London-based VC firm Octopus Ventures has topped up its evergreen early stage startup investment fund with another £100 million, bringing the total backing the fund to more than £400 million. It says it plans to invest more than £75 million in early stage startups this year.
Octopus does around 10 to 12 new investments per year, via this fund — in addition to follow on funding in its existing portfolio of more than 50 companies. It can invest between £250,000 and £25 million in a first round of funding.
“About 25 per cent of the money we invest will go into new investments and about 75 per cent will go into follow-on investments,” says Alex Macpherson, who heads up the firm.
For example, in the past year, Octopus made 36 rounds of financing — of which 10 were new investments. Its portfolio spans a wide range of tech areas, playing in both b2b and b2c markets, and includes businesses building marketplaces (e.g. Yplan and Secret Escapes), hardware (such as AR firm Waveoptics) and digital health tech.
Predictive keyboard maker SwiftKey, which exited to Microsoft earlier this year for $250M, was another Octopus investment.
Around two-thirds of its investments are in UK-based companies, with London an obvious focal point, while the other third are sourced from elsewhere in Europe — with Octopus taking a particular interest in other city startup hubs, such as Berlin, Stockholm, Paris and Lisbon, according to Macpherson.
He’s bullish on the opportunities for entrepreneurs in the European ecosystem at this point — as well he must be, given the firm’s investment focus — arguing that despite a tougher investment climate for startups over in the U.S., where startup valuations have been losing some of their unicorn-y sheen of late, here in Europe things have always had to be a bit more realistic.
“Businesses are backed in order to become self-sustaining businesses, and whilst in the US we’ve seen probably a slowdown — or certainly a reappraisal of the investment rate, over the last few months by the VCs, and that’s partly been because of the amount of money the companies are burning and they’re considering what they need to do with those businesses — here, for us, it’s all about building sustainable businesses that are able to take advantage of the situation,” he tells TechCrunch.
“Similarly I don’t think the UK and Europe has seen the same growth in valuation that you saw in the US, not the same heady heights, and that’s also why you see some of the US investors, at the later stage, coming over to make investments in Europe. So I think it’s a really exciting time for the UK and Europe. I also think there’s a big opportunity as we go forward. And there’s probably… a greater amount of capital across the spectrum… So I’m pretty bullish about the UK and European scene over the next three to five year time period.”
“US investors and potentially even some Asian investors are actually recognizing this growth of European entrepreneurs and who are also starting to look at this area — and that provides even greater opportunity for those businesses to have the funding as they go forward, and to build truly industry changing companies,” he adds.
Octopus’ fund sits somewhere in the middle in terms of European investors — dwarfed by the likes of Accel, Index and Balderton but often also investing alongside those larger VCs. It does also invest in European startups at a later stage in their business cycle, in growth rounds — so from Series B/C and up — via the $140M Octopus Opportunities Fund it announced last year.
While Macpherson is generally upbeat on the regional investment climate he stresses that European entrepreneurs should still be laser focused on building self-sustaining businesses — with sensible and realistic valuations, and a focus on generating revenue even early on.
“The cheapest form of equity for companies is the sales they make so that it reduced the amount of money they’re burning so sales are pretty key,” he notes.
How should European entrepreneurs be strategizing for the current investment climate? “The sensible thing that those entrepreneurs will do is they’ll say how do I spend the time and look at what’s the amount of money I’m taking, and how long does that money last me?” says Macpherson.
“Similarly entrepreneurs will look at saying the most important thing is having that cash liquidity so if they have very lofty valuation ideas then that may cause certain investors concern because they don’t see how the further rounds of funding are likely to come at higher valuations. And this is why I think the UK and Europe is well placed because I don’t think we’ve seen that sort of runaway to the same extent that it may have done in the US.
“So the way in which entrepreneurs approach this is to say let’s be sensible about this, what makes sense to us is to build sustainable businesses, therefore we can do this with X amount of money at Y valuation, which suits us, which suits the investors, and that’s the aspect in order to take those businesses forward.”