European Venture Capital: Efficiency, IPOs, and AI Defensibility

Foreign. Hey guys, welcome back to our second part of our interview with Simone Riva from Partech vc. Let us straight dive in. Simone, looking at Southern Europe, are founders repeating the mistakes in the Dach region, Germany, Austria and Switzerland from a decade ago? So I think that if you mention, I don't know, the mistakes that were made by the companies that were generated were created by rocket Internet back then. I think no, because overall there is also way more a much stronger VC culture understanding of the economics also in the investors in those countries. But of course there are still some, you know, mistakes, the common mistakes that are made by entrepreneurs that are made both today in Germany, uk, US and also in Southern Europe. But I think that the right now Europe on that it is really becoming, it has really improved a lot because there are, you know, since a lot of international investors are deploying capital in multiple countries, there is a cross pollination effect among founders. And so you do not have any more country where founders are kind of isolated and they are not talking anymore. They are not talking at all with founders in other countries that are more developed in terms of tech ecosystem. Give me just one thing. What do you think they're doing better? Well, I think it is a good question. I think in some cases they are setting up customer support hubs or development centers in areas of their country that are not in metropolitan cities but in very low cost areas. I don't know, southern Italy or some areas of of Spain and that helps in improving the the economics. We're now taking a look back. You already noticed this guys in in part two of our interview. We're looking a little bit more at Europe. But Simona, where do you see different capital allocation patterns, like really bertilized patterns across Europe? I think that 10 years ago or even a bit less you could invest in Europe mostly in uk, Germany and France. Okay. Nowadays you can find good companies in each single geography and country. In European Union the UiPath is approved of that they came out of Romania. And if there are very interesting companies today in Portugal, from Portugal, Estonia, Bulgaria, Romania, Czech Republic, their domestic market is relatively small. This is pushing them, pushing the founders to export this business from day one globally. In some cases they have very good development talent at a relatively cheaper cost. It's not anymore. It's not anymore cheaper like 5 years ago, but still in some cases cheaper. Yes, your iPad is an awesome success history. Unfortunately it's not part of a company coverage. Where would you say think about like all the European markets for everybody who's not familiar with that Basically you can break Europe down into several parts, into several distinct cultural language areas, including Benelux, France, D region, Germany, Austria and Switzerland and so on and so forth. Taking a look at those regions, where would you say is capital most efficiently, venture capital most efficient today? I would assume in the area where there is, where is the, where there is the least. So again, it is a very good question and I think that in some cases. Well, because then in your question it depends whether venture capital efficiency is related to how the company is burning the money compared to the growth that they are having or to the level of enterprise that VCs are paying. Because the answer might change a little bit. Let me, if you want to let me break it down. The level of prices that VCs are paying depends in some cases in some European countries also by the amount of capital that local sovereign wealth funds are giving to the venture capital funds. If you have a lot of local domestic venture capital funds that are competing against themselves automatically and they are obliged to deploy capital in that country automatically, the average price of a given round is going up just as a, as an effect of competition. I think that then on the other side, compared to, you know, efficiency in terms of companies, honestly, if you take Benelux specific, Belgium, if, if you look at the, the population of Belgium, the number of startups that they have and the average outcome, the number of great companies created there. Insane, Insane. Or even Sweden. These are like Sweden and Belgium, like today, given the size of their domestic market, really unbelievable. The, the number of amazing companies that came out of those two countries. We know Europe, especially in the European Union, out of 27 countries, if you see the, the VC investments as a percentage of GDP, they're very, very low. So I was wondering is your better at capital allocation or are we just. Later. Some people might claim that in Europe there is not enough capital. Others might claim that there is too much capital. It depends how you look at it. If you look at venture capital as an asset class or if you look at more on the ability to generate companies that can compete against the U.S. giants. So in Europe, let's say the VC industry has quite failed as of today to deliver results for their investors in line with their expectations because there is just too much capital. But I, I agree that US companies can, are actually are having a much better access to capital, especially for, I don't know, companies like entrepreneurs that failed already once or if they want to develop hardware. Look at, you know, Elon Musk, what the number of hardware companies he, he developed so Yeah, I mean it's. We have improved compared to 10 years ago. I think that it is hard to judge if we are better in tapping capital allocation or not. The. I'm seeing a lot of crazy rounds happening right now. I'm wondering whether we will really create amazing companies with those big rounds or not. But this is something that we will be able to judge in five, seven years from now. So a bit too early to say we. Simone, we've already learned from you very interesting things like Champagne Mode and that that a bad sign of companies moving into fancy office. By the way, I have a few founders that I know lining up in this. In this segment but let us talk about a little bit about where do founders consistent limiting in good and bad companies misuse the capital. So the most important thing of. Sorry, sorry, I'm not sure I got the. I got the. I got the question. Can, can you just repeat. Yeah, it was basically where do founders consistently misuse the provided capital? Doesn't matter if it's we see if it's revenue. Where do founders consistently misuse capital? Again, as, as, as I, as I said before it might be on over hiring or the. They might arrange lavish company parties or in some cases they might be tempted to buy other companies maybe mature companies that are some cases even bigger than them. So they want to swallow a big player at a price that are completely out of the market. So that create a lot of complexity and doesn't help. What would you say is there most expensive mistake? Is it the people? Is it the office? Or is it to generate a pet project, site side revenue project or something that takes way too much money? Clearly not the office. The office is just a sign okay of the way you are managing the company. I think it is people I remember I have met in the past founders that told me, you know, with a certain level of arrogance I have 1,000 people today and I want to be at 2,000 by the end of next year. That company didn't end well. I would have guessed. So okay, clearly, I mean if you hire a lot of people and revenues are not coming in, probably things won't go well. You don't have to be a philosopher to see that there are a lot of assumptions out there about venture capital. What is one assumption about venture capital, especially by founders that is fundamentally wrong? So I think that, and again here I'm going to be a bit provocative. But you know a lot of VCs during their investment thesis, investment memo preparation, they say when they think about the exit for a company they think about the IPO in the us, maybe it works. In Europe you have a very limited number of IPOs and a good chunk of them have been quite a tragedy. The reality is that in Europe capital markets are not ready to welcome tech IPOs, especially below 1 billion in, in valuation. If you start being at 5 billion plus maybe yes, but you need to almost be profitable or, and you, you really need to be prepared for that. And the other thing is that technically the IPO is not a liquidity band, especially for companies that are still burning money because when they raise the capital, the big chunk of the capital goes into. It is a primary injection, not a secondary for the investors and the founders. And after the end of the lookup, after six months, it happens that you have a number, you, you have basically a lot of people, a lot of investors that are putting their shares on the market. So you have clearly more shares to be sold than buyers and automatically the price is, the price drops and so the, the returns are destroyed. So I think this is really, so you really need to think about, you know, if, if a company can also be sold at some point if things are not going well to a private equity or to a corporate. I was wondering a little bit self reflection here for you. What's a decision you made as an investor that turned out to be wrong? I explained, so I invested, I invested in a, in a roll up, in a roll up company and as expected it was a disaster. I don't want to mention, to mention the name. And then I basically, as I explained before, I understood the reason why it doesn't work. And so I decided to stop investing in roll ups, at least with standard VC terms. Let's talk a little bit about your capital posture. So I was wondering, are you as Simona, as Partech, are you currently deploying capital aggressively, selectively or almost completely hold them back because there's some uncertainty at the time of recording. We are publishing this way later. But it's 7th of May and the strait of Homos is for example still blocked here. Look, despite the big macro and geopolitical uncertainty that we are living today, both last year and this year we have been investing at a good pace. I'm not sure whether it is selectively or aggressively, but of course we're also always trying to understand whether an investment makes sense or not and to challenge the entry valuation or at least trying to understand if the entry valuation makes sense. Typically the answer is no. But we end up investing in any case, no. But today I think that one thing that in some cases we are doing is also to look at. To look not only at very hype deals but also to verticals that are a little bit forgotten by some investors that are considered a little bit as unsexy. Because you know, we believe that some entrepreneurs building some stories still deserve some additional capital to grow their companies and at the same time valuation might could make more sense. I'm not saying that this is 100 of our strategy, but at least a part of it. Yes. What do you think? I know forecasts are always, always pretty difficult, especially concerning the future. But what would you say what type of startup will struggle to get funded in next three to five years? As you said, very difficult to say. We would need the crystal ball for that to answer that properly. But if I have to make a bet, I would say probably generative AI wrappers, meaning companies that have zero defensibility and that for multiple reasons, I don't know, they have a strong dependency for one or more LLMs and you know, price might go up and they are completely out of the market. I think that those companies will really struggle to raise. If you had to build a company today, would you choose to be more like Emma, Bootstrapped Emma or Startup Radio? Even though admittedly we are far away from the almost 1 billion revenue they add or, or more like flicks. So of course they have both present cause Emma has been more capital efficient and profitable very soon. But as I mentioned before in the post Covid world it might have struggled a little bit and it has also a relatively low defensibility meaning that the business model can be quite replicated. Flix require way more investment but at the same time it is way more defensible long term it is a company that can, you know, be there out in the market for generations. Now if I had to start my company today I would do probably something completely different. That is, you know, AI enabled service providers. That is very much in hype today. But not an AI rapper. No, no, no AI. No, no it's not, It's AI enabled service providers. It's something completely, completely different people companies that are selling services using AI. Okay. And consider that 10 years ago Flix, Flix was considered as a tech enabled low tech company. And today we have basically the a lot this new wave of companies that are considered super sexy that are AI enabled companies, AI enabled service service providers. So it is, it is quite funny because the story has been changing a little bit. It was just enough to change tech with AI and suddenly the business model became basically super sex again, Inflex. You've been an investor. Emma, you've dug in a little bit. You've moved the interview to prepare for that. Thank you very much. I gave you an option to to consider both in the last question. What would you do differently than those two companies? As a last question so on. Emma is a little bit difficult to to comment probably flixbus if I the only thing I would do differently is to move the maybe the customer support and development centers in lower cost locations. There is something that they did at some point but they could have done it maybe earlier on. So I, I met, I might have done it earlier on. But of course XPass is very, very easy, very easy to say. Yeah, it's hindsight knowledge. I know it's always easy for us to talk about something that has already happened. Simona, thank you very much. Mila Grazia was a pleasure having you here as a guest. Thank you very much. Best of luck. And for everybody out there, if a founder is listening today had to follow one rule to decide whether to raise venture capital, what would that rule be? So I think that at precedent level if I were a founder I would ask myself two questions. A if I have an insane level of ambition, an obsession to change a market and also a deep knowledge of the market where I want to start my company. Okay. Because the level of ambition and the knowledge of the market is something are the two most important elements in when you are if you want to build a super successful company. B assuming there is point one, I would say okay, I want to raise with a venture capital, is there any way I can start today? I can finance myself by selling, I don't know, some consulting projects, some AI enabled services that I can do without raising venture capital so that I can get initially some traction and I can get a higher valuation at the first round. So these are the two questions. So A do I have enough ambition and B is there a way for which I can already start to get some traction so that I can get less diluted? Simone, thank you very much. Thank you for the additional insights for everybody who stayed on. Guys, thank you very much. Looking forward to be with you next week again. Bye bye. That's all folks. Find more news streams and events and interviews at www.startupradio. remember, sharing is car.