Standing Firm in European Venture Capital Amid the Sound of Gunfire

Twenty years ago, a book called The Silicon Valley Way inspired countless Chinese entrepreneurs and investors, even setting some on entirely new life paths.

At the time, people believed the rise of the internet heralded unprecedented democratization of information. The world was flattening; people thousands of miles apart could stand beneath the same sky.

Now all of that feels distant. Between the physical lockdowns of the pandemic and other well-known factors, we seem increasingly to inhabit an age of self-sufficiency. In the business world, information asymmetries and biases between regions have only grown more pronounced. Silicon Valley and China increasingly resemble two parallel universes.

"Dark Currents Waves" is launching a new column: "Dispatches from Afar." We aim to bring you the latest business trends and observations from around the world — to let you know what's happening and what's being discussed in other corners of the commercial world. "Dispatches from Afar" will appear regularly and take various forms.

Here is the column's inaugural piece.

By Li Zhaoqi

Edited by Jing Liu

Rediscovering Europe

One day in the first half of 2020, a healthcare investor at Fosun sent friends a gift: a face mask emblazoned with the Premier League club Wolverhampton Wanderers. The European-cut design inevitably recalled the well-tailored mask — snug against high European noses — that French President Emmanuel Macron, recently re-elected, often wore.

This traced back to a deal five years prior: in 2016, Fosun Chairman Guo Guangchang acquired Wolverhampton Wanderers for £45 million.

This investment largely captured Chinese private capital's preferences toward Europe in recent years: tilted toward lifestyle and entertainment, and relatively traditional industries. Zhang Jindong invested €270 million to acquire a controlling stake in Serie A giant Inter Milan; Wang Jianlin bought European cinema chain Odeon & UCI; Tencent spent $8.6 billion for majority control of Finnish gaming company Supercell. Of course, these moves were closer to overseas expansion by large corporations than opportunities for financial investment funds.

But things are changing.

According to "Dark Currents Waves," BAI Capital is establishing a Berlin office, with investment teams to be stationed there. "Europe has long had deep roots in software and advanced manufacturing, and today we're seeing more opportunities in emerging Web 3.0," BAI Capital founding and managing partner Annabelle Long told us. BAI Capital draws on the vast European resources and global network of Bertelsmann Group, and aims to become "the hub for Chinese venture capital in Europe."

More dramatic changes are simultaneously visible in the US.

This March, Coatue hired prominent investor Sarah Cannon, formerly of European firm Index Ventures, to lead its European investments. Back in March 2020, Hongshan poached Romanian star investor Luciana Lixandru from Accel, a rival with deeper European roots. Lightspeed hired Paul Murphy from European early-stage firm Northzone to lead its London outpost.

Both Luciana and Paul had long focused on Europe. Luciana's successful European investments included UiPath, a European-born software heavyweight, and Deliveroo, the food delivery platform listed in London. Coatue's choice of Sarah Cannon, though she had long been US-based, had successfully invested in American super-unicorns Notion and Slack while representing a European fund.

Beyond this, dollar VCs including Bessemer Venture Partners and General Catalyst have either opened new European offices or become actively engaged over the past two years. Industry disruptor Tiger Global and other hedge funds have also expanded in London.

Such vibrancy once made people forget European venture capital's historical struggles.

For the past decade, the US and China were considered venture capital's most important markets. Yet the European Union — with over 450 million people and $14.45 trillion in GDP — saw its startup investment market fail to match this economic and demographic foundation, even as European old money remained among the world's most formidable limited partners.

One pre-pandemic statistic: in the global market cap pie of major internet platform companies, China held 18%, while Europe held just 4%. "Europe was somewhat absent from the internet era, but if you pull back to a longer time horizon, this only shows they fell behind in the first three kilometers of a marathon," Long emphasized to us.

Europe today indeed demands rediscovery.

Compared to its past reputation as a startup desert, Europe now matches China in single-round funding scale and offers broad sectoral choice. Last year saw multiple history-making large financings: Swedish battery company Northvolt raised $2.75 billion, roughly equivalent to the 20 billion yuan China's SVOLT Energy raised in 2021; in fintech, European "Huabei" equivalent Klarna completed two rounds in one year, raising $1.639 billion from investors including SoftBank Vision Fund, reaching a $45.6 billion valuation — making it the second-largest Buy Now Pay Later consumer fintech globally after American Stripe. Crypto investments under the Web 3.0 banner were also notably active in Europe.

From a macro data perspective, European startup funding reached hundreds of billions of euros last year, doubling from 2020. The single-year capital increase alone matched the combined startup funding of Southeast Asia and Africa. Meanwhile, European unicorns reached 321 in total, with 98 added in just one year. Currently, Europe's total unicorn count is approaching China's. European fervor seems to intensify this year. A recent report from China's Academy of Information and Communications Technology showed that in Q1 2022, UK internet investment and financing reached $11.9 billion, up 109.3% year-over-year. This is a frenzy surpassing previous emerging economy gold rushes, and a shift in the underlying logic of global venture capital's narrative.

The Lost Decade

2010 was a pivotal year for Europe.

On August 10 that year, Skype — Europe's most recognized tech company — filed for IPO. But Wall Street showed little interest. The instant messaging company's trajectory broadly summarized European internet startups' early circumstances: twice changing hands, fate turbulent, yet ultimately unable to break through American tech giants' tight encirclement.

The listing plan ended hastily. Beyond its low profit margins, market consensus held that in the imminent mobile internet era, Skype would face serious competitive threats from Google and Apple. This alone was enough to keep Wall Street at arm's length. The following year, Microsoft acquired Skype for $8.5 billion — its largest acquisition ever.

Looking at Chinese internet tech companies during the same period, this was their golden age. In 2010, Chinese new economy companies once again clustered for US listings: Youku and Dangdang debuted on the NYSE the same day with strong gains, and four more Chinese firms successfully entered American capital markets within the following week.

China's advantages over Europe were enormous: massive population base, unified language, relatively relaxed policy environment, and more. We could even say China was the internet industry's best testing ground, while Europe faced too many constraints.

London-headquartered food delivery platform Deliveroo was founded in 2012, almost simultaneously with Meituan's entry into food delivery. But by 2018, when Meituan IPO'd at roughly $60 billion in market cap, its European counterpart was valued at less than $4 billion.

German Q&A platform Gutefrage is another telling example. It predated Zhihu's founding by four years. After launching, it focused exclusively on the German domestic market, with user numbers hovering around three million at peak. Around 2017–2018, Zhihu had spent the same amount of time to amass over 100 million registered users in China. Gutefrage's user growth had essentially stalled by 2017–2018, while American Q&A pioneer Quora launched a German version, aggressively invading the German market with vast capital. Gutefrage rapidly collapsed amid user defection.

In the internet era, European consumer-facing startups were mostly small and beautiful, genuinely difficult to scale.

Partly due to limited local investable targets, many European venture funds had long sought to operate across borders. Index Ventures exemplified this, actively expanding overseas after 2010, successfully backing numerous European fintech companies while also investing in American firms including commission-free trading platform Robinhood. Cathay Capital's notable investments beyond domestic projects included Chime (highly valued American fintech unicorn), Facily (Brazil's fastest-growing e-commerce platform), and FinAccel (Indonesia's largest and fastest-growing BNPL platform).

According to one pre-Brexit 2020 statistic, 90% of European investment firms maintained offices outside their home countries, and 51% had offices outside the EU. By comparison, only 29% of American venture capital firms had international operations.

Investor skepticism toward Europe seemed inevitable. Beyond geopolitical issues, this concerned venture capital's underlying discourse system.

During the Southeast Asia boom, investors' favorite refrain was: "Southeast Asia has 660 million new mobile internet users; proven Chinese or American models will grow wildly there." When they turned to Africa, they discussed the imagination unleashed by the next billion people coming online. But in Europe, investors saw a market already contributing at least a quarter of revenue each to Meta, Amazon, and Google. In consumer markets, European startups faced even fiercer competition than in emerging economies.

Indeed, not until 2018 — when Stockholm streaming music giant Spotify and Amsterdam fintech company Adyen both staged spectacular IPOs — did venture capital begin to regard European startups with new respect. That same year in China saw Tencent Music's Nasdaq debut and Ant Group completing a $14 billion financing round that sent its valuation to $150 billion, making it the world's largest unicorn.

For a European startup seeking scale, the American market represented a major challenge.

Tracing these two companies' histories, the crucial inflection point remained 2010. That year, emerging Spotify and Adyen were planning US market entry. In American business coverage from eleven years ago, there were even rumors of Google acquiring Spotify — indirectly confirming American capital markets' bearish stance toward a European company's arrival.

Spotify's comeback story better highlights a European company's survival difficulties in America.

When Spotify entered the US in 2010, it already had 5 million users with growth accelerating. But in America at that time, Steve Jobs' agreements with upstream content suppliers centered on per-song sales, while Spotify's disruption to American music ecology would be fundamental — charging by user plays rather than one-time purchases. Unlike single payments, streaming spread the same revenue over longer periods while potentially acquiring more users through play-count-based free tiers.

Jobs played a significant obstructive role in Spotify's copyright negotiations: leveraging relationships with Universal Music and others to block Spotify's American market entry. Fortunately, Jobs' tactics drew American antitrust investigation. Ultimately Spotify secured more favorable terms with American upstream suppliers including Universal Music and Warner Music — including reduced platform revenue shares and some equity guarantees protecting upstream interests. After all, allowing Apple unchecked dominance wasn't in suppliers' interest maximization either.

After failing to block Spotify in 2010, Apple acquired streaming platform Lala for $80 million, later acquiring Beats to further enable Apple Music's launch. Under renewed competition, Spotify deepened cooperation with another American tech giant, Facebook, embedding its music software within the social platform — helping Spotify gain more traffic while Facebook increased user stickiness.

Between two giants' cracks, Spotify finally broke through three years later. In H1 2014, Spotify added 11 million users, 50% quarter-over-quarter growth.

This convinced European CEOs that American giants were not invincible, while gradually shifting overall American market bias.

Seeking a Closed Loop

For venture capital to achieve long-cycle flourishing depends not only on industrial foundations and policy, but often critically on accessible exit channels.

Though whether exit channels or venture prosperity matters more is a chicken-and-egg philosophical question. For many years, European domestic startup projects were indeed scarce and fragmented.

Not until after 2018 — following Spotify and Adyen's listings — did Europe begin seeing more unicorns than in any previous historical period. In fintech alone, Berlin's N26, London's TransferWise, and Stockholm's Klarna emerged.

During this period, early European deep-pocketed American investor T. Rowe Price (whose founder Price, predating Buffett, was acclaimed as father of American value investing) and hedge fund Coatue invested in UiPath, an RPA software platform founded in Romania — signaling Europe's emergence of a new breed of globalized tech target, which became the third-largest software IPO in NYSE history upon listing.

In the internet era, small national populations, aging demographics, and lower immigrant quality ranked among factors most unfavorable to European venture capital. But in the B2B era, these may become competitive advantages.

Longstanding labor shortages have given European companies natural acceptance of efficiency-enhancing software tools. In Germany, for instance, SMEs contribute over 70% of GDP — indicating Europe provides vast testing grounds for software service companies. Indeed, SAP, the world's largest non-American software company, was born in Germany. And while UiPath originated in Romania, the first VC fund supporting it, Earlybird (EBV), came from Germany.

Entrepreneurial multiplier effects are also occurring in parallel.

Last September, during a Zoom fundraising roadshow by a prominent European venture fund, an investor with a slight Eastern European accent enthusiastically described Europe's current conditions to LPs. When LPs asked about Europe's entrepreneurial talent pool, he responded that Europe was producing more Skype "mafias."

Following Microsoft's acquisition, over a dozen Skype founders and employees — including its CEO — went on to notable entrepreneurial success, drawing comparison to America's PayPal Mafia. Among them: Skype CEO and co-founder Niklas Zennström established London-based VC fund Atomico; co-founder Janus Friis and fellow Skype mafia member Ahti Heinla co-founded robot delivery company Starship Technologies; Skype's first employee Taavet Hinrikus founded currency exchange platform TransferWise.

Europeans' wealth-creation ambitions seem stronger than ever. Such groups are expanding — that Eastern European-accented investor also cited Swedish Spotify "mafia," French Criteo "mafia," German Zalando "mafia," and more splintered entrepreneurial teams, though most remain relatively unknown.

Today is when change can be discussed.

"Europe's local startup ecosystem always lacked a closed loop, but now it's becoming possible." In March this year, Denis Barrier, co-founder and managing partner of Cathay Capital's VC innovation fund, told "Dark Currents Waves" that Europe too needs a Nasdaq. He believes European markets always lacked the final push in financing, but this is becoming possible due to richer startup companies.

This perhaps parallels China, which created its own ChiNext and STAR Market. "This process will be lengthy, but having a complete cycle matters for Europe."

In European markets, primary securities exchanges currently include Germany's Frankfurt Stock Exchange, the London Stock Exchange, and Euronext (Europe's first cross-border exchange, formed in 2000 from the merger of Amsterdam, Paris, and Brussels exchanges). In 2021, Euronext's listed company market cap growth and issuance volume already exceeded Hong Kong Exchanges, ranking fourth globally. Yet some investors feel this remains insufficient: existing European exchanges cannot offer tech startups the premium valuations that Nasdaq provides, driving European startups to list in America.

However, an unexpected variable emerged early this year. European exchange IPO issuance has declined 83% year-over-year — a steeper drop than the global average. Common explanations include dollar interest rate hike expectations affecting European secondary market liquidity, plus Russia-Ukraine warfare weakening confidence in European economic growth. This may delay Europe's Nasdaq vision by a step.

Europe's Future Course and China

At end-2021, Patrick Hansen — Bitkom (German Information and Telecommunications Industry Association) head and EU RegTrax contributor — wrote in a Stanford Law School blog post that the crypto industry would make the EU financially independent from America, and that crypto and Web3 represented among Europe's greatest financial, economic, and geopolitical opportunities.

From the 1940s to today, the world's financial order has seen two generations: first, the Bretton Woods system anchored to gold-backed dollars; second, the petrodollar system ruling to this day. Over the past twenty years, as global geopolitics multipolarized, this order has faced constant strain and adjustment: the 2000 internet bubble, the 2008 US subprime crisis, and increasingly frequent geopolitical friction. This is the era's hidden magic beneath European venture capital's current rise.

Europe's lag in the Web2 era makes it anxious. This explains why even the notoriously cautious EU regulator takes a more permissive stance toward digital currency than America. European venture capital's crypto ambitions are unmistakably exposed, with high acceptance. A former Earlybird investor told "Dark Currents Waves": "As early as 2014, we were already distributing carried interest to investors in Bitcoin."

In BAI Capital's Annabelle Long's view, fields extending from FTAs (free trade agreements) to blockchain technology applications encompass far more than digital currency alone — including substantial infrastructure construction and government applications. Applying previous discourse frameworks, this is Europe's opportunity to leapfrog.

Europe has always been a difficult-to-capture pan-geographic concept with too many meanings. Among its primary three layers: "EU" as political Europe, "Eurozone" as economic Europe, and militarily, NATO. Among countries covered by these definitions, they quarrel incessantly among themselves while mostly presenting unified fronts outward. Some even describe them as a distributed, open collective. Of course, they more or less maintain strong positions in domestic economies and financial trade.

"Compared to domestic markets, Europe is changing fast — the fear of missing a European crypto tech company should exist for many investors," a dollar fund head already looking toward Europe told "Dark Currents Waves." Yet he emphasized that just as we once called China Web 2's dividend beneficiary, today's Europe may become Web 3's crypto-era powerhouse.

Previously, Europe's venture investment market held limited significance for China. Beyond a small number of top institutions and exceptions like BAI and Cathay Capital, most Chinese institutions lacked the extensive dollar institutional networks maintaining commercial information flows that they had with America, or the diaspora cultural links they had with Southeast Asian markets.

Nevertheless, earlier-stage Chinese investment and cooperation in European technology has always existed, though amounts and frequency never attracted attention. Fosun previously had some pharmaceutical and medical device deployments in Europe; months after the pandemic outbreak, Fosun Pharma rapidly announced mRNA vaccine cooperation with German BioNTech.

Europe's value to Chinese investors is evident. Beyond crypto technology, Europe possesses vast industrial and semiconductor industry foundations — traditionally including Dutch lithography giant ASML, chip companies Infineon and STMicroelectronics. New-generation automotive-grade semiconductor products have seen explosive demand stimulated by European automakers Mercedes-Benz, BMW, and Volkswagen launching more new energy vehicles.

For Chinese investors and entrepreneurs increasingly seeking globalized thinking, these represent potential enormous opportunities.

Under market economy's connecting threads, European startup markets also confirm Marx's description: "Capital travels the world; it not only creates wealth but possesses tremendous transformative power over society."

(Guo Yunxiao also contributed to this article)

Image source: The Beach at Sainte-Adresse (Claude Monet, 1867), Art Institute of Chicago, Chicago

Layout by Guo Yunxiao