Accel was already one in every of Silicon Valley’s most profitable enterprise capital teams when it determined in 2000 to open its first abroad workplace in London.
Since then, Accel has turn into a prolific backer of European start-ups, together with shopper tech firms Spotify, Vinted and Monzo, video games teams Rovio and Supercell, and company software program teams comparable to Snyk and UiPath. It raised a brand new $650mn early-stage fund final 12 months, after a research by Dealroom and Sifted discovered Accel had backed extra European “unicorns” (personal firms valued at greater than $1bn) than another VC between 2005 and 2023.
Harry Nelis is one in every of Accel’s longest-serving companions in Europe, becoming a member of the agency in 2004. A former start-up founder, engineer and funding banker, he led early investments in enterprise software program teams Celonis and Personio, worldwide funds group Zepz (previously WorldRemit), and journey web site Kayak.
On this dialog with Tim Bradshaw, the FT’s international expertise correspondent, Nelis displays on how the European start-up business has modified over the previous twenty years. He additionally discusses the growth in synthetic intelligence.
Tim Bradshaw: Accel is marking 25 years in Europe and also you had been among the many first members of its London workplace. How have you ever seen the market change since then?
Harry Nelis: The important thing factor that I keep in mind from the very starting was, in elevating our funds, traders asking, “Can Europe generate billion-dollar outcomes?” As much as that date, within the early 2000s, most exits in Europe had been multihundred-million greenback exits. They weren’t billion-dollar exits. And profitable enterprise capital funds can solely be created in case you have billion-dollar outcomes — outcomes that basically transfer the needle on a fund.
To be sincere with you, it was some time earlier than the primary billion-dollar end result occurred, which was 2005 within the type of Skype. After which there have been one or two extra in 2010. So think about: we raised our first [Accel Europe] fund in 2000. And the primary billion-dollar end result took 5 years to materialise. And the subsequent two took one other 5 years. So, initially, it wasn’t that clear that Europe was going to develop right into a vibrant ecosystem, the type of ecosystem that it’s at the moment.
So if you happen to ask your self, “What actually made the ecosystem work?” it’s the following. At first, there actually weren’t any repeat entrepreneurs but. So all people who began an organization did it for the primary time. Then after they assembled their staff, they assembled individuals who hadn’t been in start-ups earlier than both: usually, the groups had been first-time groups as nicely. Position fashions had been lacking. There have been no profitable European entrepreneurs but. There have been a couple of, however not the large outcomes that we’d seen within the US.
However over time, whenever you undergo sufficient cycles, there’s a profitable entrepreneur, they exit an organization, their staff desires to do it once more, then a flywheel begins to occur. That flywheel at the moment is occurring on a extremely massive scale. Unicorns in Europe — and now we have round 350 of them — have generated 1,500 new start-ups. So there’s a flywheel going the place workers from unicorns right here in Europe begin new firms right here in Europe. And that flywheel goes with individuals who have performed it earlier than. And that’s the important thing factor that has modified.
TB: For a very long time it felt much less like a flywheel and extra like a conveyor belt: if folks bought profitable in Europe, they simply moved to the US. When did you see that begin to change and other people begin to realise they might make it massive as a European firm by staying right here?
HN: I feel that occurred when there was sufficient capital right here to assist them. So within the very starting, there have been just one or two corporations supplying capital to entrepreneurs right here and so some entrepreneurs determined to go to America. However with the regular provide of extra early-stage capital and follow-on capital, many entrepreneurs have realised that Europe is a superb place to start out a enterprise, particularly in relation to engineering. We’ve bought nice universities. Our worker base for engineers really is extra secure right here than it’s within the US. Within the US, there are such a lot of alternatives that folks find yourself leaving in a short time, whereas right here in Europe, folks have a tendency to remain a bit longer of their engineering jobs.
TB: In that quiet first decade, did you or Accel’s traders ever assume, “Possibly we should always simply return to the US?” As a result of there have been a number of situations over the previous 25 years of US traders coming to Europe after which pulling again once more.
[Andreessen Horowitz, for example, announced it was closing its less-than-two-year-old London office after this interview was conducted.]
HN: We had been fortunate within the sense that we had a set of companions right here in Europe and a set of companions within the US who actually wished to make this work in the long term. Usually Accel thinks long run and is aware of that it takes a very long time to construct a precious enterprise. It concerned a whole lot of travelling forwards and backwards. It concerned spending a whole lot of time collectively. There are a number of corporations the place it ended up not working they usually ended up type of breaking up. However, in our case, via willpower and the funding in relationships between the companions right here in Europe and within the US, it ended up working rather well. In reality, it labored so nicely that, in 2008, we determined to open an workplace in Bengaluru, India, utilizing the identical type of mannequin.
TB: And was there one funding or deal in Europe that both crystallised it for Accel that this was going to work, or are you able to present at your personal subsequent fundraising that Europe had turned the nook?
HN: I feel for us, the actually massive one was Supercell [which was acquired by Chinese tech group Tencent in 2016 in a deal valuing the online games company at $10bn]. We did the sequence A funding [with] an important Finnish entrepreneur, Ilkka [Paananen, Supercell chief executive].
The fascinating bit is that Supercell’s first recreation was not profitable. Their second recreation was not profitable. After which their third or fourth recreation [Hay Day and then Clash of Clans] was a giant success and it actually put Supercell on the map. So it reveals you that nice firms take a really very long time to construct and that having affected person traders who preserve supporting you is the important thing. Spotify [which was founded in 2006] was one other breakout firm.
TB: If we quick ahead to at the moment, if Europe now has the type of expertise and ambition that it lacked whenever you began, the place do you see the bottlenecks now? Is it Europe’s regulation, fragmentation, entry to compute capability?
HN: One of many issues that we’ve learnt through the years, is that enterprise is a folks enterprise. And what makes nice firms is the entrepreneurs behind them. I feel we proceed to have a extremely regular circulate of nice entrepreneurs rising. I don’t assume a lot is holding them again. We’ve a fairly extensive and lengthy runway forward of us. We’ve a totally functioning enterprise ecosystem right here. We’ve universities which are educating enterprise leaders and engineers at world-class ranges. Nice firms can come from anyplace. That’s the opposite key factor that we’ve realised. We’ve realised that Supercell got here out of Finland, which was not a prime 5 market. UiPath got here out of Bucharest, Romania. Celonis got here out of Munich. So nice firms can come from anyplace. And there’s a gradual provide of them.
TB: What are the most important errors that European entrepreneurs make that their friends in Silicon Valley don’t? Do you are feeling like there are nonetheless variations in how we method constructing our companies right here?
HN: Historically, entrepreneurs bought too early. And that generated the $100mn outcomes. However that has modified dramatically through the years. And that has to do with ambition. Loads of it has to do with position fashions. And having the position fashions of Supercell, of UiPath, of Spotify, the place you’ll be able to construct international category-defining companies, has dramatically modified that. And that’s why we’re seeing these massive outcomes.
What has modified is that changing into an entrepreneur is an appropriate profession path. After I was an entrepreneur and I got here again residence from Silicon Valley, folks would ask me, “Why? Why aren’t you going to work for Shell? Why aren’t you going to work for Philips? Why do you need to do that?” Whereas if I needed to inform folks the identical factor in America, they’d say, “That’s nice. Good luck to you.” In order that mindset has utterly modified.
TB: Do you assume there may be nonetheless a valuation discrepancy between European and US start-ups? Are traders right here getting a greater deal?
HN: No. I want we had been.
TB: When did that even out? As a result of that’s one thing I heard folks discuss, even in the latest wave of American corporations touchdown right here.
HN: I feel the true motivation for extra US corporations establishing store right here is the realisation that nice firms can come from anyplace. And due to this fact [those firms] needed to be right here as a result of they are going to come from Europe too. I don’t assume there was an incentive or a thought that, “OK, we’re going to get cheaper offers right here than we’re going to get in America.”
TB: How does that inflow change the market right here for you?
HN: Oh, the market has turn into rather more aggressive. At first, primarily you had Index Ventures and Accel and some regional corporations. However now all the large corporations are right here as nicely. However not solely is the market extra aggressive, it has additionally grown quite a bit. So we nonetheless really feel that we get greater than our justifiable share of the good offers out of Europe. It’s roughly 40 to 50 per cent the dimensions of the US, when it comes to enterprise funding.
TB: What does that competitors and further capital imply on the bottom? Does it imply that costs get bid up on essentially the most thrilling firms? Does it imply that the flawed firms get funded as a result of folks simply should deploy their capital?
HN: No. What it means is that we must be operating even tougher than we did prior to now. That we have to spend much more time on aeroplanes flying throughout Europe to talk to an entrepreneur. It signifies that offers occur quicker. It signifies that generally within the case of an important firm, the valuation turns into very excessive as a result of there are a number of folks going after it — in the identical manner because it occurs within the US. It’s a quicker market.
TB: Did it get too quick within the final growth, throughout Covid? There have been offers getting performed in days in that interval. Have all of us learnt our classes from that, as we go into AI’s [fear of missing out] second?
HN: The Covid-19 pandemic was a extremely distorting occasion. I feel some folks learnt their lesson and others didn’t. There was a whole lot of capital that turned out there to the market. Enterprises, firms purchased software program as if their life relied on it. And in lots of situations, their lives did depend upon it, proper? Since you needed to work remotely. So there was an actual motive to construct our start-ups quick, as a result of firms had been shopping for. So we needed to construct gross sales forces that turned greater and larger. After which after all, issues went in reverse as a result of rates of interest went up, much less capital turned out there and in some ways firms overbought software program. And the logical factor that you just do after you might have overbought software program, is you find yourself shopping for much less and rationalising what you’ve purchased. So it’s been a really distorting interval for start-ups.
TB: Isn’t AI an equally distorting interval for start-ups?
HN: It’s a special one. I see it extra just like the web growth that occurred in 1999. Individuals realise that this can be a elementary shift in expertise and a shift that may trigger the complete tech stack to be reinvented. And there are numerous, many alternatives in that. Individuals need to be on the bottom ground. And with many expertise adoption cycles, folks are likely to overestimate the velocity with which it occurs after which underestimate the eventual scale that that pattern turns into.
TB: With that in thoughts, do you are feeling like individuals are behaving rationally in the intervening time in AI?
HN: I are likely to assume that there aren’t that many irrational folks. Most individuals assume rationally however from their [own] perspective. And people views generally are very totally different. However it is extremely doable that AI start-ups may have a lot bigger outcomes than we’ve seen prior to now. If the outcomes are a lot bigger, it’s doable you can afford to pay a bit extra to start with. We are going to solely be taught the reply 10 years from now.
TB: The richest firms on the planet are extra precious than they’ve ever been they usually’re all tech firms. So, is the argument that all of a sudden we’re speaking about trillion-dollar outcomes quite than simply billions? Why might the outcomes be that a lot bigger?
HN: As a result of expertise is a a lot greater a part of our life now than it was prior to now. Know-how impacts a a lot bigger a part of society, of GDP, if you’ll, than it did prior to now. Consequently, the type of firms you can construct on that foundation are greater firms.
TB: So how’s Europe doing on AI?
HN: I feel the place Europe has performed nicely on AI is on analysis. So now we have quite a lot of main universities within the UK and in France which have a disproportionate affect on the business.
That induced firms comparable to Fb to arrange [its AI research lab] in Paris, Google to purchase DeepMind in London. So Paris and London have turn into the centres of AI in Europe. There’s been quite a lot of fascinating firms which have been shaped right here, whether or not it’s Mistral in Paris, quite a lot of utility firms, whether or not it’s Synthesia in London and others. The US has been forward when it comes to infrastructure funding in AI, however we’re on the very starting of this lengthy cycle. Our expectation is that, over time, the taking part in area will even out.
TB: Does this inform us something about our skill on this a part of the world to commercialise analysis or to spin out start-ups from universities? Is that the place the UK or different elements of Europe have nonetheless not fairly bought such a well-oiled machine as Stanford in Silicon Valley, Stanford to [the VC firm cluster on] Sand Hill Street?
HN: No, I feel that that’s working fairly nicely. We did some fascinating analysis on AI and 38 per cent of founders of [European] AI firms got here from positions in universities, as professors or as researchers, which was an astoundingly massive quantity in my thoughts.
[The figures are based on an Accel study of 221 start-ups across Europe and Israel.] After which 25 per cent of co-founders come from DeepMind, Amazon, Google, and many others. In order that path is working.
TB: To your level on outcomes, the latest massive European AI takeover was US chipmaker AMD shopping for Finland’s Silo AI for $665mn. That was the most important European AI M&A deal since DeepMind in 2014. It amazes me there haven’t been extra of that dimension prior to now decade.
HN: We’re nonetheless on the very starting of the AI cycle, possibly we’re two years into it. However this cycle can run for 10 to fifteen years. We’re actually on the very, very starting.
TB: What offers you the religion that AI will enhance, both as a enterprise or as a expertise over that interval?
HN: At present firms are experimenting with AI. All people is experimenting with AI. However there are very, only a few actual functions in operation at the moment. So it’s all experimental budgets and no actual functions but. Partially that’s due to the practicalities of making use of AI in a enterprise: they must be safe, they should take care of personal info correctly. So there’s all the time a interval wherein issues must go from an experimental lab inside an organization to being in operation. And that takes time.
TB: So what offers you the religion that it’s going to come?
HN: Inside our start-ups, we’re seeing fascinating areas [of AI’s application] — whether or not it’s customer support, whether or not it’s engineering productiveness, whether or not it’s underwriting in loans — the place it has an affect already. However then traders and enterprise capitalists are optimistic and we are likely to extrapolate these sorts of issues to grander issues. However after all, it’s additionally knowledgeable by 25 years of being on the bottom. It’s my conviction — and this isn’t an outlier opinion by the way in which — that this can be a massive cycle and that is actually going to work.
With each firm, entrepreneurs and traders ought to ask themselves: is AI serving to this firm or is AI threatening this firm? A lot of the [start-up] firms that we’re concerned in, AI is a assist. And a part of that’s the query of who owns the data, who has entry to knowledge? The extra firms that we put money into the place they’re near the information and have entry to info, the extra AI is a chance quite than a menace.
TB: In a market the place there may be extra competitors amongst VCs and a bigger share of largest AI offers are going to Massive Tech firms or sovereign wealth funds, is there an argument that VC returns have peaked? Are the VC business’s greatest years behind it?
HN: I don’t assume so. It is extremely doable that the type of firms that we put money into at the moment find yourself changing into greater firms than we’ve seen prior to now. So if costs are considerably increased now, but when the outcomes are additionally commensurately increased, it’s very doable that the returns keep the identical and even enhance over time. Returns, in my thoughts, are pushed by the dimensions of the disruption and the standard of the entrepreneurs. The standard of the entrepreneurs is increased than it’s ever been and the dimensions of the disruption arguably with AI is of a extremely excessive scale as nicely. It’s similar to the web, cell and cloud.
TB: What are the most important classes you’ve learnt over Accel’s 25 years in Europe?
HN: One factor is enterprise is a folks enterprise. In the long run, whether or not it’s the entrepreneurs, whether or not it’s the traders on our staff, enterprise is a folks enterprise. Quantity two is it’s all concerning the outliers, when it comes to a profitable enterprise fund. After which the third one is, nice firms can come from anyplace.
TB: Has what you search for in an entrepreneur modified, in contrast with 25 years in the past?
HN: Sure, it has. Ambition has turn into much less of a filter, as a result of individuals are fairly formidable at the moment. So actually, the factor that we find yourself on the lookout for is whether or not they can lead and whether or not they can inform a narrative that may get co-founders on board, that may get workers on board, that may get traders on board, that may get prospects on board.
TB: Among the entrepreneurs who had been most profitable at fundraising over the past [Covid-era] cycle didn’t change into essentially the most profitable enterprise leaders. [Accel previously backed Hopin, a virtual events start-up that raised almost $1bn in 2020-21 but was broken up and sold for a tiny fraction of that sum in 2023-24.] How do you see via the pitch to see what’s going to work?
HN: You search for substance. You find yourself trusting your 25 years of expertise. By the way in which, the most important mistake in enterprise is just not dropping your funding. The largest mistake in enterprise is lacking the outlier. Being flawed generally is OK, however you had higher not miss the outlier.
