E367 | Dan Bowyer ⁠& ⁠Mads Jensen, SuperSeed: AI Nobel Prizes, Google’s Search Monopoly, UK’s Economic Shifts, and LP Appetite for VC in 2025

0:00Hello, everyone. It is the European BC. Today, we have Lomax, Mads and myself and we have a massively full docket. We're talking about Nobel prizes, the DOJay breaking up Google. We're looking at UK borrowing costs, which are rising. Pension funds and the UK government, can they play nicely to invest in infrastructure? The Regulatory Innovation Office, what will that mean for UK regulation and innovation? Our LP is going to get back into VC in 2025. We're going to look at that. And then one of yours, Lomax, we're going to look at this startup ownership and location. Had some big European Series Bs announced this week.

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1:39this one. It's more than just an ally. This is a union of values. 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. But before we start, Lomax, you are awesome. You are here. Tell us a little bit about you and where you are what you're doing what's cooking um thanks guys great delighted to be here my name is lo max i'm the general partner and co-founder at outsize ventures we're a european focused early stage feed seed fund increasing in seed um in deep tech um i live in lisbon i have two kids and that's probably the most important thing that matters and on the side of that as you guys know i i run um what some people call the greatest secret in european adventure a community and event uh retreat called dragon chasers focused on building and accelerating relations at the gplp level in europe super super duper yeah and to just to give you a little bit of a promo massive um dragon chasers fan have been on all of them and if you are an lp or a gp get in touch with lomax it's it's an awesome thing we we do super cool stuff like we're we all get together that and then we'll climb mountains or go on motorbike rides or visit icelandic volcanoes it's just super super cool stuff so well done i think that's awesome thank you man i'll bring in the brawl there's no there's no no marketing on dragon chasers but uh you are there you go but you are our number one you know for the fancy dress night i think you you're on the podium every single time so um do you know what the fancy dress stuff makes me feel super uncomfortable uncomfortable i'm a massive introvert wrapped as an extrovert it makes me feel super uncomfortable but you know what if you're going to do it you've got to go for it so but i just i just love the events they're very cool now we're going to kick off um with one of yours on the docket line max now noble prizes now they've been um given out this year for chemistry for the deep mind founder demis hasabis asabis i hope i said his name right and his colleague john jumper and also for jeffrey hinton and john hopfield who won in the physics category so demis and john were in the chemistry category and um jeffrey and john in the physics category but it looks like all nobel prizes could well be ai focused because even though they're physics and chemistry they're both actually around ai um hasabiss and jumper created an ai model called alpha fold which i'm sure most people will know that has predicted the structure of virtually all 200 million proteins that researchers have ever identified now why is this important because this is all about medicines and vaccines, but there are a number of other humanity-driven focus areas around cleaning up plastic pollution, all kinds of stuff.

4:27Now, AlphaFold was started in 20, and I think I'm right in saying AlphaFold 2 came out in 22. So these Nobel Prizes have taken a little bit of time to filter down. And Hinton in the physics category, the godfather of AI, left Google last year to talk more freely about the downsides of AI. I don't want to ruin the mojo and the good stuff for the absolute incredible achievements here. But to start with, where are you both on the Doomer scale? Mads, do you want to kick off? Handle with care. I'm not on the Doomer scale at all. I think it's super exciting. But like everything, we need to handle it with care, just like nuclear power, just like everything else that's powerful and potent, just like new, sophisticated drugs.

5:07We're not handing them out like candy for a reason. Be careful. Think about it. Max, where are you? Are you on the dimmer? I think these are technologies that are so fundamental to this industrial revolution that we're going through at the moment that we need to keep pressing on. But clearly, as Matt says, handle with care. And, you know, we don't want to cycle these things before they come to life. So I think we need to be very, very careful there with excessive regulation, which clearly us, you know, Europeans are becoming somewhat infamous. for. But we are in an exciting time and I think we need to keep pushing on quite frankly.

5:54But yes, all of these fundamental technologies, it can always be used by bad actors. Yeah. I mean, I'm in Hong Kong currently and I can't even use ChatGPT. So it's very interesting to see we're talking about the Europeans being heavy, heavy regulators. Being over here is is a whole new mind-opening kettle of fish. Now, talking about regulation, another one of yours, Limex, on the docket. So the Department of Justice in the US wants to break up Google. This has been discussed and ruminated a bunch of times. They specifically want to dismantle its search function away from the other parts of Alphabet to get more competition because 90 % of all search goes through Google.

6:34Now, I'm thinking of this in two spaces. Now, I already use GPT or others perplexity or others to do my search, to run my search. I'm thinking, is this required? Will AI naturally break down some of the barriers in search to be discussed? And obviously, in Europe, big tech is being fined every 10 seconds for some kind of antitrust practice. Now, your point, Lomax, was that as VCs, we always want to back monopolistic businesses, but where is the limit if there is one? So do you want to kick off? this is this is your this is your driving force yeah i i think um first of all you know you look at like a lot of what peter teal says the balance man manifesto and how we think like you do you know when you look at when you look at companies that could be you know billion billion dollar revenue companies as a seed investor like they are kind of quasi-monopolistic have the potential to be quasi-monopolistic right i don't even should shy away from that there's a certain irony to this whole google stuff now which is that you know this has been google have had 90 percent of search for years.

7:41And there's been rumblings always in the regulatory community to start cutting back and start holding into account for that. But actually now is the time when probably they face more competition than ever and more likely to be eroded, given what's going on with the Chachal fatigue, complexity, et cetera. So there is a somewhat kind of irony that the DOJ is finally getting to this. And by the way, this may not happen. They kicked to lock down the road. We still have the elections. I think if Trump gets in, you know, it may just be it may just be buried. But there is definitely, yeah, I mean, ironically, there's time where they face the biggest risks in their business from the market, not from the regulators.

8:24So the regulators should just let the market sort it out. The only thing that I do potentially agree with the regulators is these deals that Google does to lock in the search function as the primary go-to with third-party manufacturers. I think that needs to be looked at. But other than that, I'd let the market sort this out. Yeah, I think if you look at how Apple run their ask app not to track function and then behind the scenes are tracking everything, I mean, there is this protectionism, which I think all companies are looking to create their remote and where that oversteps the mark into something that then needs to be regulated at scale and size.

9:06I'm always intrigued by where that line is. But Mads, what's your take? My take is that I think Lomax is banging the money, that this is exactly the time when Google is the most vulnerable it has ever been due to new AI forces. And I would say, if I am Sam Altman at OpenAI, or if I'm any one of the investors that have just backed his new$150, a billion, billion dollar valuation round. Yeah, a few more than that. Yeah. I'd hope exactly for Google to be broken up or threatened like there being because history does rhyme. You have kind of the late 70s and the early 80s with IBM facing severe antitrust scrutiny and being put under a lot of restrictions that led them to taking the decisions they did around being so careful not to be, being accused of monopolizing the PC market that they invariably let the cat out of the bag and let Microsoft run away with it.

10:02Microsoft then repeating that in the noughties, they were being scrutinized. They completely lost sight of the game and lost on mobile. And so I think this is what could happen to Google here. I think Google is probably the only company that can really threaten open AI. Why? Because they have the richest data source on the planet. Outside of the internet, it's YouTube. And they have access to that data. That means they can do things that probably no other company can do. But if they are broken up in this way, well, that's going to put all that to bed. And so I think that OpenAI will cruise to victory in the AI game.

10:39So actually, for that reason alone, it is probably important that we actually don't go in and break up Google at this time. I think we need competition. OpenAI is ahead in terms of commercializing AI technology. I think Sam has involved. All the noise, all the problems the company has had, I think he's just been running an incredible engineering shop, incredible product dev shop. Everybody that's following it and using the product, as we all are every day, can see just how fast it's evolving. And so it's important that we have competition there. I think it would be a shame to kill Google now and take that potential competitor out of the game.

11:16So yeah, this is the wrong move at the wrong time. yeah i mean just coming back to the whole behemoths being being felled i remember when facebook moved into the sun microsystems building or campus it wasn't a building it was a freaking campus and just think how big sun micro was and then to absolutely collapse so it's just these things will i think naturally find uh find a rhythm but we'll see and maybe they'll see it maybe they'll stop or maybe there's too much inertia they're gonna go for it now coming back to the UK, Mads, this one is yours. We have an election coming up, right? November 4th will determine all of this, I think.

11:53I want to bring back to the UK. So UK borrowing costs are climbing, Mads, this is one of yours. Now, hopefully this won't be kind of trust level of crazy, unsustainable suggested borrowing, but the markets are obviously worried. What's going on? How will this, and obviously ultimately for us, how will this end up affecting startups and the UK venture scene? Mads, what do you think? Well, to some extent, the chickens are coming home to roost now. The IFS has come out this morning and said that the UK will have to borrow an additional 25 billion pounds a year to avoid cuts in real terms to the different departments, different services, different things we're doing, or make tax rises, increase taxes to that same tune.

12:38The government has said, look, we really do not want to raise taxes. They're already quite high, and we don't think that's necessarily good for neither the citizens or business. So what are you going to do? There's so many interesting vectors here. The obvious option has been taken off the table. The UK economy is a roughly£3 trillion beast. By all estimates, the cost of Brexit right now is about 4%. It will be about 4 % by the end of the decade. that's just in very rough terms around 100 billion pounds. The tax from that could easily be 30 to 40 billion. And so if you have a gap of 25, well, just Brexit or Brexit reversal alone could solve it.

13:21When that's taken off the table, where do you go then? You've left this massive gap in the economy. And this is really the thing Rachel Reeves is trying to figure out. When we had the pod a couple of weeks ago, we were talking about foundations. We're talking about deregulating the economy and trying to boost growth. Some of the things that will have to happen for that to happen are just going to be incredibly hard. You have so many vested interests standing in the way. And given what we've seen from the government this far, I know they've said they won't be afraid to ruffle some feathers. I'm not sure they have the energy or really the courage to take on those vested interests.

13:58And so I worry that there'll be a bit of a fudge. and it'll be a combination of a little bit of tax rises here, maybe a little bit more in business, maybe a little bit of capital gains, maybe a little bit more borrowing, but not actually fixing some of the fundamental problems and some of the fundamental unlock we need. Now, that said, at the same time, one of the things that's really interesting is that the pension funds that are big investors in bonds that we'll often say these bond investors are the bond vigilantes. they're worried about kind of the government borrowing too much they've actually come out and said listen you can borrow for sensible things and we actually really want you to borrow to invest in infrastructure because what we would like to do is to work with government to fund all these big infrastructure projects that we need to make in energy in transportation etc and so i think you know a lot will come down to are we going to make some sensible decisions around you know, actually investing in some of these areas and working with private investors, working with pension funds to raise capital.

15:02So you have a kind of a private public partnership that can unlock and drive in this investment. So I think there are opportunities here, but it's Rachel Reeves is balancing a very, very difficult set of equations right now. And I can imagine there are lots of late nights at the Treasury working through the spreadsheets. That pension fund request feels like quite a sensible quick decision to make so the their ability to change their definition of debt or to to work out a way of co-investing with pension funds because that'll bring in a whole lot of international investment as well so it feels like that's quite a simple smart inoffensive thing to do where are the where are the where are the red lines in that Mads.

15:46Why can't that happen? So I think it can happen, but I think here is the risk. I think because it can happen, and I actually think it's probably not, the hardest bit is not saying, yes, we'll do it. The hardest bit is how do you make sure you get value for money in investments? We've talked about some of the infrastructure projects that cost so many hundred millions of pounds just in planning before any screw, any brick, anything was put down. and that massively cuts the return on investment that you're going to get from that piece. And so you could say, well, the government can take up the slack.

16:23We can, you know, taxpayers can fund that kind of that grind and fund these planning costs, et cetera, and then let private pension funds, you know, pick up the reward. But wouldn't it be great if we could do both at the same time? If we could say, look, let's go in and, you know, invest progressively in infrastructure And let's also try and reform some of these barriers that stand in the way so we can build and develop, you know, in a more cost effective way. Then you get the double benefit. And then actually I think you can find a way out of this fiscal hole we're finding ourselves in. So, OK, so it's not as simple as changing that rule set.

17:00It's actually more about how that then lends itself in the infrastructure way into planning another channel. OK, maybe it's not as simple as a thought. Sorry, Max, I interrupted you. Where were you going to go? I was going to say, the UK has just suffered from a chronic lack of investment in infrastructure in the last 20, 30 years. And I think Rachel Reeves acknowledges that. She's probably been somewhat hampered by getting in and finding this quote unquote, you know, 22 billion black hole, which has made her course correct a bit. I mean, I do think that going back to the borrowing cost point, you know, this budget, which is going to be 30th October, is now four months after the election.

17:37I think I listened somewhere, I read somewhere that it was the longest distance between an election and a first budget. And actually, I think that uncertainty has been really, really helpful for everyone, quite frankly, like the investors and everyone in the business community and just everyone in the country, quite frankly. So I think that she needs to get on with it. And the longer the uncertainty continues, the more the speculation continues, the more that, you know, you have collateral damage like, you know, the borrowing costs going up. So I think it's, you know, high time that we get that done.

18:11I mean, it's only now two weeks away, two months, three weeks away, actually, still. We need to get on with it, quite frankly. But I agree with Mads. The investment, the pension funds, ironically, I want to say ironically, like, there's a little bit of bias in the pension funds that have come and said this. you've got ifm right i mean they're they're one of the biggest infrastructure owners in the uk right so it's like they're kind of they're um not just talking their own book but they're they're arguing for a position that is very fragile but actually it's consistent with what we believe anyway in terms of unlocking a whole bunch of um infrastructure investment that's bad in the country sounds super aligned i think there's always a challenge when the labor government comes in as to how much they're going to how much they're going to borrow and how much they're going the spend so you're right that uncertainty gap has been too long exactly if you look at like if you look at when labor came in you know everyone was saying new labor came in returning turning brown brown they were that everyone was obsessed with the markets just completely reacting very negatively to that the first thing that gordon brown did very sensibly was you know give the bank of england its independence to kind of take it away from the government and that kind of set the markets but that was all done extremely quickly this has actually just been done in a very actually just too slow quite frankly and then they've had all this stuff they've been miserable along the way right they've just been her and starmer have just been these miseries always going to be a tough hat you know budget it's going to be a tough year so my goodness at least some put some positivity in the pot as well yeah yeah and then they've allowed i guess in a way the lack of clear policy from them and the lack of direction all of this has actually allowed the right-wing press to fill it with all of this like expenses and you know free ticket stuff which is a bit of a sideshow if you look at boris johnson the guy was you know flying around the world and decorating his flat with with tens hundreds of thousands of of donations and gifts but um they've let that and it's a bit of an unbole i'm afraid let's see what happens in a few weeks i mean i want to stay with the uk government i saw this week they've they've launched the regulatory innovation office which Sounds like a very juxtaposed title aimed at helping speed up approvals for new technologies in the fields such as biotech space autonomous vehicles.

20:20Now, this is obviously coming out of the EU. We needed a department to manage our approvals frameworks. And it looks like that they're trying to do it more quickly. They're trying to get from innovation through to approval more quickly. And without perhaps that European overhang, maybe that's even possible. So it sounds good. But what will this really, really mean, do we think? Mads, do you want to kick off? It may be too early to say. I think the intentions are good. We know what we say about the road to hell and what it's paved with. What we need in a lot of places is deregulation. So that's step one.

20:57Will that be part of the remit? And if not, where will that happen? Because that's super, super important. There are places where we do need streamlined regulation and streamlined approvals. I would say the FCA has had some success with the sandbox and some of the other initiatives they've taken. But we also know that, you know, in general, FCA regulation in the UK is just way overkill. And it's slowing down the market. It's slowing down the financial system. It's creating kind of a shadow backing system, right? You know, so much of the credit activity that used to be on banking balance sheets are now on private credit and all kinds of other places where you can't really see it.

21:32what will happen here and will it be kind of a regulatory behemoth or will it lead to lots of new rules or will it lead to something that is truly streamlined and sensible? I just don't know that we know yet. But the intentions are there and are probably right. Now, Lundberg, you've swerved along with this. You're down in Lisbon, so I don't know how much you stay in track with UK government. Well, no, I mean, you know, it's highly relevant given we deploy about a third to half our money in the UK. And, you know, we have in our portfolio a bunch of tech buy companies. We have new food companies, cultured meat companies.

22:10So this is very, very rare. And that's one of the kind of areas that this regulator has been tasked with, streamlining things. I mean, it was sort of who guards the guards moment about this was the first thing I thought was just, you know, again, you know, talking about irony is, you know, how do we cut excessive regulation? We create a new regulatory body. It seems, I think, you know, Mads mentioned earlier in another context, like things becoming a fudge. Like there is a risk that this also becomes a fudge. It really needs like the political and the financial backing, not just for the next six months, but for the next three, four or five years for the lifeless government and ideally for the life that they win the next election.

22:47So for me, I think the intention is great. It's an acknowledgement that there is excessive regulation for some of these startups in these new areas that are extremely important. and that the FCA sandbox has a good case study to try and recreate that. But I'm always a bit skeptical about, you know, let's just create a regulatory or oversight body because look at all of the regulatory bodies in the UK, like Table Water, for example, they're completely stretched. Take the Information Commission, or the ICO. They don't have the ability to process stuff. They're underwhelmed because they're just underfunded.

23:21And if this becomes yet another underfunded, you know, body, government body then it's a waste of time yeah then what the heck well let's stay on investing so the type this was this was my one on the docket the title being will lps get back into vc in 25 so will lp start investing in gps as we are venture capital journal has launched this year's poll which i think is happening between now and november testing lp appetite for investing in venture capital now the title was of the email was rp are lp still grumpy about vc which i thought was not particularly useful framing. But let's have a look at some of the highlights from last year's report, which was taken in November 2023, where LPs expected half of their portfolio to meet expectations.

24:07It was pretty standard. It was only in 21-22, it looks like that there was an expectation of higher performance. The number of LPs avoiding first-time managers doubled last year for their expectations for this year to 42%. Nearly a quarter said they were over-allocated to VC, but it was only up 15%, but they were feeling a little bit left out hanging out to dry. The proportion of LPs looking to add new VCs dropped to 30%, which was the lowest number ever. Late stage and growth became the least popular strategy, but not by whole much, think about 5%, 6%. And the biggest challenge for LPs, which I'm not sure was just a last year challenge, was access to tier one funds and then how to pick from the rest, a choice challenge.

24:48Now, when you look at the data for context, this is a global report. But when you look at it, the largest proportion of respondents by a large margin were insurance companies, funder funds and pension funds. So the results are obviously skewed in their direction. And we also suffer with the aggregation problems. I'm sure there are territory and sector and other divides in that. Now, Lomax, we'll start with you because you work obviously with Dragon Chasers. You work with a whole bunch of LPs, not only as a fund manager, but also via DC. is there a renewed appetite, do you think, for LPs to invest in venture across Europe or not?

25:26Really interesting question. I mean, I'm not fundraising at the moment. I will be next year. But anecdotally, all of our peers in Dragon Chasers and beyond, it's tough work out there, pulling in LP commitments at the moment. I would say I see brighter sparks now. Really interesting. I was chatting to the more touristy type new entrants to the market that came in in 21-22 at the LP level. They're not back, and they're not coming back for a long time. That was a big chunk. People forget that if you look at some of the numbers, up to 70 % of that capital was not venture capital as we know it. So just to give a look at the context of that massive blow.

26:09And by the way, the slight problem with that is a lot of the emerging managers have funds 1, 2, 3, because the people you just said who filled out that survey, they're not really backing emerging managers. Some of them are, but not many of them are. It's a very, very small proportion. By emerging managers, I generally mean funds one, two, three. So a lot of that high-to-cost money, which actually became a bit of a lifeblood for, well, I mean, you guys are an emerging manager too, for us has got. So I think for the people raising funds one, two, three, you're having to work that bit extra harder.

26:36Funnily enough, though, you know, I've actually had conversations with a few family offices in the last month. that these are sophisticated smart family offices who invest for the long term and are actually building, are looking actively seeking new managers, right, which is really interesting because I wasn't having this conversation last year. So I think the people who are in this game for another 10, 20, 30 years and have that horizon, there's interesting pockets of capital. And I think there is another theme going on that a lot of those funds that used to write, you know, 20, 30, 40, 50 mil checks into the more established funds are startled to run emerging manager programs.

27:14And I can see that. It just takes time to do better. So, you know, at the same time, if you look at the established funds, you know, Tomoko Bollison, I think he probably talked about that fundraiser recently. There's sort of appetite for those kind of funds because, you know, you don't get fired for backing them. and if you've got a BC allocation that's been agreed 18 months before, you know, I mean, they're great in France, I'm sure, but, you know, they've raised a lot of money. In the face of what we've seen at the emerging manager level, which has been much, much harder. Yeah, we've seen a bit of the European megafunds fundraising, big funds, which I think is great.

27:49I'm in Hong Kong now at an event meeting some investors, and there is a much different conversation happening now than there was at the beginning of the year. it feels anecdotally more open how that transpires we will see but just to put into context their allocation of all the people that i meet their their their total allocation is one two three five percent into alternatives of which that mainly means you know us tier ones if they can get in so there is of their allocation of their entire strategy it's a tiny tiny proportion that It goes into alternatives, which is such an odd. I've never understood that word.

28:29It's just a weird thing. But we are part of that alternatives bucket, VC. But Mads, what's your take? You've done a bit of – you've hit some of these event circuits. Do you think there's more appetite for venture? I think all investing is cyclical, and most investors chase past returns. And so we saw a huge bubble going back three, four, five years, and everybody was piling into VC. and then there's a bit of an overhang. And of course, investing when everybody else is investing is generally the wrong thing to do in these types of asset classes because it just means everything gets bid up and returns they suffer.

29:06And then I think you've had a couple of bad years because of that and then folks, they take a step away and now is of course exactly the time to come in but some folks are still burned and therefore are sitting on the sidelines. I think it's entirely natural, it's human psychology and I think to some extent it's on us as managers to make the case and explain to prospective investors why now is the time to invest and why there's some great opportunities. So I can't say there's much that surprises me in any of this. No, I was going to say, one thing I've always found funny is that for the emerging manager segment, Funds 1, 2, 3, you know, in the good times, the narrative is the LPs are being forced to re-up so quickly and so often in these established funds, which are raising more quickly.

29:49So they don't have time for you. And then in the bad times, you know, They want to go to the big names and stay away from the risky little names. So in a way, there's not a market that actually really suits the emerging manager. It's a lose-lose. It's a lose-lose. The flip side of that, I was speaking with a very experienced fund allocator the other day. He's made dozens and dozens of LP commitments into venture funds. And he said, listen, the real secret here is that so many of the big firms that were gorging on money and making investments every two seconds a few years ago are sitting on these massive portfolios today.