E338 | Chris Wade, Isomer Capital: Mid Year Review 2024: European Fundraising Sentiment

0:00Hello, everyone, and welcome to another special EUVC podcast episode. This is what we call the mid-year sentiment review with Chris Wade from Isomar Capital. We've done this a few times already. We normally do at the end of a year and start of a new year. But we thought this is such an interesting conversation and we've gotten really good feedback that we felt we had to put a finger on the pulse of the ecosystem in kind of the halfway of the year.

0:35and a liar. This is a union of values. United and determined, we can serve as a model for other regions of the world. The nature of a problem requires a European response. Europe is a story of new beginnings. Let's start acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Chris, good morning and how are you today? Good morning. Well, I work in venture, so I'm always intrigued, excited and ready for your questions. Awesome, Chris. So I think, you know, the kind of words kind of around the playground, so to speak, I like to think of our venture as a playground because it is crazy fun, is that VC sentiment is quite positive this year.

1:33People feel and seem quite excited. Would you agree with that? And why do you think that's the case? Yeah, look, I think this market continues to be extremely difficult to accurately talk about. You know, we have the amazing news of WIS being acquired by Google, which sounds like it's just right out of 2021. But you continue to hear of significant write downs and you can continue to hear of difficult times for companies. And the deals being proposed are pretty prunitive. If one was just to look at the numbers, European venture is quite low in terms of commitments. and also in terms of LP commitments and also returns, you know, going back some time before you get to these levels.

2:36However, the big caution that I have to say is everybody is comparing 2024 really with 2021. And 2021, as I think I said December last year, was a complete anomaly. I think the few companies that exited successfully, I mean really exited successfully in terms of creating liquidity for them and their VCs, then 21 was great. For the vast majority of others, it was a very uncomfortable time. It was uncomfortable because valuations were clearly insane. It was uncomfortable because what you do as a VC, you've taken capital from your LPs, you're given fees to deploy it. So what do you do? You just stop deploying?

3:27Well, clearly not. So it was a very uncomfortable time from that point of view. Now, to the comment of LP sort of appetite, what we observe in the first six months of this year is that most of Isomer Capital's portfolio VCs are raising, they're raising quicker, and they're raising to their target amounts. I would not say they're all oversubscribed. That would not be the case. But they are getting raised in a timely sort of fashion. Now, we have a sort of an input, I suppose, on what's going on when the industry gathered in Berlin at Superventure and all the nice events that were around Superventure.

4:13And a couple of things that came out of that. Well, in the first quarter of 2024, 14 billion was invested in European venture. And that compares with 9 billion in 2020. So you're seeing some nice uplift from that point of view. So a bigger macro sort of point is the tech ecosystem. So this is now everything that touches tech is now 3.4 trillion euros in Europe. And that's a big number in anyone's book. We have similar number of startups. In 2023, in spite of everything, Europe created 40 unicorns. It's interesting listening to Ross Morrison's Adam Street report that the fundamental sort of ratios of, you know, what creates all the value in U.S.

5:15venture and what creates all the value in European venture is extremely similar. i.e. the power law is operating well. 20 % of the cost is creating 80 % of returns. Europe continues to have this dynamic of building companies with less capital, which means that the benchmark firms like Cambridge Associates continue to report that European venture is doing better from a returns perspective than the US. Now, I will finish this little section, unless you're speaking, by saying I think sentiment is more positive because it's a more rational market, and it's a market that we can understand. And let's be clear, Europe is still producing some amazing entrepreneurs and some amazing companies as a result.

6:19But two big things that are on the horizon. And I don't have my crystal ball this morning to know exactly when these things will happen. But I'm talking about the IPO of Revolut and Klarna. They are on the books. They will happen. I think they will happen at a moment where they can be successfully launched. And frankly, I don't care where they are. What I care about is that they are successful and they continue to build the amazing companies they are. But I really believe it will be a sentiment change for European venture in a positive way. So let's park that topic for a while because I do want to come back to that because that's very exciting for anyone who's in our little European, now less little ecosystem.

7:13But you started off by saying that there are many comparisons with 21. I'd love to try and understand that and if possible debunk that. Why do you think that's such a common place thing, right? Why are we foreseeing media, even some so-called experts, using 21 as the benchmark when we are in 24? Yeah. Well, you're in the media business, David. You'll be able to explain to our listeners why it is bad news sells better. Fundamentally, that's it. Venture capital is a cyclical business. I doubt we'll ever avoid these sort of boom and bust sort of cycles. It's somewhat the nature of our business. And we overcorrect.

8:04As you come out of a negative cycle, we overcorrect. When we come, we're at the top of a market, we overcorrect going down. And I think, if I was to sum up what I'm saying in the previous section, I'm saying, look, we finished overcorrecting on the downside. We're now in a more neutral position. But I really don't understand why people keep referring to 2021. It was an aberration. It was not good for venture, to be clear, as I said, with a few exceptions of those that were able to take advantage of that session. European venture, or venture in general, is much more stable when things are rational.

8:50You can understand that you're paying, yes, a reasonably significant valuation for the next generation company that's going to change the world, that's okay. But to what extent? And actually, for it to be completely irrational just means it makes it impossible for companies really to survive. I can think of several companies that raised capital in 2021 with incredible valuations relative to their revenue have just spent the last three years desperately trying to to get their revenues growing growing growing so that they have some chance of a reasonable valuation when they do their next round which inevitably they will do because they're not profitable i love i love what you said about cycles and you know it made me think of um of ray dalio's quote the founder of bridgewater associates where he said if you don't study history you're going to be blindsided by the future.

9:50I think that's a really powerful quote that even though Ray Dalio is not a VC geek like us, I think it does very much apply to venture as well. I think that's right. And I'm sure I've said this before, so apologies for those that have listened to this before. I was building technology companies in 2001 and went through the very significant sea change in sentiment in 2001 where all developmental contracts got stopped, all venture stopped, all belief in technology stopped temporarily. But the reason I'm mentioning is that the indications that we now know were the lead-up to that bubble bursting, boy, were they similar to what we saw in 2020.

10:48I mean, just... And that's exactly the point. It's a reasonable quote to make. So you mentioned Isamer's experience and some of the fundraisers going on in the portfolio of GPs there. So I think the obvious question I have to ask is the market is very much alive for emerging managers. I guess that is the case. But as you said, it's still the power lot. 20 % of the cost creates 80 % of the returns. And that applies also on the emerging GP side. So we're having a lot of conversations at the moment with, and this is why this thing we do, talk to VCs and investing in VCs is so exciting because they're all brilliantly smart people, know far more about technology and marketplaces than I do.

11:42But we're talking about the subject that is AI, just taking that as an instance, is it a technology so important, so powerful that there is going to be some fundamental change to the power law, i.e. everything you invest in AI will be successful? Now, my view is no. I mean, I've been through the cycles of the internet, the mobile, social media, crypto, and now AI, and they all have that similar type of characteristics. First of all, some VCs change their names to reflect the latest trend or fashion industry, well, there's a particular fashion industry and venture capital. We dress equally well, you mean.

12:35Well, no, I mean we follow trends. We follow trends from that point of view. The more saved, the more experienced, the more people who have just been around a long time understand that few AI companies will become important financial institutions in the sense that they'll generate very significant sort of businesses. Even fewer will IPO. and a small proportion will exit. And the way I think about exits is someone's got to buy those companies and they're not going to buy tens of AI companies. They may buy one or two. Once those acquiring universe has made those acquisitions, there ain't a lot of place to go for all the others.

13:27So on the topic of acquisitions, which is the topic of exits as well, You mentioned Revolut and Klarna. It goes without saying why that matters, right? DPI, I think anyone in the industry understands that clearly quite well. Would you say it's also a bit about, you know, coming back to the topic of the sentiment review? It's also about the perceived sentiment towards Europe, of what Europe can produce. I'd love to hear you expand a bit on that. And, you know, how do you see this developing over time? We've had public companies coming out of Europe for some time. I think we've now convinced the world that we can produce large, successful companies.

14:13But there is always the cynical comment, yes, but you haven't produced, you being Europe, haven't produced a Google or an Apple or or etc. And I think Revolut and there are others as well, by the way, have that potential to become a real world leader. You think about the geographic reach and applicability of Revolut, for example. It's really, really significant. And so I think it It does a number of things. Clearly, there's lots of people invested in Revolute, so there's going to be a payday for them. And that will trickle through, as good people would like to talk about their successes quite a lot.

15:05So that will become a known fact, and that will improve sentiment. But I think more fundamentally, when we say, well, the leading mobile banking company, and I still know that there's annoying things like banking licences need to be sold for implicking the UK for revenue. So I'm not saying this is gun and dusted, but I do think we will have for the first time, in the same way we had with Skype, I would argue that TransferWise or Wise as it's now called is globally known. And so I just think it's adding to that list. So if you have an environment where these kind of globally important companies can be created and at a sort of lower capital cost than might be otherwise in other markets, then you've got a beautiful moment to be investing in venture capital in Europe.

16:11I don't want to put you in this spot, Chris, but I think it's interesting. When was the first time you heard about Revolut and what was your reaction when that happened? Do you remember? Do you recall? Well, I don't use the answer. I would think at least 10 years ago, and I suspect, like most people of my age, fairly cynical, fairly negative. I use it for absolutely all my exchange transactions right now. I think the user interface is absolutely superb. I think it's a really, really successful company. I couldn't agree more with you. I'm a huge, huge proud user of Revolut as well. As anyone who's kind of interested in the financial markets, whether they're public and private, I do have a little bit of stocks here and there.

16:59And lately things have been quite interesting. And of course this affects our industry, right? I looked at my little micro portfolio. It's going quite well. Love to ask you about it. How do you see this affecting our industry? Well, you know, multiples are back to five years sort of averages. There was a little bit of reduction in multiples in Q2, but this is slightly on the margins from that point of view that we all know about the Magnificent Seven. I mean, that's positive and negative, right? I mean, it's fantastic that technology is driving so much of that market index growth. It's quite scary how big a percentage, I think in something like 30%, that things like NVIDIA actually are of that index.

17:57But what interested me was a comment I heard at Superventure. It was that sort of many software companies, and from here about SaaS-based software companies that are not part of the Magnuson 7 are growing quite a lot faster. And I think that's an interesting point of view. This drive to profitability, slowing down growth, growing profitability, over the last year, profit margins have grown from 5 % to 30%. So I think that's a really interesting point. And I noticed that some of those software companies that are growing at that rate from a margin point of view are slightly unloved, actually, if you look at the public market.

18:48So there might be an opportunity there, but I'd be the last person to say that's what you should be doing. The other comment that I heard at Superventure was that there are over 100 companies that have filed S1s and they're waiting in the pipeline to float. The fundamental difference between those that were in a similar pipeline in 2021 is these companies are all profitable. And so, as a technologist investing right at the beginning of companies in their journey that a few will get to IPO, what do you want to have happen? You want there to be a successful IPO and that company continue to thrive on the public market because it's a good company, because it's delivering value, because it's revenues to grow because it is a profitable company.

19:50You know, I sometimes feel I have to remind people that there is not sort of a parallel universe of finance in startups. It's all the same old boring stuff, you know. Cash flows out the door. You've got no cash. You've got no company. You know, you've got to grow revenues and all that stuff. That's all very boring. The European IPO market is still a question mark. You know, I think we're still sort of, there's geopolitical uncertainties, there's economic uncertainties. And I have to say, and this will be unpopular with some, I don't really care where companies are floated. I think it should be in the market that is the best for the company.

20:38I do not believe we should have a geopolitical agenda here to say that it has to be a European market because that is constraining the company, unless there's really good reasons for doing that. The last thing I want to say about SuperVenture, there was a lovely presentation made that talked about why on earth do you invest in venture? You've got things like private credit, very reliable, will do a 1 to 2x multiple. Buyout will be doing 2 to 4x. Very nice and a lot of money of course goes in that part. But here's the thing. Venture capital has the potential to give you 2 to 8x and in a good year that happens.

21:33I like that Azarup. The last thing I will say about Superventure is if you couldn't attend you missed the awesome European VC awards, which you can see a lot of content about on our podcast and our newsletter. We had a great time awarding some of the best GPs we could find in Europe. Hopefully, we can keep on doing that for years and years to come. Chris was there and he hosted the session. It was really nice. It was a lot of fun. We learned a lot of things that we can do better next time. Like anything new, people are suspicious. they're sort of saying, well, you know, is this real? Even VCs, right?

22:14Amazingly. But I think we had an amazing set of panelists from LGT and Malton and HSBC and Safina, and they provided a quality of assessment that was really great. And I think we had some great finalists and that we will build on that for next year. why are we trying to do this? We're just trying to celebrate European venture as it becomes more and more important in the global venture market. Yeah and Chris I want to personally thank you for being a spokesperson of the European VC ecosystem. I think we need more of that. It's really important and I think you've been playing that role and that's also why I love to do these sentiment reviews with you, by the way.

23:04Let's shift topics for a second. So aside from the European VC awards, Chris, what was the best thing that happened in 2024 so far from your perspective? Well, there are many things and one could talk about hundreds of companies that are really, really exciting. I mean, the rise of biotechnology is just amazing. And hearing entrepreneurs talking about how they're going to change the way we design proteins and how we're going to design new therapies just phenomenal. And the opportunity and the real positivity of changing people's lives is fundamental. But the one thing I wanted to point out, because it's is something I've seen before a long time ago, and that is the re-emergence of venture capital investing in semiconductor companies.

24:02When I was building my first set of companies in Cambridge, there were some companies like Cambridge Silicon Radio. There were companies like Element 14 that one IPO'd and one was sold for, I think,$600 million. and Stan Bowen will correct me no doubt if that's wrong, but it was a big number, and it was a big number relative to where European venture was at that time. This was about 1998, I think, something like that, and they were very successful. However, there was also a great deal of failure. There was a great deal of significant capital requirements for this sector, and effectively it died to death.

24:49So it is really interesting to see that sector rising. I think there's a couple of reasons why that's happening. There's clearly a geopolitical sort of retreat from Taiwan, and clearly European governments are getting involved in funding FAPS, which is important for technology companies. I think venture capital, quite rightly, is looking starry-eyed at NVIDIA's valuation and saying, well, we should be creating some NVIDIA killers. I just want to say one thing about NVIDIA that way. Go look at their stock price for the first 17 years of that company's life. It did not go above a dollar per share.

25:36So this is not an overnight wonder. I think no one believes it is. But if there's any deep tech entrepreneurs saying, when is my day in the sunshine going to happen? Well, I hope it's not 17 years, but it certainly was in the case of NVIDIA. But there are emerging technologies, advanced sensor technologies and silicon photonics. One company that caught my attention in Dresden was a company called Sermon, which is a startup building 3D AI chips using a new technology called Capram that is using the variable capacitance of materials to store outcomes, multiplication outcomes. And this gives this incredible potential of having super high-density chips that are very energy efficient.

26:29And that means they produce a lot less heat. And that means that you can actually increase the density. And this could be a game changer, particularly for AI applications. so I'm excited about the Semiconductor rebirth I think it's funny that you mentioned the Nvidia story and the stock I think if I remember correctly and maybe Chris you remember this better than I do because I was a bit young they almost filed bankruptcy right in early 2000s or something like that they had some major issues in the company right I believe that's the case but I couldn't find any evidence of that so I didn't mention it exactly okay that's on David but i absolutely tried just a remarkable sort of going nowhere stock for 17 years and then suddenly yeah and in our uh i think it was our past sentiment reviewer the one before we we talked about nvidia and arm which is also recent development so we've been we've been talking about this company a bit actually which is kind of interesting so that was a couple of great things that happened in 2024 according to Chris Wade what about the worst thing Chris I talked in the review of 2022 about the enormous human misery that the world is going through particularly to do with wars.

27:53And I continue every day to wake up despondent until I shake my head down and get on with the exciting things I'm doing about where we find ourselves in. We find ourselves in an ever increasing war in the Ukraine. We find ourselves almost over a year now in war in the Middle East And I don't say as a consequence, but I say it's a fact that hate has become a much more populist conversation. The rise of the right, mostly driven by fear, and I understand that fear, by the way. I don't say it doesn't exist, but the fear of economic viability, the fear of being able to continue living their lives. But this is a worrying moment for our world.

29:02We've just had a really sort of sea change of politics here in the UK. And wherever you sit on that political spectrum, there's two things to say. One, we've ended up in a centralist position. And even if you were on one side or the other, you're talking five degrees off that centralist position. So you feel pretty comfortable being in the UK. But that doesn't get over the fact that we've got some really, really negative things going on. I'd love to say some cliche at the end that technology will fix that. I'm not sure it will. I think, you know, in the end, humanity needs to prevail under the logic that there's just about more good than there is bad.

29:51And I think that's important. We could divert and talk about defense tech now, which has arised, but I won't. But that's what worries me. I still think we're in. And, you know, we can have the most amazing startup ecosystem in Europe and the world. But if we're at war, this is a third order. sort of activity what people will ignore. Yeah, for sure. And Chris and I agreed we didn't want to politicize too much this conversation. So that's why Chris was also measuring his words there and why we won't dive deeper into the topic. But I couldn't agree more. On more positive topics. And here I want to go back to our previous sentiment review, European sentiment review, which was recorded roughly six, seven months ago.

30:41And I'm going to quote you, Chris. And you said, so get ready. You said, the one thing that I'm quite bullish on is that as we start to see the interest rates starting to turn the corner downwards, I believe corporates are going to be really ramping up. They're new products, new businesses, which just means lots of more M &A for startups in our portfolio VCs. These new types of AI technologies will be part of the underpinnings of what I mentioned at the beginning of that said podcast episode, which is there's going to be an M &A bonanza at some point. And I think that's just the good old fashioned new technology.

31:18I haven't got the time or the skill to build it myself. I will go and buy a startup. I think that's really, really important. So, Chris, let's all be reminded this was from December 23. So maybe some of the contextual information is a bit less accurate today. But would you comment on your own quote? Yes. Well, look, I stand by this prediction. The fundamentals of that prediction is that there is a significant technology gap in the acquiring universe. And that will need to be addressed at some point. The challenge is time. and actually as I was thinking about this podcast I was reminded in my early sort of corporate career being a product manager of a new company and a very senior executive, a big company, very senior executive said well Wade, I guess they may have called me Chris I don't know anyway, are you going to make the product sales budget for the year and in a flash without wishing to be particularly rude, but it just came to my head.

32:30I was unable to prevent it coming out. I said, yes, just give me 15 months. It created a very nice, friendly response, which was not the intention. The real issue is I figured that lowering interest would be the sort of starting gun of this change in M &A. And yes, we've seen a little bit of interest rate reductions in Europe, but clearly it hasn't happened in the US yet. And I think that's the fundamental reason. I think that what corporations, particularly in the US, are doing and saying, At what point do you feel confident that recession is not happening and the world is more buoyant and then we need to start building more products, we need to start looking at our cost structure, etc.

33:37So that clearly hasn't happened. The current plan is in for Q4. So let's see. Let's review in December 24. As I mentioned earlier, it's quite an interesting sentiment topic. You know, Google is buying this cybersecurity company that started in Israel. And that's a kind of interesting sentiment, by the way, of how the world thinks about Israeli cybersecurity companies. But wherever it came from, it's a big, big deal. and probably I don't say it's the starting gun, but certainly is an indication of what's happening. And we see every quarter lots of 100 million euro dollar deals being done by our portfolio.

34:34And how do we see that? Well, we see that as distributions coming back. Okay, so everyone listening in, there is an M &A bonanza coming. We just don't know when. I like that. I like that soundbite. I have to play it again and again. This conversation was very much prompted and related to a technological kind of driver, which is AI. So I'd love to ask you, Chris, you know, I think we've said this so many times on this podcast with different guests, yourself included, about how AI is this fundamental change to how, you know, we view it. the world operates in business. What's your take here? Where do you see the sentiment for AI, not necessarily only in venture, but as a whole, and how that impacts venture here in the middle of 2024?

35:26Well, it's hot. It's very hot. And there's probably a bit of irrationality in that heat. If you think about a couple of topics, let's talk about research and development. it's remarkable how venture capital is a really important contributor to the investment into generative AI, for example. Over 50 % of all funds, all capital being invested in the development is coming from venture capital. Now, you would think that would come from big corporations, though clearly they are, the other 50 % is. But that's an interesting department. There were lots of areas in 2023 where the amount of capital relative to previous years went down in industry sectors from venture capital.