How VCs are adapting to meet an increasingly global startup market

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Good morning my dear friends, I trust you are well. It’s the weekend! Here’s hoping you are going to consume more sugar in the next few days than your doctor would approve of. After all, we all die in the end. And on that encouraging note, let’s get to work!

TechCrunch’s recurring coverage of venture capital trends has taken on an increasingly global tilt as the startup market has expanded to fill every geography. Hence our ramping coverage of India’s startup scene, not to mention our increasing focus on the startups coming out of the African continent.

With so many startups raising so very much money, it can be hard to keep it all straight. But we’re not the only organization with its eyes on upstart technology companies busy adapting to the new global startup reality. Venture capitalists are as well.

We’ve seen VCs shake up their operations to better suit a flat world for technology innovation in recent years. Larger funds with more partners to spread focus, for example, or the creation of country- or region-specific funds.

White Star is one such firm with an increasingly broad focus. The venture group recently closed its third fund, a $360 million vehicle, and TechCrunch caught up with founder Eric Martineau-Fortin a few days back. But instead of chatting about valuations, or sectors, we mostly talked about geographies.

Martineau-Fortin lives in Guernsey, a small island that sits roughly between France and the United Kingdom. Residing between two major landmasses is fitting for the investor, as his firm’s first fund focused on the United States and Europe, roughly splitting investments between the two.

White Star’s second fund expanded its geographical purview to include a modest Asia focus as well. The group’s third fund will split roughly 40/40/20 between America, Europe and Asia, Martineau-Fortin said.

Notably, the group doesn’t actively pursue the Indian market. Which stood out, given how much capital is flowing into the country, but White Star keeps its focus more on the South Korean and Japanese markets, so it can invest in Asia more broadly while not putting India atop its list.

I riffed with Martineau-Fortin about other markets. He had rather positive things to say about Brazil’s startup scene — not a huge surprise with Nubank’s IPO in the offing — and Mexico. More simply, the Latin American venture capital market is respected even by investors that don’t have a focus there.

The world’s venture market remains uneven, despite some flattening. The United States saw $72.3 billion in total VC activity in Q3 2021, per CB Insights data. Asia as a whole saw $50.2 billion. Europe managed $24.2 billion, and Latin America just $5.3 billion. That means that there’s likely arbitrage out there for the investor willing to add new time zones to their mix.

Looking ahead, White Star could split its investment focus into thirds among the U.S., Europe and Asia. I wonder if that will become a normal split in time. After all, the internet is everywhere at once — sans North Korea, China and a few other markets — so why not put capital into companies, well, everywhere?

The future of consumer investing

Taking a hard right turn this morning, let’s talk about consumer investing in the United Kingdom.

I promise I am going somewhere with this!

The Exchange caught up with Freetrade this week, auspicious timing as our call came in the wake of Robinhood’s poor earnings report. As a reminder, Robinhood shares fell after the company announced a sharp sequential-quarterly revenue decline, falling active users and slim figures on total funded accounts.

The short answer to what happened from Q2 2021 to Q3 2021 at Robinhood is that crypto trading fell off a cliff on its platform, leading to a lackluster revenue result. The company’s Q4 is forecasted to be even smaller than its Q3. Not good!

I expected the Robinhood results to prove indicative of what Freetrade was seeing amongst its own user base. But, per the company’s CEO Adam Dodds, nothing of the sort. Indeed, the company recently announced that it has reached one million users, but more importantly that it has secured 110,000 new funded accounts thus far in October. That’s a huge portion of the company’s aggregate user base in a single month!

That hardly bearish fact in hand, Dodds doesn’t see Freetrade’s core market of the U.K. as nearly tapped out, and the company has expansion plans involving Canada, Australia and more coming in the next few months. Along with, yes, crypto trading.

The other difference of note between Robinhood and Freetrade, apart from their presently disparate user growth figures, is that the latter company doesn’t engage in payment for order flow. Instead, Dodds explained, the company makes money from subscriptions, a small slice of FX transactions and interest on held user cash.

The subscription element is key to the company’s long-term value, I reckon. Why? Because recurring software revenues are investor catnip, and Dodds said that something akin to a quarter of folks opt to pony up for the paid version of its service.

If that ratio holds up — or merely experiences modest declines — Freetrade could build a huge software business. Given just how much more penetration the startup anticipates in its home market, let alone foreign shores, there’s money to be made. More when Freetrade raises again.

— Alex