Microsoft’s M12: ‘Seed-stage has institutionalized across Europe’

Venture Capital Journal caught up with M12's managing director Matthew Goldstein to discuss the landscape for investing in Europe and why the conditions are ripe for growth in seed-stage investing.

For many years, Europe has been slow to catch up to the large amount of capital being provided at seed-stage rounds in the US, but that has changed over the last five years, according to Matthew Goldstein, managing director and co-founder of M12.

“Seed stage has institutionalized beautifully over the last five years across Europe,” Goldstein told Venture Capital Journal.

“The talent is everywhere, and historically, what was missing was two things,” he added. One is access to the right mentors and advisors; the other is access to institutional seed-stage capital.

M12, Microsoft’s venture fund, which has offices in London, Tel Aviv, San Francisco, Seattle, and Bengaluru, India, invests in early-stage enterprise software companies, writing checks between $2 million and $20 million.

According to Goldstein, the right advisers and mentors typically come from founders who’ve gone through many of the initial internal processes of scaling, and ideally, have already completed an exit. In San Francisco, he says, you’d be hard-pressed not to bump into someone who meets these credentials at your local Starbucks. But in much of Europe, the lack of regional concentration has made this type of mentorship less common.

Matthew Goldstein, M12

But over the last five years, “there has been more M&A here [in Europe], which has led to more wealth being created,” said Goldstein, who noted that combined with the fact that “more exited founders and early executives from the start-up venture ecosystem are sticking around in Europe, and therefore, available to be those mentors and advisers.”

The environment for institutional seed-stage capital has been more of a work in progress, one that is just now beginning to flourish.

There has always been a market for young, credentialed founders to attract seed-stage capital, “but typically, that first check was coming from some family office, some high-net-worth individual,” Goldstein said.

“As a result, these groups or individuals were less accustomed to burn-fast, grow-fast venture-style investments.” But that is changing at a rapid pace with the rise of captive, or university sponsored funds, such as Cambridge Innovation Capital, Oxford Science Innovation, as well as others both in the UK and on the continent more broadly that are helping to turn students into founders.

Additionally, the seed-stage managers that have put capital to work in these Series A and B funding rounds are growing significantly, allowing them to cover more corners of the market.

Seed valuations doubled

This institutional momentum seems to be having an effect this year: the average valuation for angel and seed rounds of European start-ups, which stood at €7.4 million in 2020, as of March 31 has almost doubled to  €14.3 million, according to PitchBook.

And while seed-stage investments are becoming well-covered by European institutions, late-stage activity has also ballooned over the last few years, partially because of significant American investment as well as large Silicon Valley VCs setting up physical operations within the bloc.

“You’ve seen the US firms come over very recently,” Goldstein said. “And we’ve seen some incremental growth in the number and size of local Series A firms. But the coverage was still light.”

“Once you got to the Series B and beyond, the number of local firms that were willing to write a $20 or $30 million check into a high growth, unprofitable business in Europe was very limited,” he added.

M12, under Goldstein’s direction, has largely done its part to fill those gaps.