E369 | The Autumn Budget, Arm vs. Nvidia, Volkswagen’s Decline, and Boeing’s Space Division – with Dan Bowyer

0:00Yeah, let's dig straight in. So what is happening in European VC this week? I think we're going to be fairly UK centric. We have the autumn budget. We have Arm. We're going to speak about Arm going toe to toe with NVIDIA, which is really, really interesting. We're going to dip into Germany. VW's profit warnings and obviously BMW and Merck are not far behind. Boeing, could they spin out their space department? That might be quite an interesting chat. can startups thrive in the age of AI another really interesting one meta is going going alone because no one wants to play nicely with poor old Zuckerberg so on search they might build their own search engine and then one of yours mad's looking at football regulation of all of the crazy wonderful things here's a few words from our beloved sponsor introducing the cult tech summit a two-day celebration of culture and technology carefully selected startups unique workshops, lectures, theater shows, investment opportunities, and more at Cult Tech Association.

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1:27Tear down this wall. 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. So, starting at the top, the big whack, the autumn budget happened as of recording this podcast about four hours ago. so um just to tee up so this is Labour's first one in 14 years obviously Reeves first stab at the podium and when I was listening to it today that the opening her opening mantra was invest invest invest so that was kind of music to my ears I'm sure the same for you the key themes of time being increasing the minimum wage tax changes for higher earners no great surprise there more support for the NHS energy and cost of living measures for for low earners green and infrastructure initiatives and then obviously taxes up, borrowing up effectively.

2:29Now, so many questions, so many things to discuss. They talk about stability. Will this create the stability that they've been banging on about forever? And what else is going on specifically for you, Mads? And let's dip into like founders and startup and VC. What's going on? Yeah, absolutely. I mean, look, with this thing, it's easy to be a Debbie Downer, right? You got a Labour government, they're going to raise some taxes. it's easy to sort of be really negative about the whole thing. I was actually prepared to give the government some credit for plucking the fiscal gap, trying to get the finances on a path to profit, investing in repairing broken public services because they are broken and they need fixing in some way.

3:13We've got people on wait lists for the NHS for 18 months. It's not serious. It doesn't feel like a serious modern country. Regardless of COVID, right? I mean, COVID was obviously an extra challenge, but this is massive decline 10 years. Yeah, absolutely. And we borrowed billions to try and fix the COVID issue. It's not like money was not put into trying to address it, but you still have these lingering issues. And also the fact that there's a focus on investment, both in infrastructure and in technology, to really help make the government more productive. So I think all of those things is kind of, yeah, directionally, that feels like the right thing to do.

3:56You've got to be serious about it. And there's going to be some costs, of course, but it's part of repairing things. Now, it was widely believed that the right kind of investments would be positive for the long-term growth of the country, and therefore that bond investors would look favorably upon the right kind of investment. However, what's actually happened this afternoon, so as Rachel Reeves was speaking, yields were coming down. So the kind of meaning that bond prices were going up and investors were sort of saying, oh, maybe it's not so bad. But actually what's happened this afternoon is that yields have spiked and it looks like the government potentially went too far in the combination of tax and spend and that investors have been spooked a little bit.

4:38And so clearly if rates are kept at an elevated level, that's going to dampen overall economic growth and that's exactly the opposite of what the government wanted. So I'd say the jury is a little bit out here about whether they calibrated it correctly or whether they got it wrong at a macro level. Now, at a micro level, lots of tweaks to taxes and spending. Some of them, capital gains tax rates are going up. Employers' national insurance is going up. Lots of things that you wouldn't necessarily like. Some of it is probably necessary. If you want to repair things that are broken, you have to invest.

5:16You have to spend to do that. Are they going far enough in terms of getting efficiencies and driving efficiencies? I think that remains to be seen. I think there's probably a sense that maybe they're not going to be sufficiently ambitious in taking on the vested interest of unions in terms of driving productivity. So it's one thing to say, listen, we're going to invest in the different services and we're going to increase pay for employees and all that is fine, but are we going to ask for productivity increases in return? There's maybe some sense that potentially labor is too close to the unions and are not going to be serious enough about negotiating and driving those efficiency gains that are needed, just like any business would.

6:06There are some important changes around capital gains tax, which is going to impact founders selling their companies and also on changes to the tax rates for people like us, venture capital investors. And the thing is, building a company is really hard. I don't know if you saw last week, Jensen Wang from NVIDIA, he sort of came out and he said, if I realized the pain and the suffering I had to go through and how vulnerable I would be feeling on that journey and the embarrassment and the shame and the list of all the things that go wrong, nobody in their right mind would start a business. And he said he's not sure he would start a company again if he knew everything he knows now.

6:54And I think it's just worth thinking about. I mean, if anybody, he's made it, right? Three and a half trillion dollar company, perhaps the most successful entrepreneur of our generation. But building a company is so hard and it takes a long time and it's just years of uncertainty and all this stuff. What's the phrase? It's smart enough to do it, dumb enough to try, right? Yeah, exactly, exactly. And so I think there's always been a recognition that, look, it's one thing to sort of collect your paycheck, whether that's of this level or that level, but you get your salary every year and you pay a tax on that.

7:31There's something else to maybe wait 10 years or more before you actually make money, if you make anything at all. And therefore, to some extent, you pay a different tax rate. And I think that's always been an important principle. To some extent, it's the same thing we have as VC investors. We're going to be lucky if we make any money for the first 10 years of running a fund. Maybe it'll come, maybe not. Hopefully, if we're good at doing what we're doing, we'll make some money. But it's very, very delayed gratification. and so to sort of say look that should be taxed exactly the same way as a salary income just feels wrong because you know you have to you have to go through that that you know that potentially a decade or more of your life to get to something which feels very different qualitatively from i'm collecting a nice paycheck every year but it's not a couple of games of 24 right yeah yeah but but but they've said that on the venture capital side they want to increase it to level it with with you know income tax so that's 45 oh i missed that okay oh okay all right so why would carried interest well so they've said that they are going to increase the rate first from 28 to 32 and then they're going to level it with with interest uh so with income tax okay okay and do you think do you think that will shift risk appetite i don't i don't believe so but What do you think?

8:58Look, there is the here and now, and then there's the long term. I think it's been recognized for a long time how important capital and capital provision is to the economy, whether it's kind of for growth stage companies or venture capital. This was also recognized by the previous Labour government. I think the regime we've had had helped make London a global center for the alternatives investment industry, for private equity, for venture capital. with all the benefits that brings with it. And, you know, maybe people are already here. I mean, some will leave. We know some have left because they sort of thought this was going to come.

9:36Others might choose to stay. But all else being equal, if you're sitting today in Germany or France or Italy, are you going to be more likely to move to the UK to set up a shop? Or are you going to be less likely if you know that your tax rate is almost doubling? It was a missed opportunity, wasn't it? because I know France has just changed some of their tax implications for founders. And it feels like a little bit on the investment side and on the founder side, it feels like a little bit of a missed opportunity perhaps to not just make it extremely attractive to come to London or come to the UK and set up shop and invest here and do most.

10:14I think that's right. I think that's right. I think the UK is the best. London is the best when all the best and brightest come here to set up. and that's what we should be catering for. And that's just not what's been done. So you have, at the same time, you're abolishing the non-dom regime. There are many opinions on that, but one thing's for sure, it's helped attract a lot of people to come here. And actually, those non-doms paid a lot of tax, kind of more than 10 billion pounds a year in tax. And then you have the founders, the entrepreneurs, et cetera. So I guess I would have liked to see a little bit more of an open for business, come here to invest, to build, to grow, to make, and not just, well, we're going to increase the tax rates, we're going to remove non-DOM, we're going to do all this stuff that made the UK very attractive, but what are we going to replace it with instead?

11:07Well, you know, some more, if I'm unkind, I'll say kind of some more handouts for the unions, right? That's just not how we create a successful and wealthy UK, which is back to your point, what they've been talking about. Everybody's talking about invest to grow. Well, that's where the investment is going to come from. It's fairly counter to the opening mantra of invest, invest, invest. Oh, but we're not going to quite set the right frameworks to deliver on that because it feels like a political mandate to be perceived. What was around the social web this week? It was Starmer's definition of a working person, I think, was one of the big stories.

11:52And there were loads of other reports in the tech press and sifted of tax advisors being inundated with phone calls from investors and founders about how they can how they can sell or or circumvent the law, the regulations and laws they thought were going to come in. So it doesn't feel very aligned with invest, invest, invest. Oh, no, maybe we won't. And maybe we'll just make that a little bit tricksy. Yeah. So I think that's a shame. It's a bit of a missed opportunity. And it would just have been great to see, you know, if they'd said, look, we're going to abolish none, Dom. But here's what we're going to do instead because we still want all the best and the brightest to come here.

12:31And we still want the UK to be the most attractive destination for investors to be in, to work in, and to invest capital. And it's like you can do the first, but you also have to do the second. And if you just do the first without the second, it's like, what are we really trying to do here? It's almost like they don't get the innovation piece. I think what I really wanted to see was more on an understanding and awareness of where that innovation piece happens. And that feels like I have to be supportive. Sorry, I interrupted you. Yeah, no, no. So that's it. So it feels a little ideological. I could see that the proposed budget changes, kind of the benefits they are budgeting in the outer years, kind of 28, 29, are only 85 million pounds a year.

13:18So why are you going through all this stuff if you don't think you're going to get more out of it? And is that because, well, actually, you do expect to be watering down the changes over time. You don't really mean it, and you're just trying to fly the flag for party political purposes? or do they expect that the plans will backfire and people will leave? It's not really clear how they arrived at the numbers. These are the OBR numbers that are sort of independently assessed. But yeah, there's definitely more work to do here. I think if they do a mic drop and leave it at this, I can see why guilt rates are going up.

13:57It's not creating a lot of comfort that they have made the right decisions. I guess by the time this goes out on Halloween of all days tomorrow, I think the markets will definitely react. I guess there are some levers to pull interest rates. I mean, I remember hearing Reeves talking about inflation dropping to 2 % over the next five years. Hopefully not because no one's doing anything and there's nothing to curb, but we will see. I guess there are a few other potential levers they can pull. Anything else stand out on the budget?

14:38Lots to unpack. It was quite a substantial budget. I mean, they are talking about continuing to invest in R &D. That's important. They're talking about investing in infrastructure. That's important. You'd question whether all of the money, I mean, they're kind of talking about 20 billion pounds a year, a lot of which will be invested via UKRI. And I guess some of that will flow to Innovate UK. There's a question about how much some of the grants that are being granted are helping and whether the government's giving grants out is the right way to invest, whether they're smarter ways. I think we've always said, look, become customers, buy technology from emerging companies that's much more powerful than handing out grants.

15:22The US has proven that use case, haven't they? The US and the IRA were very good at creating some of those dynamics. Yes, correct. Hmm. OK, well, lots to unpack. Let's see how the next few days, how the news cycle works on this over the next few days. It'll be really interesting to see. Next is another biggie. So Arm is possibly going to go toe to toe with NVIDIA and Arm, the chip designer who don't make things. it looks like their their key investor soft bank is potentially going to push them to actually build things and get into the ai race and go toe-to-toe within video is obviously one of their biggest partners so up 150 percent arm is up 150 since listening two years ago market cap is now 160 billion dollars um it's a massive uk european success it's fabulous this wonderfully clever licensing model they run they might well now be playing with um as in they get a dollar for every phone sold so it's a beautiful model so what else is on your mind with this because this feels like if he gets his way if my son gets his way this is going to be a big shift a huge shift arm is a super interesting company for many of the reasons you mentioned we often talk about you know where are the big uk and kind of european tech companies and this is certainly one of them, at least if you measure by market cap.

16:51And actually also influence they've had on the global tech ecosystem. So they've built this beautiful model. They're getting revenue from pretty much every single mobile phone that's sold today. They license out the chip design and they get a dollar for every chip that's put into a phone. So it's very, very nice. It's given them steady growth and positioned them in a key way. They've also built this deep, deep partnership with NVIDIA. NVIDIA tried to buy the company a few years ago So that merger was blocked. But in many ways, because they're working so closely with NVIDIA and because NVIDIA is putting small CPUs with ARM technology on every chip they sell, people are looking at ARM and saying...

17:31It's been in context. This is running a whole bunch of data centers, right? This is the kit that runs the data centers. That's the licensing that ARM have provided. Yeah. I mean, every computer needs a CPU. And so every ARM chip has GPUs on them, but also has a small CPU that is kind of the central processor that does the work that's not GPU-related. And so people are tying ARM to the AI wave and saying, look, AI clearly is going to be a huge thing. ARM seems to be fundamental to this thing, this wave. Therefore, ARM has got a lot of potential, and therefore the company is now valued at$160 billion, kind of up 150 % since the IPO two years ago.

18:14So it's been a great investment. But the thing is, the model is under pressure because even today, only 10 % of their revenue comes from the data center business and the NVIDIA partnership. Now, most of it is still from mobile phones. And companies like Qualcomm has been looking at producing their own chips with their own architecture. You've got the open source architecture, RISC-V, which is a little bit like Arm being Solaris, right, being Sun Microsystems, and Linux is coming charging you over the horizon. And you can just see that, you know, in a number of years, potentially there's no business left because everything has been open sourced in your core business model.

18:57So the question is how you... Wasn't that chipset originally an Arm design? wasn't there? What's the legal battle with Qualcomm? What was all that about? Do you remember? Well, you're absolutely right. So Qualcomm purchased another company, continued to develop on their IP, and then wanted to turn that into their own new chip line that was not kind of tied to paying royalties and license fees to Arm. But Arm was saying, look, the company you bought had been using our architecture. They'd been making derivatives of our IP. And the license clearly said that they did not have a right to do that. Therefore, we're going to issue an injunction here.

19:37And so that new chip you designed and want to sell, well, guess what? The courts are going to put a cease and desist on that. They're not going to stop it. But that means they're effectively now in kind of lawsuits and fighting with their own customers. And so how do you get out of this? And I think you can easily see something similar happening with NVIDIA. Yes, today, NVIDIA is very happy to pay a bit of money. I've seen them in a bunch of poems. They're all very friendly, aren't they? We all chatty-chatty. A couple of hundred million a year to ARM is peanuts for NVIDIA. There's no doubt. But if you're ARM and if you're my Yoshi son and you look at this business and you're like, okay, well, our mobile chips business is going to go away because all our existing customers, they're going to use open source architectures to build their own chips.

20:29Then where does that lead you? And what they concluded is, well, it'll probably mean that we'll have to make our own chips. And once you've said, well, let's make our own chips. Well, the most valuable chips right now are not mobile chips. They're AI chips. So why don't we make those two? In which case, you go head-to-head with NVIDIA. And so - Your own customer, your own channel. But don't bank own 90%. don't they own a massive chunk of arm? They have a massive chunk of it. And they're looking at this asset and they're saying, well, we're damned if we don't, if we're damned if we do. But, you know, SoftBank and Myoshi-san, they're gamblers, right?

21:06Or certainly like to bet big. He's elegantly nuts. I mean, I've seen him in a few. I mean, he's so big on AI. He's so bullish on AI. I can see him probably kind of plotting it. How can we max this asset and get them to go total? I can imagine the boiling of the cauldron behind the scenes. So bull and bear case, kind of the bear case is that it all falls apart. The AI initiative doesn't manage to make any dent or take any share, neither in training or inference in the AI space. Why? NVIDIA has got such an incredible stack. It's completely locked up with CUDA. They've got all the layers. Very, very hard to get out of that ecosystem.

21:46So how do you compete against that? And it's quite possible and probable that NVIDIA won't be able to compete there. They might, but it looks more likely than not that they won't. And similarly, it's possible that they just won't be able to manufacture chips at this scale to compete with the Qualcomm's and the Samsung's of this world, in which case the business falls apart. So that's the bare case. Where would production be? If he gets his way, where are they going to actually build this stuff? I don't know that they've decided that yet. It's probably a Cambridge, is it? No, I don't, listen, it depends, right?

22:18If there's a government that says, like the US government said, look, let's put some sterling down here to develop the UK semiconductor industry, why not? I mean, that becomes a negotiation like everything. But so, you know, back to the question is, you know, what's the bull case? Well, the bull case is that it works, right? that they do manage to manufacture and to get a toehold in both the mobile chipset, where they have very energy-efficient architectures, and an AI, again, where they might be better placed than NVIDIA, especially on inference, which could be kind of the big workload. NVIDIA's got all the chips to train, but maybe ARM can make chips that are better at inference kind of very low power that can be used in lots of places, including phones.

23:06So there is a bullet of the bear case for sure, but extremely high risk right now, which is very interesting that there is kind of finally a European company, a UK company that is at least playing. But they're not really UK. They listed over the pond, right? Yeah, but I don't think that matters a whole lot where you're listed, does it? I mean, some companies are listed in multiple places. But I think what matters is where's the talent? Where's the management team? Where do they pay tax? What ecosystem are they part of? And in that sense, they're very much part of the Cambridge ecosystem. yeah they're they're just up the road so hopefully hopefully they'll build here if they go that far um talking about building so next up we talked about this last week but um volkswagen second profit warning uh it's looking even more uh challenging and bmw and mercedes have followed suit with profit warnings uh blaming this kind of weak ev transition the china slump and um just the general general market malaise i mean having bought a volkswagen not so long ago a very snazzy gulf i think they have a massive quality issue and i think you know there's been these kind of many compounding challenges over the years that have created this slump so this is this is obviously massive we we talk about this a lot but is there anything else that you wanted to specifically dig into with this profit warning?

24:35Well, I think it sort of connects a few other dots we've been talking about. I saw we had Boeing on the list as well in their space program. When companies lose sight of their core identity and why they're here, they become too full of their own success, right? And they rest on their laurels. And I think for some time, it was just taken for granted that the Germans made the best cars in the world, and they are beautiful, right? The Porsches, the BMWs, the Mercedes of this world. Incredible cars. But when you then forget, to your point, about the quality, when you roll out new models, when you try to enter the EV space without kind of living up to the brand promise of that incredible quality, when you disappoint your customers, well, you erode the very fabric, the very essence of who you are.

25:29This is to Boeing's point. If you are an airline company and you can't make aircraft that can get people safely from A to B, why do you exist? Or get people back from the ISS. I mean, they screwed the pooch with that recent space launch. That was hyper embarrassing, especially after the 737 MAX or 787 MAX, whatever the airline is. I mean, this is, and all the industrial troubles Boeing is going through, this is just not good. And it goes to show that it's not just a single, it's symptomatic of underlying cultural issues in a business where you've lost sight of why you're there. And I think to some extent, we've been at risk of that in Europe, in the European industrial sectors, in automotive.

26:19We've taken this superiority that we've had so long for granted. There was a view that it would be impossible for the Chinese to create a car that could compete globally. They're great. I was in Hong Kong recently and I was in a BYD. I don't know what the model was, but it was a very impressive. I can see why the EU is setting up tariffs up the yin yang to block Chinese EVs because they're bloody good. Yeah, but we know where that ends, right? I mean, my good Brazilian friends, they have this saying that you know brasil is the country of the future and always will be and it's they've been experimenting with tariffs and protectionist structures and we just need to kind of guard our own industry a little bit more for a little bit longer and then we'll kind of we'll come into our own right and we'll be competitive but you get caught in this trap of just never being good enough to compete globally and guess what that is the road to mediocrity and and that's where you're going to end up and it's this road that we are on if we're not careful so i think the reason why we're bringing it up is sort of just to remind all of us that you know that the bull case for venture capital and technology and investing and next generation is that if it goes well we can become you know as a nation as a society we can become more affluent and we can create the wealth that we all need to create good you know good countries good institutions good services for our citizens But if we don't get it right, if we get this wrong, if we don't get our act together, the alternative is also pretty scary.

27:59So whether you are inspired by kind of positive outcomes or by running away from negative outcomes, I think we've got we kind of got both staring in our face right now. It's decision time. Well, AI is going to be a big part of the solution. and I was reading this week an article in the Harvard Business Review which was titled Can Startups Thrive in an Age of AI? And the reason I wanted to bring this up was I really struggled reading this because it very clearly positioned the fact that all of big tech have the money and the compute to do AI and therefore the only thing that startups can do is collaborate better with enterprise and come up with measures to to deal with the job destruction that they posited that was going to happen because of ai and i was like this just doesn't smell right to me at all um sure big tech is producing all the foundational models and and laying the ground work for this it's almost like almost like i put it as they're they're creating the the new cloud if you like all of these incredible ai facilities but that just for me opens the door for an incredible swathe of startups to then come through and build the tooling and in the application layer so i don't know if you had any thoughts on this but i just found the whole article just like really upside down so big tech have got it startups are screwed let's all let's all go and make sandwiches which just felt like absolute tough to me yep yep i i mean what's what's what's the question here no it was it was just it just felt it just felt like a really misinformed article and i just kind of expected more from hbr to be fair but it just felt like i i kind of get it you know i i kind of get that you know big tech is you know doing ai sure but that's not what ai i mean ai hasn't even really started at the application level how it's really going to impact business and all the stuff that i bang on about about agentic workflows and that stuff hasn't really really taken any any any route and that's where startups and private markets will thrive because that's that's what we do um moving on to so meta is building its own ai search engine Just before you move on, I think that's an important vector.

30:28AI will be incredibly important. I think it's important to remember that with the next wave of technology and with AI, it is no longer just about Silicon Valley. it's no longer just about databases and things that are already highly digitized and all the stuff we've been doing in the last couple of decades around e-commerce and digital industries. The next wave of automation is going to be in the real economy. It's going to be where we make things, where we grow things, where we transport things. And AI has got a huge role to play there. And if we are visionary and if we do invest that if we drive change, we can make a very successful society.

31:13I have no doubt. But we've got to have a forward-looking mindset. Our good friend Harry Briggs shared a stat the other day around installation of industrial robots. And the largest market for industrial robots is China. And sort of at the face of it, you might say, well, that makes sense. They make a lot of stuff. They need a lot of robots. But then you turn it around and you sort of say, well, actually, where is the biggest benefit to installing robots? Is that where the cost of labor is lower or where the cost of labor is higher? And if you look at the top 15 countries, top 15 markets, the UK is not even in the top 15.

31:59So how can it be that on one hand we're saying, look, we're not manufacturing as much as we could be because labor is too expensive, but we're also not investing in automation to become more competitive. And that's where I think, I was going to feel the wheels are coming off a little bit. We're just going to be a little bit more forward thinking in how we approach some of this stuff. And it's all there for the taking. I just hope there's not so much inertia baked in that we just hit it all too late. And that comes down to EU regulation and a willingness to open capital markets and get some liquidity back in, I think, unless we do those two things mainly, I think we're going to be screwed.

32:41Last one is yours. So this is an odd one to throw in the mix, but football regulation. So UK government is set to introduce strengthened legislation, which I think reading the article is more about this kind of parachute payments issue. There's obviously fans and ticket prices changes. There's ground relocations changes. But it looks like it's this kind of the financial piece, the big money piece. What's going on here and why did you throw it in? So it was discussed last week and I thought it was interesting because it's a little symptomatic of where I think we are in this cycle of a new government and a new administration.

33:26I think it's broadly relevant because you've just got the Premier League, which is the world's premier football league, and it's watched everywhere. You could travel around the world, go to Texas, you can chat Premier League with the cabbie. You go to Singapore, you chat Premier League with the cabbie. It's become sort of a global cultural phenomenon. And so I think it's an important asset to have. and we talked before about what do we need to do to really strengthen those assets that we have, the City of London, our investment industry, but also things like the Premier League. And it just strikes me that what's being proposed here, I can see why it might be popular.