Sep 20, 2024, 3:30 AM ETInterview, Podcast

Molly Alter, Partner (Northzone), $4B AUM | Software for Hardware, EU vs USA, Vertical AI, VC Biases

European VC funding reached approximately $30 billion in the first half of 2024, representing a 12% increase compared to the same period in 2023.
If current momentum holds, 2024 is projected to become the third most active year on record for European VC funding.
Regional diversification is evident, with the UK raising the highest total ($9.5 billion), followed by France ($4.3 billion) which is increasingly establishing itself as an AI hub.
The Nordics are producing a disproportionate number of unicorns relative to their size, a trend recently highlighted by The New York Times.
In Q1 2024, Europe hosted 139 active unicorns, including four new additions such as Wave and Mistral (which secured a $640 million Series B).
Stockholm has demonstrated a "talent flywheel" effect, where alumni from Spotify and Klarna have founded 70 venture-backed companies.
European VC funds have historically generated higher net Internal Rates of Return (IRR) over 10-to-15-year horizons compared to North American funds.
Europe offers capital-efficient companies with lower entry valuations, less local competition, and diverse market opportunities compared to the US.
Despite perceptions of Europe as a "museum," investors favor the region for generating returns for Limited Partners (LPs) rather than chasing hype or deal volume.

North Zone manages $4 billion in Assets Under Management (AUM) across offices in the US, Western Europe, and Northern Europe.
The firm maintains a geographically split investment approach, typically allocating 50% or more of capital to Europe, with a slight emphasis on Europe in dollar terms.
North Zone employs a meritocratic culture rooted in Scandinavian values to minimize internal politics and focus on LP returns and founder NPS.
The firm leverages cross-regional insights to anticipate US market trends; for example, Scandinavian destigmatization of mental health led to an early Series A investment in Spring Health.
Conversely, US innovations in medical scribing (e.g., Abridge, DeepScribe) informed investments in European equivalents like Tandem Health.
Investment check sizes range from $2.5 million at the seed stage up to $50–60 million at the growth stage, with the primary focus between $10 million and $20 million.

Molly Alter identifies "Vertical AI" as a superior opportunity to horizontal AI, as specific domain expertise creates defensibility against generic models.
The strategy focuses on AI tools that integrate deeply into existing vertical workflows (e.g., prescribing medication, billing) rather than standalone transcription or chat interfaces.
"Hybrid SaaS" is defined as the combination of traditional workflow software, AI capabilities, and often fintech or marketplace elements to create defensible moats.
GovDash serves as a prime example of this thesis, using AI to automate government RFP responses (reducing a two-week process to two hours) while providing broader business management tools.
Vertical AI addresses the limitation of generic foundation models by embedding AI into specific, complex, and highly regulated environments like legal, healthcare, and construction.

Hardware software development lags behind general software due to the inability of engineers to intuitively build tools for themselves and the presence of entrenched physical incumbents.
Macro factors driving the current "software for hardware" opportunity include global onshoring, declining birth rates affecting labor, and competition from China.
Legacy hardware vendors are forced to modernize as aging executives retire and are replaced by Gen X/Millennials accustomed to cloud-based collaboration tools.
The AI hype cycle pressures hardware manufacturers to adopt modern cloud infrastructure to enable AI integration, which is impossible with jerry-rigged Excel and on-prem legacy systems.
Significant capital flows exist in this sector, evidenced by companies like Toyota and Boeing paying tens to hundreds of millions annually for tools like MATLAB and Simulink.
Current investment focus areas include Computer-Assisted Engineering (CAE) tools, simulation software, and program management systems utilizing "digital threads" similar to F1 methodologies.

Key founder traits include extreme intensity (viewing company building as a full-life pursuit, akin to Olympic training) and a customer-centric ego that prioritizes data-driven listening.
Networking dynamics show that strong professional connections remain "sticky" even when investors move across geographies or firms over decades.
Intellectual honesty regarding biases (sunk cost, discovery, angst) is critical; recognizing these biases is viewed as a primary mechanism for improving investment decisions.
North Zone differentiates its operational model by maintaining an even split between sourcing and platform support, prioritizing post-investment value creation.
Molly Alter's personal experience sourcing Frame.io as a video creator illustrates the strategy of investing in tools she personally validates, which led to a $1.2 billion exit to Adobe.

European regulations (GDPR, energy restrictions) are viewed as drivers of innovation rather than purely negative constraints, forcing creative solutions in clean tech and data privacy.
Environmental regulations have directly enabled the growth of companies like Flower, which uses AI to optimize grid energy storage and battery demand management.
Geopolitical risks including declining birth rates and energy dependence in Europe remain valid challenges that may cap the ceiling of growth.
Future trends indicate a continued shift toward "hybrid" business models where pure software or pure AI is insufficient, necessitating integrated platforms.