Early Facebook investor Accel raises $650 million fund to back European and Israeli startups

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

The firm, which made prolific early bets on the likes of social media app Facebook and music streaming service Spotify, said in a press release it raised the fund to “support ambitious founders building global category-defining companies” in Europe and Israel.

Harry Nelis, general partner at Accel, said the European tech ecosystem in particular has evolved drastically in the nearly 25 years since it opened up its London office as a separate fund in 2001.

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

“Now, there are more than 360 venture-backed unicorns across Europe and Israel, and the whole ecosystem has evolved from one that raised about $1 billion in capital to now $66 billion in 2023.”

Nelis said Europe is producing a more promising talent pool now thanks to a “flywheel” of experienced employees from other companies that have hit unicorn status becoming founders of new companies themselves.

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

Nelis noted that there are emerging geographies in Europe that investors aren’t paying as much attention to, but that are showing huge potential in technology innovation.

He called out Lithuania and Romania as examples of countries where major technology successes are emerging. In Lithuania, for example, secondhand marketplace Vinted is now a $4.5 billion “unicorn” company, while in Romania, UiPath has attracted a $10.9 billion valuation in 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 as funding for high-growth tech startups has plunged sharply in the past two years.

That’s as 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 technology valuations.

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

The firm managed to close its eighth fund for the region in just a couple of months, according to a source familiar with the matter speaking on condition of anonymity, since the details aren’t public.

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

Climate-focused VC firm World Fund closed a 300 million euro 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 inching up since the start of this year — and he expects Europe to follow the trend.

“It’s on its way back,” Grimeland said in an interview at Antler’s London office in March. “We see 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 U.S. tends to always act quicker.”

Even as startup funding has waned, though, excitement about artificial intelligence has led to a rush of capital flowing into startups focusing on AI.

For example, the likes of OpenAI, Anthropic and Cohere have raised billions of dollars.

Nelis suggested that Accel doesn’t want to get distracted and focus solely on a hyped area 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’re lucky that with DeepMind here in London and with Fair [Facebook AI Research] in Paris, there’s at least two big centers that have great AI expertise,” Nelis told CNBC.

“Together with smaller centers across Europe, we think that Europe is extremely well-positioned to create some important AI companies, the same way we created important enterprise businesses.”

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

He added that he thinks Europe will excel when it comes to AI application companies, as opposed to foundation models where U.S. technology giants have a big advantage.

“My expectation is Europe is going to generate some really interesting AI application companies,” Nelis told CNBC. “The foundation layer is a layer where at least for now the U.S. incumbents currently have a real advantage — they have the advantage of compute power, large datasets, and lots of capital.”

The firm 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 his company partnered with Accel last year as the firm’s team knows “how to strike the right balance between visionary and useful technology.”

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