Kasper:
On this special edition of Balentic Edge, you can listen to the full panel discussion, “fueling ambition, unlocking private capital to power Europe’s tech future” from the Nordic FinTech Week in Copenhagen. Expertly hosted by Kim Rosenkilde I was joined by Christian Lindström-Lage, Toby Triebel and Rune Ulbak to explore the future of European venture capital in the context of FinTech. We dig into themes including why Europe’s fragmented regulatory and capital market hold back scale.
How pension funds and banks can and can’t channel capital into VC and growth equity. Their persistent US, Europe, Asia dynamic in venture performance, capital flows and tech dependency. What portfolio construction and risk adjusted return really mean when allocating to early stage strategies. From sovereign capital mobilization to the realities of building unicorns. This is a conversation packed with insights you don’t want to miss. 

Tune in and tell us, do you see Europe’s diversity and regulatory complexity as a weakness, or could it be turned into an advantage for private markets?

Kim:
My background is that of an allocator, a banker and a trader. I’ve been around the world like my colleagues here. We therefore feel we’re all qualified to talk about some of the voids that we have in Europe when it comes to single capital market and the frustration that often having 25 sovereigns have been away for so long. I think it’s 25 in Europe now.
That has to decide. And then we have to compete as Europeans against a US that is exceptionally focused and has a pedigree of taking risks that we frankly don’t have. We come from a society where we’ve invested in bonds and mortgage bonds and so forth.
4 % of the equities in the world is owned by Scandinavia and if we add Holland it’s even more. And that’s true and of course the Norwegians play a significant role in that after they stole the oil from the Danes and allocated it to the oil fund.

Kim:
I have spent the last 18 years in Asia and I have also worked for the Chinese Central bank and we only mostly talk about Europe versus the US but I can assure you it would be foolish to underestimate the Chinese at the moment especially against the backdrop where everybody’s focused leadership elsewhere. By the way, we have not an escalator that brings us any problem, no one telecoms them, those excuses won’t be any hindrance to the people here. They are two allocators and we have venture capitalists and then we have somebody who is not only an entrepreneur, around the world and also is a very good observer of what’s going on in the business and I’m actually going to hand him over now to…
He is my chat gpt because today Kasper has put a blog on at 12 o’clock that discusses this subject at length and in a very thorough way. I urge everyone to read it. I am certainly going to post it as well. And I will also send it to a few people. I’ll ask you maybe just go through the synopsis of your pieces.

Kasper:
Thank you Kim. So just as a very quick background, I spent 20 years as an allocator, recently turned founder, so I’ve allocated to VC and growth funds globally, And so when I sat down and thought about this, I also did a bit research and I actually turned it into one of my blog posts. And Kim has asked me to give you the synopsis. what I basically wrote at the top, and it is as Kim says live now, we have the talent and the ideas,  but like the capital depth and the conviction.
There is a reliance on soft money and subscale VC funds, which to some extent fosters complacency instead of risk taking. Then we have risk aversion. We have regulatory fragmentation and we have under allocation, which all holds back the whole ecosystem. Draghi actually addressed it a little bit over a year ago, the solutions, at least, single market solvency II reform. But the implementation, I think we can all agree is glacial 11%. So says the media of Draghi’s 360 ! or so recommendations have actually been implemented. In short, we talk, we don’t ship, just to stay in the startup founder role. Finally, think FinTech is the canary in the coal mine, which is also what we’re asked to talk about, because this is not an asset light industry. So if we can solve it for FinTech, we can arguably also solve it and scale it in the other verticals where we’d like to be a power hub.

Kim:
It’s a very good summary, so we’re almost done now. Again, read the blog. Rune, you and Christian meet probably a thousand pictures a year or something. But what on your moment, when you look at Europe and its VC world and you look at the way capital is pitched in the US, what’s the first difference that’s springs to mind

Rune:
Coming from a pension world where our largest backers is a pension fund and they wanted to support the venture scene, well, they give you some very, very clear mandate to go do that, but it’s a global mandate. And with that in mind, where do you go to find the best returns? And there’s no doubt that Europe has been evolving, but venture as we know it and venture as it’s today has been created out of the US. And it’s that kind of backlog where it really takes
a lot of time. A venture fund is not something that shows their returns within the first five years. You have to wait probably 10 years to get an idea if they’re actually any good. 

So when you’re allocating to the space, you want to allocate where you have proof of concept. Like who has really proven out that they can consistently over time produce outsized returns and the US just have a much better track record. So we’re up against somewhere when anybody in the world that would look at what’s the easier choice for allocating to it will probably start in the US and then you’d go from there and then and maybe come to Europe. I think we’re at a place where Europe is looking much better and I think we have had our unicorns in Europe as well now and the whole… hubs of technology and the hubs of fintech and the hubs of people who’s actually seen what it looks like to create a unicorn is now much better. 

I have used the stack about Revolut, a company that has really done well in the fintech world. And if you look at what’s come out of that, it’s not one team, it’s 46 teams that have started their own startup. And that’s the same as you’ve seen in the US for many years with PayPal Mafia and stuff like that.
I think we’re catching up, but we still don’t have that consistency of returns proven out that it’s going to make it easy for the people who actually have the mandates to go into venture capital to go to Europe first.

Kim:
Christian you mentioned the 4% of world stock equity is owned by Scandinavia. So, clearly there’s more risk in stocks than there are in bonds. So, we do have some sense of risk appetite. What then prevents that from extending itself to what we would rightly call something…

Christian:
Well,  maybe one step back because I think, you know, that I’m sitting here representing a big bank and I think it’s worth mentioning that we are playing a very vital role in this whole ecosystem. Not only providing funding from clients with a risk appetite for a certain strategy, but also kind of fostering  an appetite for these new technologies and the users for them. So we kind of got a dual role here. 

What you were asking… What you’re pointing at right now is the risk appetite thing. And here I think we are as an industry a little bit stuck because we see more and more pension funds becoming more and more passive for various reasons. We can discuss that as another topic. And we are also becoming increasingly regulated. So our ability to canalize funding from clients
into this ecosystem is fairly limited today. It’s almost only possible to canalize given the current set up, to professional clients.
And that’s kind of where we get stuck today. You mentioned the Draghi report and with that comes also Ursula von der Leyen’s presentation and key findings at the Davos meeting this year where she also highlighted the phenomenon that when European startups want to go for an IPO, they typically go to the US and then what they’re funded by is typically European money.
Which is kind of a complete disaster looking at the same sustainability of society here in Europe. There’s all different kinds of perspectives that we need to take into consideration here, but the overarching concern is that we kind of prohibit it for canalizing or fostering these flows by how revelation is being…

Kim:
One of the things I think for is the solvency. I remember as an insurer, something that prevented me from entering into these assets. Toby, you’re an American in VC,  your asset will show that you’re not American, but you’re also setting up a fund here in Europe dedicated to European investment. So we’ll talk a little bit about not necessarily what that is because we’re not pitching here, but please tell me what was the motivation behind focusing on that.

Toby:
I do indeed represent the American voice with a German accent today. I think Europe is actually extremely interesting at this point and sort of I would like to disagree but I actually agree more with what’s being said than disagree. I think today we are at an interesting secular inflection point. Europe has been exposed. We’ve seen it in supply chains when the war started. We’ve seen it in COVID, energy dependence, and we see it now with  what we call liberation day and that’s led to sort of a realization that Europe can no longer blindly rely on external countries, especially the US. They no longer provide the comfortable blanket that has been there for too long. And when we speak to financial institutions across Europe, the boardrooms are increasingly anxious about the fact that 70 % of their technology stack is American. Now that dependence is dangerous. And it’s not just the core banking systems, it’s in asset management, it’s Aladdin. What if Donald Trump calls up Larry Fink tomorrow and says, well, no longer is Aladdin allowed to serve certain banks in Europe? I think that is a… a risk that is increasingly relevant. 

And we’ve now seen sovereigns mobilizing 750 billion plus euros that will go in investing in European infrastructure. In financial services is sort of the connecting tissue that underpins a lot of what consumers and businesses do, trade, et cetera, et cetera. And we need to wake up and invest in financial infrastructure to no longer blindly rely on on on the US and other countries and I think to Rune’s point If you want to make a lot of return the US has the the examples, but it’s no longer as obvious in the US as it was 20-30 years ago and The proof points aren’t there in Europe, but we think Europe today in financial services and tech more broadly
is one of the most interesting places in venture globally.

Kim:
Just a quick question, I want to ask Kasper. Kasper and I will represent, Asia.
We talk a lot about the US. you were at, sorry I had a super national in Asia working for the ADB What do you think the Asian view of all this is? I know it’s not necessarily what you do today, but I know have great links to Hong Kong,

Kasper:
I was in Hong Kong for many years heading up private equity for UBS in the region. I think what’s really frightening from a sort of European perspective is when you talk to young Asians..
They’ll very quietly tell you if you are in Asia and if they sort of acknowledge that you’re at least part of “Team Asia”. Europe is largely irrelevant. 

They don’t look to us as anything except a place to go for some great pics for TikTok or what they may be using and some great food. We are largely irrelevant. As an investment case, because our own pension funds don’t invest here, why would they? So for them, it’s a nice travel destination. And I do think putting it a little bit  on its head, we’re at the risk of becoming a really nice open-air museum with great food. 

The Asians look to the Middle East, they look to the US, a little bit less today and maybe look for some funding here, but then they just come to see if our pension funds will invest into risk-adjusted returns and growth in Asia instead of in Europe. And I think there is a great chance that Rune will be picking that over European venture

Kim:
Rune, What’s the difference when you have a Sequoia coming into pitch or a FinTech Collective? Just to make sure that I’m still in Toby’s conflict. Or a European smaller firm.

Rune:
Yeah, just, Sequoia doesn’t pitch. You pitch them. It’s the other way around. It’s pretty easy. FinTech Collective, we’ve with several times, but it’s been kind of a collaboral meeting for coffee here and there. And the US is just, ⁓ the top quartile funds over there is just at a point in time where they can pick and choose their own investors. you have to really work on the relationship part there. Europe has a couple of those names that are kind of  transatlantic successes and are hard to access. 

But in general you can… You are a good relationship builder, can get into any fund in Europe still and you are able to then have the best of the best here in Europe which is actually as I said something that we find quite interesting because I think you’re right at that forward-looking view on Europe will probably be a good place to be in terms of now that all the cocktails are here all you need to be like a successful venture system has now been created I feel but the problem comes down to what we were talking about before when you elevate
it up to the top of the risk curve and looking at what is venture investment. It’s the most likely to go wrong. So you’re having to kind of look at your…

Kim:
It’s the greater return.

Rune:
Yeah, but  you have to look at your portfolio construction and be, am I going to bring this to my investment committee or am I going to come with EQT or something that you never get fired for, right? So in terms of having that conviction to bring it to the top, the top needs to be really into the venture thing and really want that in their portfolio also. 

If you can’t get that alignment structure into it, I think often a pension fund leaves it on the side and say we’ll manage fine with buyouts. Those companies have revenues, have processes of bottom lines and stuff like that. I think in terms of getting that when people come pitch, well there’s no need to come pitch if there’s not a top-down approach to venture within that pension fund. They’ll simply just say no and I think if I’m sure there’s anything in part of my job it’s saying no we’re really good at that, I do that like a hundred times I do maybe 99 of the funds the one that comes up is probably someone that I picked or choose myself to meet with so it’s really a tough situation

Kim:
Just on the banks, there was a lot of banks participating in VCs at some point, and part of it was driven by this FOMO thing. Your first busy hours in the agreement system is on. And I have no data on the success of that, I don’t know if you possibly did it, but Deutsche Bank was an early starter in that as well.
How far do you actually think? So now you’re invested in the VC fund for the fear of missing out, on new technology. Do you think that goes all the way? That, whatever conversations that takes place, does that go to the chairman? Does that go to the CEO? Is that structured enough? Or is it just a hedge? You can tell the board we are in it.

Christian:
I think it’s be completely frank here, think it’s a combo.
I think what we’ve done with SEB is we’ve launched a separate company which we call SEBX which is kind of a sandbox environment where we can kind of test technologies, solutions, before we even consider to onboard it on the platform. That being said, SEB’s strategy involves working together with external providers that kind of provides niche solutions to our ecosystem.
This is a little bit in contrast to earlier days where we kind of insisted as everyone else to build everything ourselves. So what’s the difference? Well, it kind of changes the dynamic in the boardroom because you need to be much more on top of, you need to consider yourself a control tower that kind of allows you to navigate as an ecosystem rather than a control tower that tells IT what to deliver and consistently being frustrated that they deliver too late and they cannot update the system in line with expectations and so on and so forth. So I think it’s a good idea.

Rune:
I was just wondering, is it fair to say that because of the risk you’ve put it into this separate vehicle, this separate X department, or because you want to exploit it, but you’re not…

Christian:
One thing is to exploit in production. That’s something you don’t want to do. We’ve got 19,000 employees. So if you open that, it can be enormously dangerous. So the privilege with SEB X is that it allows us to test out solutions in a very, very safe manner. And as soon as things are approved and… and kind of prudent and you know we bring it into

Kim:
I want to get back a little bit to Europe versus US. Because I asked how they, the VCs pitch differently. How do companies, sorry, how do people seeking capital pitch to you differently in the, European companies ask, I don’t know, fluid in pitching?

Toby:
I do think, and that has changed over the last decade or so, the talent in Europe is actually finally there.  And the talent that was there a decade ago in Europe went to the US. I think the talent that is here now that is spun off of Revolut, I actually think it’s way more than 46 teams. Ithink there are statistics that show there’s 200 companies that have been founded by former Revolut guys. It’s talent that has been taught how to build venture. That is finally there in Europe. And the opportunity is now there in Europe too. So they no longer need to go. 

What is increasingly missing is the capital stack. So they need that little bit of capital is always relatively straightforward to come by the pre-seed the seed and lots of funds both locally and Europe-wide it’s the it’s the larger funding rounds that are still dominated by US players, I mean the growth capital environment in Europe is predominantly American. American outfits mentioned some of them that have set up shop in Europe and there is a funding gap and sort of our thesis and hypothesis is that with  the tailwinds that we’ve discussed and the sovereign capital that is helping support that system, that this capital gap is starting to be filled. And that I think is the opportunity. And then we maybe no longer need to have a plan to go to the US, to the public markets, even though I think on the public markets, we’ve got a long way to go for any of the European bourses. But I think the tide is shifting. And what I find most interesting, you mentioned FOMO, is maybe not so much fomo anymore when it comes to boardrooms, but it is that fear of dependence on US technology. That is really real. And the need to invest in financial sovereignty in Europe. And that’s not going to be done overnight, but it is starting. And we feel it in a number of examples.

Kim:
Quick question, because I want to ask Kasper something. Do banks invest in VCs because they want a return? I know they say they don’t, but do they measure the return or is it because they clearly want to see what’s happening? ⁓

Toby:
I think that’s the latter.
They want to see what’s happening. want to see… And some are moving much faster than others. We always have in every front cycle we have two, three strategic LPs. Those are banks mostly that want to have a lens into what’s happening in terms of potential partnerships, in terms of potential acquisition opportunities, in terms of potential challenges and disruptors. And I think you have to have a lens into innovation and technology. And the beautiful thing about…
GEN.AI is happening much faster. It doesn’t take years to build a 10 million revenue business. It takes months.

Kim:
I guess it was a cross-eyed rhetorical question with a hint of sarcasm, but we’ll leave it there for saying. You have the best pen in this group, suppose. The way you are taking it in the end. In terms of actually not lobbying, but I guess this is all being. Who is it you would address these issues to in the context of Europe? Where do you start in this country?

Kasper:
Thank you.  I think it cuts to the core of the problem. We’re at 27 different markets, 27 regulators, and then you can add a few because you’ve got ESMA, the ECB will want to say something, the national banks will want to say something, we’re competing against each other. I don’t think there’s a single person we can call because we haven’t actually completed the capital markets. We haven’t aligned Solvency II to unlock capital, and then we haven’t aligned our tax incentives in order to actually unleash the money. But I think also Kim, it goes beyond that…because unleashing the money is not enough if that money ends up in the US or in Asia. And I think there’s a great risk of that because we only touched upon it initially. This is about risk adjusted return. You didn’t mention the risk, but it is. And the risk, I think we’d say for early stage, is the same across the world, right? Then if you look at the they are consistently higher in the US. And I’ll give you a data point. The pooled IRR, not that we should take and measure everything by IRR, but the pooled IRR across a decade in UK venture
is 4%. I think you should go and buy an ETF. I think you’d be better off in many, many, many ways. And then the last thing is consistency. You need to consistently pick not unicorns, but fund returners And that’s something that we don’t see when we look with an LP head on in the European ecosystem. They end up largely being funded by American funds. That’s where we go.

Rune:
Okay. Add to that as well because I think what also is happening is that you might have a seed fund that does the first round and a local Danish fund and this company does well. What do they look to then achieve? They achieve the stamp of approval of the next round which could be a UK based fund that are more pan-European and then you get to like a Series A, Series B and you want to look at what is the next big market I’m going to conquer and it’s not the 27 small markets, it’s the US. So who do you want to help you get into the US?
Often that’s growth capital from the US and then they come in and out compete whoever’s been there from the European side to deliver if there is any interest at all As such the capital just flows away and often time if it’s a big market for them to go into the US they will ask them to headquarter or bring over the team and that’s how it all starts with the Klarna US IPO.

Kasper:
To your point Rune, just as a very concrete example, we have to have a law firm in every single European country we operate in. We have to have one law firm in the US. We have to one law firm in Hong Kong, one law firm in Singapore, one in the UAE. In Europe, tier one law firm in every single country. That’s an enormous compliance drag for a small FinTech.

Kim:
I’m not gonna have a poll amongst the panel. Because I don’t think it’s that binary. And I think we all bring some different perspectives, but it is a crucial situation at the moment. I know everybody has a lot more to say. However, I’m also just gonna ask amongst the…
who haven’t had their lunch yet, we’re here. Are there any questions? I would certainly miss the opportunity. This is the money. If you’re looking for it, this is a great time to ask, not for the money, but how to get the money.

Rune:
And while people are thinking about this great question, I’m like, just the risk adjusted return thing that Kasper brought up, I may have a comment there as well. So I think when we’re looking at stuff like venture that is so far down the risk curve, we want to security of having those outsized returns, not the downsized returns. Because oftentimes when people think about how do we solve for getting more capital into venture, they talk about, well, if we can provide a safety net underneath these venture funds investments. That doesn’t make it for me. That’s not what gets my boss going. My boss is to get funds that want 3x net returns And if I can get that by some way leveraging the cap structure, and this could be by people who is not looking for the upside, but people who’s just willing to take risk and just get a low return. So I’m saying there are ways where you can manipulate this type of risk adjusted returns, but that could be a starting point in terms of who to ask, who to do what, and how we could get to a point where it could be interesting.

Kim:
One question?

Christian:
Thank  you.

Question from the audience:
  Thank you everybody for a wonderful panel. It’s very thought-provoking and an important topic. I’ve been trying to figure out how to come up with a question that could provide us with some really interesting insights, which is how can the situation in Europe be seen as a positive? How can we take our labor laws, our diversity with so many countries and needing legal, you know, how can we see that as a positive? Because if we’re trying to compete with the US, we’ll never be the US. That’s never gonna happen. And that’s a good thing. So what can we do that can embrace kind of the DNA of Europe to become truly so the private capital can power Europe’s tech future?

Kim:
Thank you

Kasper:
I’ll  give you the first shot. So if we look at some core European values I think trust is up there. I think long-term thinking is up there, and think privacy is up there. That is not something that Americans are thinking about, and it is certainly not something that the Chinese are thinking about. Maybe the long-term part, but we can sell trust, and we can sell privacy.
That is a core European values and I think that is actually something we can trade on. We’re not going to be switching off everybody’s cars just because we can. That’s not what we stand for in Europe. That’s maybe part of the answer.

Kim:
I think you could sell a lot of private Danish companies to almost every sovereign wealth fund in the world because Scandinavian governance is admired throughout the world and I hope it goes with the money and to invest it into every single one. I think we’ve over extended our period of time but thank you very much for having us.

Kasper:
Finally, a small disclaimer. The views expressed in this podcast are solely those of the host and guests and are provided for informational purposes only. They do not represent the views of any affiliated organizations, employers or entities. Nothing discussed should be construed as investment, legal, tax or business advice. Any reference to specific funds, companies or investment strategies are purely illustrative and do not constitute an offer, solicitation or recommendation to buy or sell any security or financial instrument.
listeners should consult their own professional advisors before making any investment or financial decisions.