Chris Grew:

Welcome to the Future Fountain, a podcast series dedicated to conversations about the tech ecosystem brought to you by Orrick and NYU Future Labs. I’m your host Chris Grew, a partner with the Technology Companies Group at Orrick where I work with high-growth tech companies and investors. I’m really excited to be speaking with Tom Wehmeier. Tom is not only a friend but a partner at Atomico, based in London where he runs its Insights team. The team’s mission is to share data and insights to help the Atomico team make better decisions and have more informed conversations with the people who matter most. Tom is also the founder of Atomico’s annual industry-defining State of European Tech Report. Orrick’s been an active contributor in the report for many years and a participant in this incredible report. So, I’m really pleased to be discussing this more in depth with Tom. I’ve got some questions for you, Tom, and, first off, can you share with us a little bit about Atomico and its investment thesis?

Tom Wehmeier:

Of course. Well, first of all, let me just say it’s great to be with you here today, and if I may, just also say that it’s been such a pleasure to have this enduring partnership with Orrick on the State of European Tech. It stretches right back into the early days of the report, so, you know, it’s really, always fantastic to get together in this way. And, yes, let me go back to Atomico’s founding story because I think it’s helpful to understand more about us, but also relevant context as we get into some of the later conversation around the report. And so, I really need to roll the clock back to 2006. Atomico was founded that year by Niklas Zennström, the co-founder of Skype. And Skype had just become Europe’s first breakout global internet success story and, in doing so, had really proven many doubters wrong. Despite what was a lot of investor pressure, Niklas and Skype chose to stay in Europe and build the business from here, and really no one thought it was possible for a tech company based in Europe to go and have global success. And it’s funny because, of course, today few would really doubt that. And so, back then they had just executed selling to eBay in what was a multibillion-dollar transaction, and Atomico, then, was born in the aftermath of that and really out of two clear insights. First of all, that great companies can come from anywhere. There’s no fundamental geographic monopoly on talent or on ideas. And then, secondly, the European VC was just this huge, underserved GP opportunity—that there was room to build a firm that did things differently and really capitalize on what it felt like was a massive opportunity. Europe had an abundance of talent, world-class education, and Skype had just proven that you could build great businesses from here. And then Atomico’s always been ambitious right from the early days, and a big part of our mission is not just about building Atomico, the firm, but also about contributing to building a tech ecosystem here in Europe. And we’ve really had from those early days, you know, at the core of our mission a goal to be an active participant in shaping this ecosystem and to help it to not only be successful and prosperous, but also to be inclusive, diverse, and really producing companies that scale consciously and with huge consideration for all of our stakeholders. And so, today we’re now 70 or so people, we’ve built a portfolio of significantly more than 20 unicorns, we have about five billion in assets, and the management continues backing amazing founder-led tech companies that are solving world problems and have great potential to go and become global capital leaders.

Chris:

That’s great. Thanks, Tom. So, what inspired you to start publishing this report, the State of European Tech. And why do you think that the report is valuable to the ecosystem?

Tom:

So, I think it’s like how many things start. The initial inspiration was really just sparked by a problem that we felt acutely. Back in 2015 when we started the report, and almost ten years after Atomico was first founded, we just felt there was still this huge disconnect between the day-to-day reality of what was happening on the ground here in Europe around tech and then a prevailing perception that we would encounter time and again when we spoke with institutional investors, with journalists, with policy makers: that Europe was still considered to be a nobody when it came to tech. And that perception, I think, was driven, in part, by some legitimate questions. But also, in large part, at least we felt, by what were clearly data stereotypes and false assumptions. And we still kept bumping into comments like, “There’re fundamental cultural barriers to entrepreneurship here in Europe. There’s no ambition. There’s no risk appetite. There’s no talent.” And, as a consequence, there’s no real companies of scale, and all those things we thought were objectively not true. And, so, we started the report to try and look at those questions and to try and bridge what we thought was this kind of knowledge or perception gap—and do that with data. So, it all started seven years ago now with, frankly, what was a pretty terrible PowerPoint deck. But it was good enough, and it was the right thing at the right time. And, I suppose, we just kind of found product-market fit. And then today it’s obviously growing to become way more than that. The stats on its reach are always great to see, but I think, to me, it’s really the impact that we’ve seen in terms of its influence in some small, but hopefully meaningful, way within the ecosystem. And to your question on why do we think it’s important, I think the things that I would point to are: it contributes in a small way to how convinced founders that, yeah, it is possible to stay here and start and build companies here in Europe. Or it does contribute to help talent to commit their careers to building in the European tech industry. We’ve seen for fund managers, it’s really valuable to have the data to help underpin their narrative as they’re trying to convince LPs to back them. When we look at kind of capital flows, hopefully the data is useful for capital allocators, whether it’s LPs or GPs, deciding about whether to focus on Europe, to help make that case. In some ways, we’ve almost been too successful in that front {laughter} when you think about all the capital that’s flooded in and the competition that that brings.

And, then, of course, policy is such a big topic that we’ve covered for years in the report, too, and I think helping to give the data to influence policy direction, you know, at local, at national, at regional levels, I think is important. And I think the other thing, too, now, and particularly in more recent years, now that it’s become a big platform is that this is really an opportunity to put important issues on the agenda, and to make sure that there is an awareness around these, and that these are discussed. And, so, whether that has been things like a shift towards purpose or the regulatory landscape, or I think one thing that we’re really proud of is talking about diversity and inclusion. These have all been ways in which it’s helped to kind of drive the agenda here in Europe.

Chris:

Great. Now, each year there’s certain findings that sort of percolate to the top. What were some of the key findings for 2021 in the last year? What surprised you most in last year’s report?

Tom:

I love this question because the report’s nearly 500 charts {laughter}, and we just got the print editions of the report now, and it’s a monster. It’s a real kind of doorstop thing, and, so, trying to condense it down is, is always quite tough. But… let me give it a bit of a shot.

I think, first and foremost, 2021 felt like a year where you really just got a sense for the scale of the impact that European founders are starting to have on the global tech landscape. And that there’s a huge scale in terms of the value creation, that European founders and their companies are now generating for their customers, for their users, and, of course, for their shareholders. And European tech has grown now to become a multitrillion-dollar industry. By the end of 2021, we saw the ecosystem hit three trillion dollars in total enterprise value across the public and private markets. And, so, if you put that in context, I think what’s kind of interesting is that it was only in December 2018 that we got to the first trillion dollars total equity value. And so, that had taken what was effectively multiple decades, this sort of long-winding journey to get to that first trillion-dollar milestone. And then we saw it travel in the space of just three years. And I think it’s really just this huge validation of how far things have come. And then, what that has really meant is, I think it’s fair to say that last year we almost saw European tech become the hottest ticket in town for investors. We saw just a massive inflow of new investors and new capital, most notably from the U.S. I think we pretty much saw every top-tier U.S. fund come and be increasingly active in terms of their investment activity in Europe. You might ask, “What took me so long?” And so all of that then translated into more than a hundred billion dollars of investment into European tech founders. It’s just a really remarkable scale. And to put that in context, it’s two-and-a-half times more than we’d seen in the year prior to that—so, in 2020. And ten times higher than when we did our first report back in 2015. So, the order of magnitude has changed in terms of investment levels over the course of the seven years that we’ve been doing this report.

Investment is kind of - is obviously the input, and the output is important, too. And 2021 was also a record year for companies proving an ability to kind of crystalize value by going public or through acquisition. And it was remarkable to see that there was $275 billion of combined enterprise value of public listings and M&A last year in Europe. And so, when you think about companies like Wise and AUTO1, and Wolt, and Tink and Cazoo and Arrival and many, many more. I think those numbers obviously stand out. And I think, from a broader ecosystem perspective, this really mattered because they’re liquidity events that are just so critical to set a virtuous cycle in motion that enables talent and capital to be recycled back in, and to help basically feed, then, a new generation of founders, to help make sure that experienced talent is kind of back and available to help go and build again. It’s obviously such a critical factor in terms of helping to spawn new generations of angel investors, and, then, the freeing up of capital is important, too, for the regions. All those investors that are focused in on the regions go and redeploy that back. And this is actually the concept that we laid out in this year’s report and kind of called the European tech flywheel. And I think, as we kind of demonstrate in a lot of detail in the report, what we saw last year was really that this is compounding at a really lightning speed.

And maybe, you know, just two last points that I would make, and then I’ll pause. First of all, it’s kind of notable that we’ve seen just this big, dramatic change in the scale of startups in the ecosystems. So, by our count, there’s something like more than 150,000. And, obviously, that’s been, as I’ve talked about, has been backed by record levels of funding coming in. And I think that one of the outcomes that has come from that, and something that I think we focused attention in on in the report, is the impact that that’s had now in terms of the challenge of basically finding and retaining and rewarding the best talent. It’s really never been more competitive from that perspective, and I think we’re seeing that founders and companies are really having to act to—to basically make sure that they can attract and keep that top talent. And what we’re seeing from, as kind of the two dominant strategies, are one: to increase the focus on hiring remotely, really to think about how to tap into different sets of talent pools.

And then, secondly, increasing the focus on mission and purpose. And that brings me to the to the last point, which is, we’ve seen now, I think, over a number of years, just this clear shift in the ecosystem towards purpose. And by that I mean just a growing number of companies that, at their core, have a clear purpose and mission to go and address a meaningful problem—be that climate, be that health, be that equal employment opportunities, financial inclusion—and I think that in the report and what we’ve seen in the data really clearly is pretty much that shift playing out on every dimension. You see it in terms of the share of companies being started; you see it becoming increasingly important to customers; you see it being just an increasingly important decision-driver for the best talent; you see it in terms of the focus and interest areas of every type of investor. So from angels to LPs to VCs, it’s obviously reflected, therefore, in where capital is being invested. And then we’re also just seeing it in terms of growing numbers of really very important companies, i.e., unicorns being built with this kind of embedded into them.

So, yeah, that’s my best shot at trying to summarize the highlights.

Chris:

That’s really helpful, Tom, and insightful. You did allude to, earlier, some of the themes, and you mentioned that diversity was one of the big themes coming out of the 2021 report. Can you talk a bit about diversity in European tech and where you’re encouraged and, also, where more you think can be done within the ecosystem in respect to diversity?

Tom:

I’ve spent—what?—nearly 10 years in this ecosystem, seven years writing this report, and I think one of the things I’ve learned is the big things that really matter tend to change at a frustratingly slow pace. Maybe, in other words, it’s, you know, when you think about meaningful change playing out on the ecosystem level, it just doesn’t happen in the space of a few months. And particularly so for those issues that are really deep-rooted and institutionalized. And I think that is certainly true of diversity and inclusion when it comes to European tech. When you look at the headline numbers, it’s still grim reading. As I mentioned, the report talks about all this kind of unprecedented capital flow that’s come into European tech. But against that, I think that the reality that we saw—and this is reflected in the survey that we run—is that raising capital is never easy. And access to capital remains unequally distributed. So against that record funding that came in last year, we found 18% of founders actually said it had become harder to raise capital. Another 40% felt like nothing has changed. And then what we also clearly saw in the data is that that challenge of accessing capital has just felt disproportionately by underrepresented founders. So female founders, two times more likely than white men to say it has become hard to fundraise. Founders from ethnic minorities were three times more likely to say the same thing.

And, so, this kind of great funding divide absolutely remains a harsh reality for the European tech ecosystem. And what we saw in the data is that capital flows to all-women founding teams, for example, are not improving on a relative basis. And, actually, when you look at the distribution of capital that goes to founding teams, either composed all of women or where there’s teams of founders of mixed genders, it’s basically been constant for the past five years, both in terms of the share of total capital that’s come in as well as the overall number of deals happening. And, so, when I say the numbers are sobering, to put that in context, last year 1.1% of capital raised overall went to all-women founding teams, and just 8.8% to those with mixed-gender founding teams. And then if you go beyond gender and you look at this through the lens of ethnicity, there you see then even more heightened barriers to funding. And one of the things that we did for last year’s report that I thought was particularly meaningful was we commissioned a special study together with a firm called Extend Ventures to basically go and create what was the first-ever European-wide snapshot on funding flows to ethnic minority founding teams. And, again, that data, too—I used the word grim before, I’ll use it again now—it was the same. Just 11% of capital invested in the companies in our sample went to founding teams and executives from ethnic minority groups. Only 1.8% of that type of capital raised today was captured by Black founders. And I think one of the interesting things that we pointed to in the report on this is, there’s kind of this compounding issue, because what we’ve seen is as cohorts establish companies, which, until now, have been overwhelmingly dominated by all white and all male founding teams, as they continue to raise more capital, you just see this continued imbalance in terms of where capital’s flowing.

So, I think that was the summary of the overall funding flow. I think at the same time, too, there are reasons to be encouraged. And we did pick a bunch of things out of the report, and I think first of all—and we’ve talked a lot over the years in the report in terms of the importance of the power of inspiration, basically, and the importance of role models in terms of just the general impact that that can have, in terms of getting people involved, in terms of changing their mindset— on that front, I think one of the things that has been great to see is we are now seeing just more and more unicorns founded by women and founded by people of color.

And, actually, at the launch event in December, we were joined by somebody called Corinne Vigreux. She was the co-founder of TomTom. She’s actually the first-ever female founder of a European billion-dollar tech company. And they actually got there back in 2005. Now what’s amazing—or depressing—is that it took another ten years until we saw another company founded by a woman get to that milestone. But now, we’re just seeing more and more of these emerge. In fact, there’s now dozens across Europe, from Vinted, to Kry, to Starling, to Infarm, to Mambu. We’ve also seen last year, I think, which is also a really meaningful milestone, the first unicorns founded by Black founders in European tech, so Zepz and then Marshmallow. And as I said, I think that representation at that level, it’s just so important because it inspires and it shows what’s possible. And, so, I think that’s one thing to be encouraged by.

We also looked on the talent side, and one of the things that we were looking at is the gender distribution of basically the people leading today’s European tech companies. And one thing that we see is that amongst younger generations, there’s just an increasingly positive numbers in terms of the share of women at those levels. And, so, when we look, for example, at the most recent cohorts of those, women make up as much as 29%, which is obviously a long way from 50%, but it’s a hell of a lot better than what we’ve seen in prior cohorts, which is more like the 15% level. And so, yeah, I think it’s great that we’re seeing these younger cohorts of leaders come through as being more gender diverse, but we need to get those numbers higher, and we need to make sure that we retain that talent in the industry long-term. And I think the way that we framed it in the report is, unless we make progress on these things, we’re really just capping the total addressable market that we have for ideas and talent. And then I think, just lastly on the investor side, there’s reasons to be positive too. I think we’re seeing newer generations of partners at top firms becoming increasingly diverse. You know, we’re really proud that 50% of our checkwriters here at Atomico are women, and when you look at other firms like Accel, Seedcamp, Dawn, Cherry, and Sapphire, just to name a few, you can see an amazing lineup of the diverse investors. And then, I think, if you start to look at the angel ecosystem, again there, we’re seeing just more diverse angels coming through. People like Deepali Nangia, Sophia Bendz, Gloria Baeuerlein. And then, I think, lastly on the investors’ side, we’re also really encouraged to see just a whole new generation of VCs emerge—whether it’s CapitalT, or Ada Ventures, or Auxxo or Cornerstone, Black Seed, Impact X—there’s many others. This is a new generation of VCs owned by women, founded by women and people of color that are going on to back more diverse portfolio founders too. You take those things together, you take the fact that there’s just a much greater awareness, and, I think, a greater degree of commitment to change and just a bigger network of organizations and groups that are really kind of trying to bridge things like knowledge gaps and unlock access for founders and for talent from underrepresented groups, that we can see things moving forwards even if the headline numbers are still kind of overall developing at what feels, as I said, like a frustratingly slow pace.

That’s great about some of the historical trends and what you’re seeing coming along, but what do you see that’s trending in this year, in 2022, so far? Have there been any shifts since the last report that you’ve been able to identify already? I know you haven’t started writing the report yet, but I’m not going to ask you for a sneak preview of next year’s report because {laughter} that may be a bit unfair, but what are you seeing already developing?

Tom:

We’re thankfully in that cooling-off period between reports where we get to switch off for a moment, and so we have to start thinking about the next one, but I think it’s – we launched the last report in December 2021. At least from a macro perspective, it’s fair to say that {laughter} quite a lot’s happened since then. And I think it’s really hard to answer this without a nod to the macro environment. You know, obviously, on the geopolitical side, it’s not just the war in Ukraine, but I think we’ve seen an intense location of kind of some of these shifts in attitude to globalization and to the makeup of supply chains. I think you’ve also seen in those four months or so a kind of increased focus on kind of the big macro-economic considerations, questions around the effect of the end of kind of loose military policy and stimulus, and especially against the context of what feels like very consistent inflation. Not to mention, obviously, COVID, which seems like it comes back just when you think it’s in a different place and so, again, kind of biting in terms of disruption to the economy and to supply chains, and so, to me, when I think about 2022, it’s all those things have really just kind of played into a high degree of uncertainty and volatility as a macro backdrop. And then, therefore, what we’ve kind of seen play out from a tech perspective has been most obviously seen in the public markets.

We’ve obviously seen a big correction there. Multiple compression across high-, mid-, low-growth tech. When I spoke earlier about $3 trillion of European tech enterprise value, about $2 trillion of that was in the public markets. And we’ve seen about a 30% drop in terms of exit values. And, in particular, I think what we’ve seen is those companies that seem to have a higher perceived risk when there’s a bit more uncertainty, have been hit the hardest, and if I think back to some of the SPACs that we saw last year, you know, many of those down 50, 60, 70%. And, so, I think it’s kind of become this quiet, I would say less forgiving backdrop. Expectations have been increased in terms of what you need to deliver as a company, and those therefore that have shown a bit more predictability and durability have been a lot more resistant. Maybe one of the trends that we’ve been seeing is getting to the public markets has become a lot more challenging, in terms of the start of the year. I think that this time last year, we’d seen something like 27 European tech IPOs. I think we’re on for ten. That’s about a third of the level so far.

Now, in terms of change in the private markets, I think that there’s always a bit of a lag effect here. I think that what we have certainly seen has been, at least from an investment perspective, is a bit of a shift in terms of risk appetite, particularly at the later stages. And I think there is a degree of multiple compression in the later stages. That’s probably a bit of a change in terms of just the general pace of the market.

Now, interestingly, when I look at some of the headline figures that we’ve had year-to-date, investment levels have stayed pretty robust actually, so Q1 2022, we’ve seen 26.5 billion invested already into European tech companies, which is about 50% higher actually than the equivalent from last year. Now, when you remember that we had 100 billion plus invested in 2021, and it was already a record by quite some distance—it’s pretty remarkable. And we’ve also seen, and if I look at – obviously last year, the overall investment activity was very much driven by megarounds, these hundred million plus rounds. Those have again stayed at elevated levels. So we’ve had 64 of those in Q1 2022, versus 41 in the same quarter last year.

I would say I’m still a little bit cautious as to where 2022 may end up on that front. It’s been interesting to see that the numbers here in Europe so far have held up, where we’ve seen, at least on those metrics, either showed declines in the U.S. and declines in Asia. Let’s see what happens. I think maybe just one other point, or maybe two other points around this. I think one of the things that’s been interesting has been from a purpose perspective. Going back to one of those highlights that I talked about from last year’s report is just how quickly narratives can shift. Because I think that what we’ve seen in the first few months of this year has been – if you take something like energy, for example, you can see a clear shift in terms of attitudes in some parts, where suddenly from it being centered around climate and climate concerns, there’s a sort of reprioritization happening towards national interests. And, suddenly, we’re seeing greater interest again in more traditional energy sources. And, again, when you look at things like that point of shifting attitudes to globalization and a kind of strengthening of national interests, I think you see that when it comes to, for example, a trend in terms of focus on national security or defense tech and within that including cybersecurity, too. It’s only four months in. As you say, it’s still too early to tell to see how the full year’s going to play out. And, actually, I think, in general, we operate in an industry where you need a longer duration perspective. It’s a ten-year journey typically to go from founding to IPO. A fund life cycle is a ten-plus-year horizon, and so I always feel like time and duration is really the friend of patiently building a company or investing in disruptive tech, and there’s just, as a consequence of that, much less sensitivity to mark your own gyrations when you’re not on this quarterly clock.

Chris:

On that basis, Tom, are you optimistic about the future of European tech?

Tom:

Yeah, I mean, absolutely. I think, from my perspective, it still feels like we’re just getting started. I think that when you look at where we are on the cycle of kind of digital transformation of the global economy and of society, it’s still the early innings. Here in Europe, tech-native companies still account for less than 10 percent of total equity value when you look across the public and private markets. So, when we’re still in mid-single digit range and in the U.S. they’re already up to something like 35%, I think you just get a sense that over the long term, there’s still a really, really long way to go for tech. And then I think, secondly, as I talked about, this flywheel that sort of underpins the ecosystem here, it’s just spinning faster than ever. We’ve never had a deeper and more sophisticated network of talent. We’ve never been this effective in making sure that we recycle and redirect talent and capital effectively. We’ve never had such a strong ecosystem that can consistently funnel an idea from inception to global category winner. And so, you take all of those things—they’re just amazing foundations that will continue to compound over time. And so that systematic flywheel that we see, that is making sure that the success that we have had breeds more success, is just absolutely at play.

Now, those are the two big reasons to be optimistic over the long term, and I think that, at least when we think about where the ecosystem goes next, there’s clearly a path to go from three to ten trillion and beyond over the course of the next decade or so. I think, at the same time, too, to get there, there’s many areas for improvement. And this is, again, one of the things that we try to speak about in the report. We talked about diversity already. We talked about how you make sure that you maximize the addressable market for ideas and talent. When I think about the laundry list of things of how Europe needs to be better, we need to continue to improve access to long-term patient capital, we need to do better at bridging the gap between our amazing research capabilities as a region, bring that closer to our tech ecosystem. We need to work on conditions in the public markets. We need to make sure that talent and access to talent and our ability to reward talent doesn’t become a bottleneck to growth. We need to, I think, also look at how we can accelerate the shift towards purpose or in the tech industry to work on really meaningful problems because there is such extraordinary potential for tech and technology entrepreneurship to move the needle quickly. And I think, too, there’s a lot of work that can still be done to make sure that, from a policy framework perspective, we move to a place where policy becomes a real competitive advantage to us as a region and that we can be more progressive in the way that policy works so that it can be anticipatory and experimental. And so, I think all of those are things that are important for us to address to reach that full potential. We’re confident that well get there, but as I said earlier, too, these things that are meaningful and impactful also take time, so I think that we also tend to think about these things over a longer time duration. But I think in spite of all of those things, it’s really true today that there’s never been a better time to be a tech entrepreneur in Europe. So, very optimistic on that front.

Chris:

Thanks very much, Tom. That was really insightful thoughts that you just provided, and thank you very much for sharing that with us.

Tom:

Thank you so much for having me. It’s been my pleasure.

Chris:

And thank you to our listeners for joining us for The Future Fountain.