We opened a London office this year. We did so because the most consequential companies of the next decade will need access to European talent and customers, and because Asian funds have been historically underrepresented in that conversation. This letter is about what we have learned from the first six months in Europe.

On Why Europe, and Why Now

Europe has, for two decades, been treated by Asian and American investors as a market that imports innovation from elsewhere. The premise is no longer accurate. The continent is now producing category-defining companies in fintech, music streaming, mobility, and several enterprise verticals at a rate that requires being there, locally, to evaluate.

The structural reasons matter as much as the visible ones. European founders increasingly build for global markets from the start; the technical talent base in cities like Berlin and Stockholm has matured to a level that competes with the Bay Area on quality if not yet on volume; and the regulatory environment, while occasionally hostile, produces categories of companies that do not emerge under lighter regulation. The third reason has been under-discussed in the venture press. Regulation that cannot be circumvented forces founders to build differently — to design for compliance from inception, to invest in capabilities that lighter-regulated competitors do not develop, and to build defensibility into their products in ways that do not depend on regulatory arbitrage. The European companies we are most interested in are, almost without exception, ones whose moats are partly regulatory in origin.

The decision to open in London, specifically, was driven by talent rather than capital. London has the deepest pool of operators with cross-jurisdictional experience in the European time zone; the city's financial-services background produces a particular kind of operator who is, in our reading, well-suited to the kinds of companies we want to back. We expect to expand the office's coverage to continental Europe over the next two years, with London as the operational base.

On What Alibaba's IPO Tells Us About Asian Capital

Alibaba's September IPO raised twenty-five billion dollars at a valuation greater than any other internet company in history. The story is not the size; the story is the demand. American institutional capital allocated to the offering at a level that suggests the structural under-allocation of US institutional money to Asian internet companies is finally being corrected.

The implication for our work is that the discount we have been able to harvest, by being early and patient in Asia, will narrow. We expect this and we are pricing it. The harder question is what to do with our existing positions; some of them are now valued at marks that imply, in their later rounds, the kind of premium we used to be able to acquire at discounts. We are inclined to hold most of these positions through the premium and into whatever follows; the alternative would be to sell into a structurally over-valued moment, and we have learned that timing such moments is harder than holding through them.

The deeper observation, which we have been making in private conversations for some time, is that the global capital markets are integrating around technology in ways that older sectors have not. The barriers to capital flowing across jurisdictions for technology companies are now meaningfully lower than the barriers for industrial companies, financial-services companies, or consumer-goods companies. We expect this to continue. The companies we want to back are, by their nature, the companies most able to attract globally diversified capital.

On the Founders Building in Berlin and Stockholm

The European founders we have met this year share two properties that we have come to value. They build with longer time horizons than their American counterparts — the European venture industry is younger and the founders feel less pressure to compress timelines. And they are more comfortable with smaller initial markets — they do not assume that a product must be national before it can be regional, or regional before it can be global.

Both properties are well-suited to a family-fund structure. We are, as a result, deploying more capital into European founders this year than we expected to. We made five commitments in Europe in 2014; we had budgeted for three. The over-deployment is not strategic; it is a consequence of the founder pool being deeper than we had assessed at the start of the year.

The harder questions about European companies are operational. The continent does not yet produce large public-market exits at the same rate as the US or China; the path to liquidity for our European positions is, in most cases, less clear than the path for our positions in other regions. We are comfortable with this; we are a long-hold fund. Founders who are not equally comfortable need to be prepared for a longer journey than they would face elsewhere. We have begun making this point explicitly in early diligence conversations.

On What Brussels Will Mean for the Next Wave

The European data-protection framework now in late-stage drafting will, when enacted, materially change what categories of companies can be built profitably in Europe and elsewhere. We have not modeled the implications fully. Our directional view is that companies whose business models depend on the unconstrained collection of consumer data will face structural headwinds, and companies whose business models do not depend on such collection will benefit. We are positioning toward the second group.

The deeper structural argument is that the framework, once in force, will create a category of companies that is privacy-native rather than privacy-compliant — companies that did not start with the assumption that user data is freely available and that, in consequence, build products whose architecture is materially different. We expect the privacy-native companies to outperform privacy-compliant ones in Europe, and to extend into other jurisdictions as similar regulatory frameworks emerge. We have made one investment this year that we believe is structurally privacy-native. We expect to make more.

A Closing Note

Three offices is more than three times the operational complexity of one. The complexity is worth carrying when it brings us closer to companies we would otherwise miss. So far in Europe, it has. The 2014 letter, in retrospect, will likely be remembered as the year the firm became fully transcontinental. The 2024 letter, we expect, will be writing about what that meant.

The Partners
Winzheng Family Investment Fund · December 2014