Molly Alter, Partner at Northzone, $4B AUM

EU vs USA, Software for Hardware, Vertical AI, VC Biases

Today we have Molly Alter, Partner at Northzone, a $1.2B fund X with around $4B AUM. Molly joined Northzone in 2023, bringing with her an impressive track record of 12 investments from her time at Insight Partners and Index Ventures. Her portfolio includes notable successes such as Lightricks, Glia, Tractable, and Frame.io, which she sourced and served on the board of before their $1.28B sale to Adobe.

We discuss her successful investments, founder qualities, VC biases and decision-making, as well as the firm's global approach to identifying opportunities.

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We dig further into the EU vs USA debate, realistic venture outcomes, and her personal perspectives on the different regions. Alter believes in the potential of Europe's tech ecosystem, citing higher net IRR for European VC funds compared to North American ones over 10-15 year horizons.

Focusing on meritocracy and founder-friendliness with a balanced approach between US and European investments, Alter also explains why she's bullish on workflow SaaS and vertical AI. Despite changing market conditions and valuation multiples (5-6x down from 2021’s 20x), she goes deep into the specific emerging opportunities in vertical AI and software for hardware.

Full Q&A, resources, timestamps & more below

→ Follow Molly Alter on X

The Debate: EU vs USA

Europe has better VC returns than the U.S., but productivity in the U.S. far exceeds the region

We go deeper on this in the episode, including a pushback on the innovation ceiling in the eurozone due to it’s geopolitical risks, energy dependence, regulations, and conservative outlook on tech.

“European VC yielded 20.77% net IRR (internal rate of return) over 10 years, compared to North American VC’s 18.18%. Over a 15 year period too, European VC has better returns: 16.57% IRR to North American VC’s 16.09% IRR.”

Productivity in US vs Europe

Source: Financial Times

Resources

• Overall Stats: Venture Pulse Q2 2024 [KPMG Private Equities]

• PitchBook's Q1 2024 European VC Valuations Report - Valuations, trends, and outlook [Tech EU]

• European VCs outperform US VCs over 10 and 15 year horizons [Sifted]

• Can This Country Show Europe How to Compete Again? [NYT]

  • Sweden outperforms in tech, has a roster of $1 billion-plus start-ups and could be a model as the European Union refigures its growth policies.

• Perspectives: From Pixels to Prototype – Software for Hardware [Northzone]

Timestamps

(00:00) The EU vs USA Debate

(03:07) Molly Alter’s Career Journey

(07:26) Insights from Working in Different VC Firms (Insight, Index, Northzone)

(11:38) Investment Focus and Thesis

(15:28) Impactful Investments: Frame.io and Glia

(18:54) Qualities of World-Class CEOs and Founders

(22:17) Northzone: History, Strategy, and Values

(26:06) Global Reach and US-Europe Investment Split

(29:13) Defending European Tech Ecosystem

(32:27) Innovation from Restrictions in Europe

(35:35) Software for Hardware: Opportunities and Challenges

(42:08) Specific Areas of Interest in Software for Hardware

(45:05) The Future of SaaS and Hybrid SaaS Models

(47:30) Example of Hybrid SaaS: GovDash

Q&A with Molly Alter

Since then you moved to London for Index and now you’re back in the states at Northzone - such an incredible journey and I’d love to know, what are your 4 or 5 takeaways from the 8 years you’ve been working in venture across various funds?

• No matter what firm you’re at, your network stays mostly the same, and people have good memories, so every interaction matters – evidenced in this conversation!

• Cliche but the people at a firm are the most important thing - everything else, fund size, brand, should be necessary but sufficient conditions.

• Especially for younger VCs, build your own moat. Nobody wants to look at the boring and complex stuff? Perfect opportunity for you

• Volume matters - your ability to pick is directly correlated to the size of your aperture. Meeting 5 vs 10 companies per week. Same with hiring. 

• Know your biases. Some I think about… 

Do you still travel back to London for work? Any surprises from your time living there? Any recommendations?

• Surprises: the delta between the queuing “hello love” daytime persona and the pub belligerent nighttime persona. Never have I seen such a werewolf-like transition from day to night 

• Recommendations: Gelato: Romeo and Giulieta, Bilmonte. Caesar Salads: I had a great one at the Colony the other day. They let you decide how many anchovies.  

Give your experience at megafunds, I’d love to get your perspective on the difference between large institutions with teams of 30-50-100+ people versus smaller shops - do you get more resources? Do you have to write more reports? More bureaucratic buy-in from partners?

• So there are a number of dimensions in which firms can differ in their approach: Sourcing, diligence, picking, supporting, back office. What I’ve learned so far is that the size often doesn’t correlate with what you’d expect it to. Firms decide what they want to spend their headcount on and that’s typically one of the most strategic decisions one can make. So there are huge firms but the headcount is very focused on sourcing and all the DD or legal work is outsourced. Or there are small firms with few associates but a lot of data scientists to surface deals using technology. To really understand how a firm works it’s important to not just understand the overall size, but actually the composition of their team and how that is distributed across those dimensions. I love sourcing and diligence and so would hate to be at a firm that outsourced the DD process to Bain. But knowing this stuff going in is important. 

For those who may not know, what are you investing in now? What’s your thesis and stage of check?

• Mostly Vertical AI, anywhere from $2.5m to $50-60m. 

What have been your most impactful investments to date? 

• Frame.io - the world's leading video review and collaboration platform

  • Adobe buying Frame.io in $1.28B deal [TechCrunch]

  • Frame.io CEO on Selling to Adobe for $1.3B, Working with SNL and High Pain Tolerance [Logan Bartlett]

• Glia - unified interaction platform transforms how financial institutions connect with their customers using Messaging, Video, Voice, CoBrowsing, and AI

  • Glia raises $45M at a $1B+ valuation for an AI-based CRM that lets agents get hands-on to help [TechCrunch]

Europe’s Landscape

Shifting to Northzone’s strategy, the fund was founded in 1996 in Europe and has strong connectivity to the region, could you share more on the strategic advantage, how the fund was founded, and it’s AUM?

• Founded on the shores of Norway. Entrepreneurs themselves–looked for founders they would have wanted to work with. Pioneered idea of being founder friendly in Europe long before that became a thing. 

• Of considerable note, the shores of Norway were not exactly abounding in tech opportunity in 1996. We went global from the start and this is a huge strategic advantage. Fast forward to today, and we’re a $4B AUM firm with offices throughout the US, Western, and Northern Europe. 

• Scandinavian culture is extremely meritocratic. This helps us avoid hype cycles throughout the decades and focus on technologies and business models with real substance. It also helps us almost completely avoid internal politics, which is really special. Even though investing cycles can take a long time to show up, there are actually really clear numbers on a page that we are accountable to our LPs for. VC firms should’t really be political–I’d understand it more if you were putting on a broadway show and politics ran high because someone’s performance on stage might actually be hard to measure. But investing firms should be able to put aside egos and focus on deliverables and clear metrics like DPI. That’s what Northzone does really well.  

Okay, this is a challenger question, and we’ll switch to the side of VC/macro land that likes to poke at the decline of Europe but I’d like to be aware of the macros against the separate niche that is VC, as well as how they may affect tech innovation.

To first lay it all out, could you share more on the trends of VC dollars, funds, companies, unicorns & success stories that have come out of the region? (i.e. # of unicorns in US vs EU, # of venture dollars, # of venture firms, country w the biggest growth)

Funding

• VC funding reached $29.3 billion in the first half of 2024, a 12% increase compared to the same period in 2023.

• Q2 2024 saw VC investment rise to $17.8 billion, up from $13.9 billion in Q1 2024.

If the current pace continues, 2024 could become the third most active year ever for VC funding in Europe

Regions

• ​​The UK has raised $9.4 billion in total, with $6.8 billion going to London-based firms. France ranks second with $4.3 billion, with Paris emerging as an AI hub

Deals

• As of Q1 2024, Europe had 139 active unicorns, with four new additions during the quarter. Notable mega-deals include Wayve's $1.1 billion Series C round and Mistral AI's $640 million Series B round

Talent

• Flywheel of talent and company builders coming out of multiple geographies, for example, Spotify and Klarna alone has spawned 70 venture backed companies in Stockholm

Now when you compare to the US, of course the US numbers might look more aggressive. But ultimately we’re in the business of making money for our LPs, which doesn’t always mean investing in the markets with the greatest number of deals or highest valuations. When you look at the kinds of companies being built in Europe–capital efficient, better entry prices, often less competition, diverse market opportunities, it’s no surprise that over 10-year and 15-year horizons, European VC funds have yielded higher net IRR compared to North American VC funds.

• European VC achieved a 20.77% net IRR over 10 years, surpassing North American VC's 18.18%

Is there real concern for degrowth/decline in Europe for technology innovation due to their strict regulations & restrictions? Free speech? Access to the internet? Energy dependence & power?