. As already touched on, we previously lost people to the US because of the access to capital and networks over there but with the new hubs popping up in Europe (cloud architecture etc.), people are staying in Europe.

Another factor is that Europeans have previously been accused of selling too early. Famously, Booking.com was sold to Priceline for $133 million. Now Priceline has been renamed and the Booking.com technology is core to the company’s $88 billion valuation.

What is the reason behind these different approaches in the UK and the US – is it a cultural difference?

I think it’s cultural but we are starting to see the recycling of talent and capital and we are starting to see more capital being invested in Europe. Hopefully we can get the IPO market going in Europe in terms of size, not volume. We’ve recently seen a lot of companies listing in Europe such as The Hut Group, Allegro etc. And, the new wave of European tech companies have started to be bought off so it’s really important that we continue to support these tech engines. Just like how the Silicon Valley firms helped the same types of companies in the US.

If you look at the portion of tech-based companies that are sold to the likes of, Google, Microsoft and Facebook (the big tech conglomerates), are there equivalent companies in Europe – i.e. where large tech businesses purchase tech start-ups?

There have been. And now there is a new wave of these companies – for example, TeamViewer was acquiring a company last week after they went public and Kahoot! in Norway is acquiring two companies. So, that’s the new wave.

And we need 15, 20 or even 50 of those companies so that we get this circulation of capital but most of all, we actually need the institutional backing. That may not happen before the liquidity of the stock markets settles down. I think it’s a cycle but we’re getting there. There are so many positive changes happening in Europe – still some challenges, but, we are getting there.

There are questions coming in from our audience, so I am going to pass over to my colleague Harriet Dedman.       

We’ve spoken about US VCs migrating over to Europe but we’ve touched less on the investor side. A question in from our audience: are you also seeing the same sort of migration from institutional LPs now looking to migrate over to Europe for VC investments as the sector matures over here?

For sure. There are very professional (probably the most professional in the world) LP investors based in the US. They see what is happening in Europe with the evidence that we have developed over the last 15 years or so. And, they also see the fact that digital transformation is wiping out some of the fragmentation in Europe – so, you can move across borders now and be more efficient and agile with this.

They also see the valuation gap that exists between the US and Europe (as we said, 70-80%). But they do also see that there are segments in Europe where there is a funding gap. So, at the seed stage, there is seemingly enough capital – provided by seed funds and government soft loans and grants, as well as private, angel capital. On the other side (Series C and beyond) there is also a good amount of capital but there is this gap between seed and Series C where we see a lot of room to invest in Europe. This is something that the US LPs definitely see.

I think that leads to another question: we’re seeing more US VC firms interested in Seed and Series A rounds rather than what we have traditionally seen in terms of their interest (i.e. Series B+). Do you think that’s a deliberate play to: (1) try and harness that valuation gap; and (2) do you think we might see that gap narrow and if so, what time-scale do you think we are looking at?

In terms of them coming over to take advantage of the valuation gap – yes. I think that’s why a lot of the big brand names have started to set up shop in Europe, particularly in London. They have seen the talent in Europe and the ability to built companies and they are able to capture companies that go on to be world-class. In terms of talent, we are now seen as being as good as anywhere else. The issue is still access to capital and liquidity in terms of exit on the public markets.

In terms of narrowing that valuation gap: if you look at data from Pitchbook, the valuation gap for the past 5 years has moved commensurately – it has gone up in Europe but it has also gone up in the US. So, the gap is not actually narrowing but when we start getting the IPO markets up and running here (and I think both exchanges and people working in the industry have a very strong desire to do this) we will create even larger companies. When that happens, I think the valuation gap will narrow.

You mentioned previously that there is the possibility of increasing holding periods beyond the life of the fund and the question from the floor is: would you consider using a continuation vehicle to hold onto assets for longer? Especially in the context of the IPO industry becoming more sophisticated over here, might you try and gear towards this and utilise spin-off continuation vehicles?

Yes. Some companies evolve more slowly than others. They can still be super valuable but they just need a bit more time so we consider all possible ways of supporting our companies, including through a continuation (or side) vehicle. I think LPs and backers of venture capital are fully aligned in this.

In terms of the public markets – we have seen more IPOs in Europe than in the US in the last 6 years (this to be clear is in terms of the number of IPOs, not the amount of money raised) but the risk of taking a company public when it’s too small is great because then you end up taking on a big burden in terms of showing profitability and trying to prove that there is an advantage to being listed. So, there are pros and cons of the public market but, for sure, we need to get up to speed here in Europe with this because that is the US’ massive advantage.

Do you think that Deliveroo’s recent decision to list in the UK is a big win for the industry here?

Absolutely. One of the biggest losses to the industry was Spotify’s decision to list in the US. We also saw Unity (Danish company) and the French company Criteo list in the US. But again, there is the fact that The Hut Group listed in London, Kahoot! listed in Oslo, TeamViewer listed in Frankfurt and Allegro listed in Warsaw – these are all amazing examples for Europe. There is also a whole load of venture-backed companies looking to list in Europe now.

Something we haven’t yet touched on in this talk is venture debt and how that fits into the VC matrix in Europe: do you have a view on the growth of or the place for venture debt in Europe? Do you see this as growing in tandem with the more traditional venture equity financings?

Yes. I think that’s another area where the US have done well. They are coming up with new financing solutions, whether that’s equity or debt. Venture debt has been an integral part of venture-backed companies in the US for years and years. I remember around 10 years ago, there were maybe 2 venture debt providers in Europe but now there are more like 20 firms across Europe. Most of all, the entrepreneurs are becoming more familiar with venture debt and include it in their considerations when raising money. So, venture debt definitely has a big role to play and will play an integral role going forward. As always, venture equity people have been coming up with new solutions and new takes on both technology and the way we deploy capital. Venture debt guys need to do the same but I think they are certainly aware of that and the direction is positive here.

Within VC funds themselves and VC teams, we are seeing Americans coming over and settling here in Europe: what would your advice be to the emerging manager in this space within Europe looking to compete with those coming over from the US?

I would welcome the influx from the US – we need more venture capital in Europe. We should aspire to these big US brand names. What the likes of Sequoia have achieved is nothing short of amazing and the fact that they are setting down in Europe is a testament to Europe’s progress.

There will be certain circumstances where top-class European entrepreneurs will gravitate towards these US brand names and us European funds will feel left behind. But, over time, there will be a close co-operation between us. We need them and they need us. I’m positive about it.

One of the key differences that we are seeing with European managers is the idea of making a more founder-friendly environment and European VCs appear to be really leading the charge on that in terms of creating sustainable partnerships and “activist” investing. Do you think that is a way that emerging managers can stand out from the crowd or, are you more cynical about this and think that this is only really happening because the VC landscape is getting more competitive?

I think that in order to be a top-class venture capital investor going forward, you need to have an “activist” venture mindset and deliver more than just capital – you need to bring skills, introductions and networks etc. In terms of what is being portrayed now, many funds are probably better at marketing than actually delivering but I think that over time, entrepreneurs will learn who to work with. At the end of the day, the entrepreneurs are those who are building the companies (we just provide the fuel) and entrepreneurs talk to each other. There is this cyclical structure that we are getting into here.

On the flip side: what would your advice be to founder teams who are inundated with interest and have a lot of term sheets on the table?

They will have to do their due diligence in the same way that we do. Every company has tough times and the question is: which investor will support them through these tough times? Also, it’s easy to be wooed by a brand name but at the end of the day, it’s the person behind the brand that you will have to work with. I would say, develop the dialogue and develop the communication as much as possible pre-deal.

Finally, in your view, what is the one app or piece of technology that you think nearly everyone in the world will be using in a few years’ time?

Good question. I think we will harmonise payment structures so that you will not need to carry all your bank cards or have all the related apps. So, it won’t matter how you pay for something or where you pay for something – you can pay by just using that app. The people who crack that will be onto something really great. Everyone will use that.

And, will that be money they will use or a bitcoin-type product?

I think it will be agnostic.