Saul Klein (LocalGlobe): “There will be a lot of investment activity in the coming months”

STATION F is (virtually) sitting down with various VCs to understand how they see the impact of the current Covid-19 crisis on tech startups.

Saul Klein is a serial entrepreneur, operator and investor with over 25 years experience building and exiting companies in the US, Israel and Europe.  He has a passion for working with seed and early stage businesses and the positive impact that technology can make on society. Saul is currently a Founding Partner at LocalGlobe and Latitude Ventures. Gwen Salley, Head of Investment & Services at STATION F, interviewed him to learn more on how LocalGlobe is managing the crisis and his vision on the ecosystem in the coming months.

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What is the concrete impact you are seeing on your portfolio companies?

What we are seeing is very consistent with the macro trends in the economy and what Sifted and Dealroom reported in this very comprehensive analysis of the current situation in the European ecosystem. As for our portfolio, areas like healthtech, food delivery, collaboration tools and education resources are seeing a massive increase in activity. At the other end, areas like travel, mobility, restaurants or HR are very affected, and our portfolio follows this reality. Some companies in our portfolio have never been growing faster but there are companies at the other end of the spectrum, who are finding it tough.  However, even some of those companies who were profoundly affected like e-scooter operator Voi Technology, are starting to see demand recover, or have found ways to deliver their services again.

What advice are you giving to your founders facing a massive slowdown in their operations?

We are trying to make sure that all the CEOs in our portfolio are focussing on three key things. First, cutting their costs where possible and using Government help, including the tax system’s time to pay scheme and furlough schemes, to do that. Second, using the second quarter to cut their costs further, with the objective of extending their runway for even longer. We’re encouraging them to prepare for an entire 2020 without revenue.  Ideally, we are advising CEOs to extend their runway all the way to Christmas 2021 – basically making sure the business is set up to survive through troubled waters for the next 18 months. If they had planned to raise funds, it would be prudent to expect any raise to be considerably delayed.

Finally, we want companies to spend time between now and the end of the year considering the strategic options available for their company. This is the ideal time to consider for example where there are gaps in the team’s skills and recruit to fill those, or to cover a gap in the product line. One strategic option might be to potentially partner with another business. Companies should give themselves the best chance of doing that, by developing the relationships that might lead to such a step now.

We are also working with portfolio companies to define what are the right tools available to them to survive and making their case to government. We made a successful case for a matching fund from the UK government, to help startups get through this difficult time, which will see £1.25bn directed at the tech sector in the most useful way.

Lots of funds are saying they are “open for business”, what’s your take on this, and what is the situation for LocalGlobe? Have you signed any term sheets since mid-march?

We are very much open for business and we have announced four investments from our seed fund, LocalGlobe and our Series B fund Latitude, since the crisis hit. We invested in Libeo, a French startup that makes it easier to pay your suppliers, without having to go through your bank account. We also announced our investment in Count, a startup that is developing a new way to combine, organise and visualise data. We revealed a Series A investment in Yapily, an open banking infrastructure platform and our Latitude fund has invested in Moshi, a storytelling app for parents with young children. We haven’t slowed down our sourcing activities and we are continuing to close deals, some of which will be announced in the coming weeks – including several in France!

The last two years have seen record amounts of money raised by VC funds in Europe. In 2019,  €13.2bn was raised and in the first few months of 2020, a further €7.1bn was announced. It may be that there is a temporary slow-down in investing that money as VCs spend more time helping and working closely with their existing portfolio companies. But the amount of money or dry powder available to invest will not disappear and will be invested in due course.

How do you foresee the VC ecosystem to evolve in the coming months?

There is an unprecedented amount of money available in Europe with the most active funds sitting on large amounts of fresh money to deploy (Balderton, Accel, Index Ventures, Northzone, EQT, Atomico, Lakestar, Alven and Creandum).  Governments are also strategically deploying billions of Euros for the tech ecosystem. On top of that, international funds (Sequoia in London, Lightspeed and other very active US funds) are becoming increasingly active in Europe.

It’s obviously not business as usual right now but with all of that money available, there will be a lot of activity in the coming months. One issue that is becoming clearer is that European VCs will have to continue raising the bar of what makes a good investment. Even in the middle of the crisis, we are seeing over-subscribed rounds. The best companies won’t suffer from a valuation perspective – that has never happened in the past 20 years. The best companies and entrepreneurs are and always will be in demand.

We are seeing a lot of business also booming! What type of business and industries you think will see sustainable growth in the future as a result of this virus episode?

Having operated through 9/11, 2008 and all the other major financial crises we have had in the past 20 years, we’ve seen over and over that some of the greatest companies were born during those dark periods.

At a macro level, one of the great things about tech is that every industry, in the long run, integrates a certain degree of digital transformation. The real question is, what degree of digital transformation is there today, how the current context will impact that degree, and what opportunities exist from this new reality. Putting the massive slow down we are experiencing today in context, most industries will recover. The right question to ask is: “Will that activity exist in 5, 10 or 20 years?”. People will most likely continue to travel, buy cars, rent apartments, and have jobs. And if you are building a business in these areas, with a great product, a little bit of capital and a strong vision, the current situation is a setback but in the long-term it makes no difference.

What would you say to: An entrepreneur who’s thinking of starting a business in this context and to an entrepreneur who’s looking at raising funds in this context?

It’s a fantastic time to start a business – probably one of the best times in the last 20 years. But the ingredients today to start a business are the same as at any other time: minimize your dependencies, raise as little as you need, make something people want, get it out quickly in a capital-efficient way, then iterate.

Just do what scrappy entrepreneurs always do, the only difference is that in times like this you have no other choice.