Venture capital firm Accel raises $650 million fund for Europe and Israel

Venture capital firm Accel said on Tuesday it had raised $650 million for its eighth fund aimed at investing in early-stage European and Israeli startups, in a sign that the venture capital market may be showing signs of recovery.

The company that made fruitful early bets on applications like social media Facebook and a music streaming service Spotifysaid in a press release that it raised the fund to “support ambitious founders building category-defining global companies” in Europe and Israel.

Harry Nellis, general partner at Accel, said the European tech ecosystem in particular has evolved dramatically in the nearly 25 years since he opened his London office as a stand-alone fund in 2001.

“The environment has changed dramatically since then,” Nellis told CNBC. “People would ask us, can Europe generate $1 billion results?”

“There are now more than 360 unicorns backed in Europe and Israel, and the entire ecosystem has evolved from one that raised around $1 billion in capital to now $66 billion in 2023.”

Nellis said Europe is now creating a more promising talent pool thanks to a “flywheel” of experienced employees from other companies who have reached unicorn status by becoming founders of new companies themselves.

A report published by the firm last year, citing data from Dealroom, showed that employees of 248 venture-funded unicorns in the region nurtured 1,451 new tech startups in Europe and Israel.

Nellis noted that there are emerging geographies in Europe that investors are not paying as much attention to, but which show huge potential in technological innovation.

He pointed to Lithuania and Romania as examples of countries where great technological successes are being achieved. In Lithuania, for example, second-hand marketplace Vinted is now a $4.5 billion unicorn company, while in Romania, UiPath attracted a $10.9 billion valuation on the public markets.

Accel expects to invest in between 25 and 30 companies from its latest early-stage fund.

The launch of Accel’s eighth European fund comes amid a steep decline in funding for high-growth tech startups over the past two years.

That’s because macroeconomic uncertainty caused by Russia’s full-scale invasion of Ukraine, coupled with higher interest rates from central banks, has caused something of a reset in tech valuations.

Against this backdrop, Accel’s ability to raise such a large fund for European and Israeli ventures suggests that the gloomy environment for tech may be showing signs of easing.

The firm was able to close its eighth fund for the region in just a few months, according to a source familiar with the matter who spoke on condition of anonymity because the details are not public.

It comes after Plural, a venture capital firm founded by the founders of Wise, Skype and Songkick, raised its own €400 million ($431 million) fund in January to back tech startups in Europe.

Climate-focused venture capital firm World Fund closed a €300 million fund in March.

Magnus Grimeland, CEO of seed investor Antler, told CNBC earlier this year that early-stage venture activity and private company valuations have been rising since the start of this year — and he expects Europe to follow suit.

“It’s coming back,” Grimeland said in an interview at Antler’s London office in March. “We’re seeing a lot more activity in the portfolio. In New York, we made eight investments in January and seven of them already have follow-on investments. The US always moves faster.”

Although startup funding has declined, the excitement surrounding artificial intelligence has led to an influx of capital flowing into AI-focused startups.

For example, companies like OpenAI, Anthropic and Cohere have raised billions of dollars.

Nellis suggested that Accel doesn’t want to get distracted and focus solely on a hyped field like AI with its latest fund.

Instead, he said, the firm will focus on using its “prepared mind” philosophy — which encourages deep focus and a disciplined and informed approach to investing — to approach its next startup bets.

“We are lucky with DeepMind here in London and with Fair [Facebook AI Research] there are at least two big centers in Paris that have great expertise in artificial intelligence,” Nellis told CNBC.

“Along with the smaller hubs across Europe, we think Europe is extremely well positioned to create some important AI companies, in the same way that we have created important enterprise businesses.”

Nellis said the way Accel thinks about AI can be divided into three layers: a “foundation model” layer, referring to the algorithms that underlie advanced AI systems, a “tooling layer” that helps of the applications that sit on top of these algorithms to run, and the “application layer”.

He added that he thinks Europe will excel when it comes to AI application companies, as opposed to base models where US tech giants have a big advantage.

“My expectation is that Europe will generate some really interesting AI application companies,” Nellis told CNBC. “The core layer is a layer where, at least for now, the incumbents in the US have a real advantage — they have the advantage of computing power, big data sets and a lot of capital.”

The company has previously invested in Synthesia, a $1 billion generative AI startup backed by U.S. chipmaker Nvidia that helps companies make presentations with AI-generated avatars.

Victor Riparbelli, CEO and co-founder of Synthesia, told CNBC that his company partnered with Accel last year because the firm’s team knew “how to strike the right balance between visionary and useful technology.”

“Over the past year, there have been a lot of cool demos and maybe too much froth in the AI ​​industry,” Riparbelli told CNBC via email. “It was really important for us to partner with a fund that is as focused as we are on delivering real, tangible business value.”