At the end of 2020, we looked back on the year through which we had just been with a weird dual feeling. To quote our guest Pär-Jörgen Pärson, “the world is in shambles but venture is doing better than ever”, which is by itself confusing and reassuring. PJ Pärson has been a General Partner at Northzone since 2004. He has been named one of the world’s top investors on Forbes’ Midas List and is an investor in leading European companies like Spotify. Northzone is a Tier 1 venture capital fund, operating across Europe and the West Coast. We wrapped up our last investor interview in 2020 with PJ Pärson to get his insights on what to expect for 2021.
Gwen Salley: We have just been through a tough year 2020 with a lot of impact on the ecosystem: travel being almost taken to a full-stop, future of work solutions growing exponentially, and so on. In a broader sense, how did Covid-19 and 2020 reshape the European tech landscape from your perspective?
Pär-Jörgen Pärson: Going back to the early months of the pandemic, I think we all were pretty worried about where this was going, with a similar sense of financial crisis as 2008 which would really hurt the tech ecosystem and the supply of capital in many different ways. I was probably one of the loudest proponents of this idea that it was going to be worse than in 2008. I was really wrong! It actually became more of a dual speed move of the entire economy. There were the ones who were strictly impacted by the pandemic, such as the hospitality industry. There was a lot of support that quickly got off the ground but it was still tough. Whereas, our industry (venture capital and the tech industry) which is large and digital, got tailwinds that we have never experienced before.
During the first few months of adjustment, before realizing the world was not going to pieces, our industry was actually thriving. Then, the second thing that started to happen was the investment dollars started to flow. However, they flowed in a different way than they did in the past. There were so many new markets that were considered as accessible for so many investment firms. Asian firms investing in Europe, American firms investing in Europe, or even European firms investing in the US. So all this sudden, we went from having structure built over decades on what you invest in and where you invest to a new set of rules because we started to realize that we could make an early investment without even meeting people in person. And that, I think, propelled the investment pace and also increased the competition for deals. We saw not only higher volume but also more participants in those runs than we had ever seen before.
Standing now, looking back at 2020, I think it has likely been one of the best ages ever in venture capital. Quite a lot of the companies that got off the ground one or two years ago, started with a product and got a very strong boost throughout the year of pandemic. They have been fast forced to grow in terms of revenue, fundraising, and talent development.
I’m not sure we have ever seen a similar growth in SaaS businesses. For example, we invested in the Series A of Hopin and a few months later they raised their Series B. In less than two years, Hopin has reached a valuation of over $2 billion.
From a recruiting perspective, since people started working from home, you can start accessing a talent pool who is not necessarily living in the place where you have your offices. And that is also a massive change for the workplace and ways of working/collaborating.
So very unexpected how this had panned out. I can even say that I feel a little bad sometimes because our industry was really lucky compared to others who were negatively impacted.
GS: Since 2020 unfolded in a pretty unexpected way for our ecosystem, what can we expect from 2021?
PP: A little hard to be certain about anything given that I was so wrong 10 months ago! But, I do think there have been a number of imbalances built up in the world economy. One of these imbalances is obviously that we still operate in an environment where there is no cost of capital and that is really weird. At some point in time, it is going to end. And when it ends we will see a totally different thing unfold. All the pundits are saying that this will go on for several more years. If that is true I think we will have continued strong development of tech. Tech represents basically the shift from old capital-intensive industry, inefficient and predominantly physical processes to something that can be reproduced at a much lower cost, with a lower carbon footprint and all that stuff that means a lot for today’s consumer.
Unless there is a shift in the capital market, mainly on the fact that capital doesn’t cost anything, I think we can expect a continued really strong development for our tech ecosystem. But you know, all the countries finances are actually in shambles and that is only not sustainable in the long run as there is a fundamental imbalance that someday needs to be corrected and when that comes it will be a really painful day for most developed economies.
GS: If we fast forward to the moment when the cost of capital is being adjusted to a more normal pace, how do you think it’s going to be translated into the ecosystem? Does that mean we are going to have less money available in venture, we are going to see less innovation?
PP: Relatively speaking, the venture and the tech ecosystem will feel better than the rest of the economy. VCs have historically invested in future-proof solutions, as people are looking for cheaper, more resilient, less capital-intensive solutions; and that is inherent to what many startups are building into their product. I’m not sure it has yet a global impact on society, and I’m worried about the financial inequalities getting worse. We have to find ways to correct that because it is not sustainable to borrow more from our kids and grandkids to sort of fix the problem. We have to fix this problem now. We are building this debt in a situation where we are also operating above our means in terms of sustainability. We have a massive bill to pay when it comes to the environment going forward and we have to start paying for that right away. It is super hard for politicians to get unity and agreement on these issues because there is always the feeling that someone is losing even if it is not the case.
GS: If we look back to 2020, we have seen loads of fresh unicorns, at least 10 new ones, so it has been a very prolific year for Europe in particular. Why do you think it is the case and what does that mean for the European ecosystem?
PP: I think Europe started to produce and to punch at or above our own weight maybe already 3 to 4 years ago. We started to really show returns in the past few years and investors are noticing. . This past year has also shown tremendous strength in the European tech ecosystem because we have, I think, a couple of things that have happened. The tech ecosystem had gone from being very local to much more internationalized. If we go back only a few years ago there was only one ecosystem in Europe truly international in its character which was London. Now we have Stockholm, Paris, Berlin, and also other emerging places like Lisbon, Barcelona. They have and can attract both talent and capital from many other places than the local ecosystem now.
That is very important for European success going forward and that is something that has just happened in the past 10 years. And we are seeing the fruits of that labor now.
I had been into VC for less than 10 years back in 2005 when Skype came up alongside MySQL being the only 2 unicorns in Europe. That was a massive happening to have 2 unicorns during a 5-year period or something. Now we have 10 of them in a single year. At Northzone alone, we have seen 6 new unicorns being added to our portfolio.
GS: We can also expect way more European IPOs (Initial Public Offerings) as well. It’s a very vanilla question but: is that a good thing and is it positive for the ecosystem?
PP: Absolutely, I think that has been one, and still is a weakness that we have in Europe: we don’t have a strong European-wide IPO market and the really functioning IPO markets are in the US. If you look at the New-York stock exchange (NYSE), its relative size is probably twice the size of the whole European market together.
It is all fragmented in Europe. Nasdaq Stockholm is, I think, the third-largest market in Europe and then there are many small stock markets. I think we should ask those guys to drive more consolidation and maybe have one or two big stock markets that serve not only the traditional industries but also take earlier companies public. Today, if you look at the listing alternatives, the half good companies can be listed and consider being listed locally but if you are a really good company, you wouldn’t list locally and that’s a real issue.
GS: We expect Kahoot!, Klarna – which are some of your portfolio startups – to maybe IPO next year. Are there other companies that you believe will IPO next year?
PP: In our portfolio, I think those are probably the ones. And if it is not next year, it will be in the following years.
Having a strong European IPO market would imply having big institutions be more involved in the ecosystem.
A couple of years back, the State of Venture Capital report (Atomico Report) stated that 0.3% of the big pension capital had been directed into VC funds. That’s nothing compared to what it is in the US where some of the bigger pension funds allocate like 5 to 10% of their assets into that category. I don’t know what the exact number is but I think it is needed to also give access to a fast-growing asset class and provide much more knowledge within the financial community on the inner workings of tech companies. When they think about tech, the pension funds only consider buying stocks listed on the NYSE and the Nasdaq. European tech companies are therefore at a disadvantage.
I think we really need to see a mind shift there with institutional investors engaging more and more within the tech ecosystem.
GS: To focus on Northzone for a bit and the year we have just been through: have you changed the way you look at deals, the verticals you look at, the way you source them, close them? Did 2020 impact you in any way?
PP: Yes, we became much more collaborative across offices. We had people from the NYC office, London office, or Stockholm office working on the same deal in a much more seamless way compared to what we are used to. Back then we would automatically sit together in a conference room to talk about the deal. That has also improved our processes speed. Now we can become more convinced to go into more detailed discussions overinvesting into a company faster because we can make more people work simultaneously on a particular situation. That is a tremendous improvement.
I don’t think verticals have had any big difference. Obviously, given that many companies that we have looked at have had impressive development over this time, we got used to sitting down and trying to figure out how much of it was due to Covid boost and how much of that growth will sustain post-pandemic. Even within our own portfolio, assessing the growth sustainability has been a new element to the job.
GS: You count many unicorns in your portfolio, probably one of the largest numbers of the top Tier VC firms such as Klarna, Hopin, Kahoot, and other ones that we mentioned earlier. What is your secret sauce to finding them so early? 🌶
PP: I think one of the reasons is probably that we really want to talk to founders who have big bold ideas and who go after markets that can really make a difference. Also, we are not particularly afraid of capital intensive spaces either because that is a competitive edge. If you prove that you can raise capital it becomes like a competitive moat against others because when you are the second or third company addressing the same market and needing to raise capital it becomes harder if someone else has done that better. Then, obviously, the most important factor is to work with entrepreneurs who really have the resilience, the grit, who never take no for an answer, who keep on going, and who have the capacity to recruit the best. They also recruit up: they always look for better people than themselves. That is incredibly fun to be around that kind of person.
GS: Bolder companies also mean riskier bets, does that mean you guys at Northzone have higher failure rates than other top VCs?
PP: I think we have the industry’s average failure rate. We accept failure because we have seen over years of experience that the notion of playing safe doesn’t exist. It is actually more risky to try to and follow a safe road because someone else is more likely to come to market with a value proposition that’s more radical. The biggest risk for any startup is not standing out enough. We, as investors, have historically been very much at fault for sending those kinds of signals to entrepreneurs of constantly warning them “Have you thought about that risk or that one or this?”. What we should instead do is basically say “How do you focus so you can get maximum impact on what really matters and don’t care about the rest?”. That’s how you win! It’s incredibly hard to build a successful startup.
GS: You covered that question a lot already but I need to ask it. Back in 2007 you were one of the first investors in Spotify. I had the chance to read a lot about it and from what I understood it was a complicated deal. Can you tell us why and what happened?
PP: Back in 2007 it was basically at the peak of the peer to peer wave of the music and record industry. At that time there were 4 massive networks. The market had more or less collapsed. The VC industry looking at Spotify agreed on how much of a cool solution it was but why on earth would we go after this broken market! It was really hard to get the capital together. I was talking to pretty much all VCs across Europe because I had spent some time investing in other music startups that failed but I thought Daniel and Martin were AAA founders. They also knew what the right move was to be taken seriously by the content industry and they had a product that was blowing me away. So I really wanted to put that investment together. It took me a year to do that but ultimately when I got to the finishing line, I think it became apparent the music industry saw this path as one option of potential resolution of this terrible state the industry was in.
GS: Is it the all-time most profitable investment that you have made at Northzone?
PP: Well, in terms of absolute dollars, absolutely. In terms of relative, there’s one that’s even better which is our first unicorn StepStone.
GS: We keep track of those billion dollar companies and we look at it as the most relevant metric to assess these companies. We have been doing that for the past 20 years. Should that change? Is that the only metric we should be looking at? And, if not, is there any other?
PP: I think for the venture industry it is actually a pretty meaningful metric because it shows that a business is a breakout company. I think it is an appropriate one because it really puts the finger on scale. However, as a society, we are talking about something else because you should consider that the unicorns are sort of the top of a really large iceberg. Given that we have ten unicorns in our portfolio and that we have historically made 150 or so investments, it means there is only something like 5 to 7% of our investments becoming unicorns. We typically may be looking at maybe 100 companies for every investment we make. That means in order to make those ten unicorns we have probably looked at 15000 companies or something like that.
So there’s a lot of volume that creates an economy. From a society perspective, these 14800+ companies we don’t invest in are just as important – or even more important probably – than the unicorns.
GS: What are your hopes for 2021?
PP: My hopes are obviously that the vaccine will make it possible to travel again because I think working this way is incredibly boring. I really want to interact with people and meet in person because I think we can do a lot of stuff remotely but the real creativity doesn’t happen this way.
GS: Any expectations or hopes for the European ecosystem at large
PP: I think we should continue to grow our self confidence. The fact that Europe has a talent pool advantage over pretty much any other ecosystem in the world: I think we should leverage that. And now we have access to capital so we should continue to punch at or above our weight.