There is a common investor behind several of this year’s biggest money-making events in Silicon Valley: A venture capital firm that has not historically been regarded as a tier-one player in the United States.
But rivals and fans alike have noticed the year that Index Ventures, an investing firm born in Europe that has gradually encroached on the prestige of its top American competitors, has had in 2018. When the music-speaker company Sonos went public on Thursday, it was Index’s fifth billion dollar cha-ching moment — or in the parlance of Silicon Valley, an “exit” — far more than any other year in Index’s history.
Its sixth exit came, well, that same day, when Cisco purchased Duo Security for $2.3 billion.
Not including Duo, Index invested $250 million into those five companies — Sonos, Dropbox, Zuora, iZettle and, most crucially, Adyen — for stakes that are today worth about $3.6 billion.
We chatted with Mike Volpi, one of the firm’s senior-most partners here in the United States, about whether there’s anything behind the rush of acquisitions and initial public offerings beyond just dumb luck. This interview, edited for length, was conducted before the Duo Security acquisition.
Recode: You guys are really, really active in Europe. A lot of funds are not. People started doing things there and retrenched. Obviously you guys started there — are you surprised that there’s not more competition among the U.S. VC set in Europe? Are they making a mistake by sitting it out?
Mike Volpi: I think they’re doing great sitting it out. [Laughter]...
... I do think that in the last two years, there’s been a couple of pretty seminal events for Europe. Spotify, which is not one of our investments, but it’s worth $30 billion, and Adyen, worth $17 [billion], is going to open the eyes of European entrepreneurs.
Historically, I think that there was a comfort with a, “Oh, I got a $4 billion exit, that’s great.” Now, people are going to start shooting for a higher mark because of the examples that these companies have set. Just as in the U.S., Facebook sets a goal, or Twitter or Snap set a goal, for what the next entrepreneur is thinking about, “That’s what I want to see.”
You think that other firms here just don’t see the same — or at least before Spotify, before Adyen — just didn’t see the same possibilities?
If you think about the financial mechanics of it, when your exits are smaller, you have to have more of them. If you want to have more of them, you have to invest early. If you have to invest early, you need the team, bodies, people running around Europe, etc. None of the U.S. firms wanted to make that investment. They just wanted to skim the best ones, so they waited until later, or they just didn’t do it at all.
I think the Spotifys and the Adyens of the world have shown that you can show up later and add capital, but they’re still not making yet the investment in the early, early stages. That may change because of the outsized outcomes, but for now, I think the ecosystem is staying pretty stable in Europe.
On 2018 for Index
Obviously you can’t predict M&A. You can’t sit there at the beginning of the year and say iZettle’s going to be acquired. When you think back on the beginning of the year, is it just kind of a coincidence that all these exits are happening? I assume this is the most you guys have in a year. What were your guys’ expectations? I guess on IPOs you had some read on how your companies were thinking.
Two factors: One is it just works that way. Things happen and they line up. So, luck.
The other one is that this year coincides with us launching our U.S. office about seven years ago in 2011.
Some of these are your first U.S. batch?
The first investment we made was Dropbox — or not first, but [first] that went public. Sonos was an eight-year-old investment that we made. Zuora was one of the first investments I made when I came here.
You’re a farmer. You’re putting seeds in the ground. Now, seven years later, you’re starting to see the product of that. I think we have this confluence of events that are happening where the European market is maturing nicely and our U.S. portfolio is starting to bear fruit. I think that combined has created this effect.
The truth of the matter is we don’t expect every year to look like this. We’re lucky this year. But I do think that the U.S. portfolio in particular should continue to — because we’ve been farming for awhile — we should start to see some of it harvest, and I think Europe is going to get more and more exciting.
In Year Three of the U.S. fund, for instance, you guys obviously weren’t having huge exits. Do you feel like this year enhances your profile — in terms of up and down the Street, Sand Hill — just in terms of what Index is?
We sort of gradually built up the practice, and the more people, the more visibility you have, good outcomes translate to a little more awareness for us.
I wouldn’t say that we feel like we’ve arrived, but we feel like, “Okay, people are paying attention to us.” Things are coming our way, and I think we’re being recognized for a certain amount of differentiation of value added that we have relative to the pack.
Dropbox, obviously a $10 billion exit. There’s a lot of talk in Silicon Valley about ownership targets. Do you wish you’d owned more of that? I think it was like 5 percent?
Undoubtedly. It’s an amazing company; we should’ve owned more. But for us, it was an incredibly important investment. Because it was series B, and because it gave us access to an extraordinary community of people at Dropbox.
I feel like that’s the company that you guys were probably most closely associated with in the U.S.
No, look, as investments go, it’s a very good investment for us. Not the best investment we’ve ever made. Obviously we made more money on Adyen.
But in terms of the cultivating — our business is a very network-centric business. It’s about the relationships you have, ultimately. If you measure the relationships that we’ve been able to establish through Dropbox, I think it’s one of the most valuable investments we’ve ever made.
Last thing is fintech. Obviously you are closely associated with that. There’s a loud — maybe it’s a minority, it’s impossible to tell — but there’s a lot of VCs who are not excited about fintech. You obviously have had some success, and Adyen, as you talked about, is a $17 billion company. Why are there people out there who say fintech’s a not good bet? Why are they wrong?
I would argue that what’s happened in fintech is there is a life cycle. So five-seven years ago, people thought it was nuts to invest in fintech because you have incumbents: Banks, insurance companies, whatever, they’re massively powerful, too big to fail, blah, blah, blah. Why would you ever go up against those guys?
… It turns out that, like any business, it’s nuanced. It’s complicated. You have to know what you’re doing. You have to understand interest rates and a bunch of foreign objects. People who jumped into it without fundamental understanding got hurt. Now, the people that got hurt are saying, “Aw, I don’t like that business so much. It’s hard.”
I would say we completely disagree. Well, we agree to the extent that it’s hard, you need to know what you’re doing, you need to understand the sectors and whys and the players and so forth.
It doesn’t make any sense to me that you argue that the sector isn’t good, because it’s an enormous portion of the economy and there’s enormous inefficiencies that exist in it. Like, huge. All the little fees that add up to everything that you do.
If you polled the average American [on] how they feel about their relationship with Wells Fargo, Bank of America or Chase, it’s not highly positive. You see what those traditional incumbents are doing to American consumers, or consumers around the world, it’s not positive ...
So the sector is definitely lucrative. The one thing that we’ve had in our advantage that I think other firms have not had is that regulations are easier in a bunch of geographies in Europe.
Why do you say you’re “intermediate-shy” on crypto?
At the end of the day, I think our true north has always been: “Okay, tell me what it is that a consumer gets to do, or that an enterprise gets to do, because this thing arises.” Why is Robinhood better? Robinhood is better because a consumer gets a great service out of this thing they didn’t have access to. It’s commission-free trading. Other than capital appreciation, what can you do on cryptocurrencies that you couldn’t do before? Name one thing.
... That’s the way we feel about it. So yes, we’ll see. There’s undoubtedly a large number of very intelligent people working on the problem. When they come up with something good, we’ll invest in it.
This article originally appeared on Recode.net.