E418 | This Week in European Tech with Dan Bowyer, Mads Jensen, and Ben Prade

0:00So welcome to Upside, where we talk all things European venture, startups and investing. digging into the real stories behind the tech headlines. Today it's Mads and myself from SuperC joined by Ben Prade, a partner at the growth investment firm GP Bullhound. Now, GP looks like they've got nearly a billion AUM and by the looks of things have invested in every cool tech household name under the sun.

0:26Tear 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. Ben, welcome. Tell us a little bit about you and what you do. Yeah, hey guys. Well, great to be part of it. I've been listening to the podcast for the last few weeks and I really love what you guys are doing. You're the listener, you and my mum. so uh yeah so gp bullhound it may be a name that pops out to some of you in the kind of tech industry um so we've been around about 20 25 years we're an interesting beast actually because we are probably more predominantly known as an advisory house um we've been doing mna for tech founders across europe and the us for the last one as i say 20 25 years actually it's just around that the dot-com burst, that we kind of got started, actually.

1:27That's allowed us to build a big office network. You know, we're 12 offices. We're in Asia now as well. But I guess what's maybe a little bit less known is that we're building an investment business alongside that for the last 10, 15 years as well, really kind of using the best kind of knowledge and contacts and deal flow from the network to really invest in those companies. And a bit different to you guys, we're a little bit more of a growth stage investor, I would say. I know you guys like the early days. Hey, listen, that's what Europe needs, right? I mean, we need more GP bullhounds. I think, you know, no one's going to argue with that.

2:01We need more growth beyond the pre and the seeds. That's right, yeah. And again, I think our portfolios are probably a little bit more concentrated as well. So, you know, we're only investing in maybe 10 companies per fund, getting very hands-on with those companies. So, you know, we'll often find they'll have a great early stage VC like yourselves in there but then we're taking that baton on to really help internationalize them think about even bolt-on acquisitions you know going to the US which is such a core part of any European company strategy is really if you're going to go global you have to break the US right and we're a good partner for that with the two offices over there.

2:41Wonderful thanks so much for joining us. No no no problem and then myself so I was a kind of more traditional investment banker for many years hedge funds trading all that kind of jazz made the jump about kind of eight ten years ago into tech i sit on the ic so i get involved in the investments but really my day job is fundraising uh which has been a you know an interesting process we're gonna dig into that we're gonna dig into that because we want to we want to share because i think many of our listeners are founders and i really want to dig into what goes on behind behind behind the scenes which you're hopefully going to share all the dirty secrets.

3:21So that'll be super cool. But Mads, listen, first up, how's your week been? You've been away. You've been fabulous-ing in the mountains. What's new with you? I've had a great week in the mountains. There's just nothing quite like the Alps. And we had terrific weather this year, lots of snow right before we came, and then a week of sunshine. But temperature's cold enough to keep the snow powdery. I really enjoyed that. In the meantime, we were able to do two term sheets this week. So got some investment done there. Just while you were shushing down the slopes, just, you know, signing a term sheet on your mobile phone.

3:54I just need to go away more. I bet the family loves that when you're out there doing term sheets when you should be with the kids. Yeah, yeah. And with four daughters. What are lifts for? Yeah, yeah. What are lifts for, right? There you go. If we can do a few deals going up the mountain, why not? What else has been on your mind? So you've had some other thoughts. Do share. Something that happened tail end of last week was the Munich Security Conference. And I think we recorded last week on a Thursday and it happened Friday and we published Sunday. So there was kind of a little bit of a debt zone that we didn't quite get to catch on the pod.

4:32And it was really interesting that there was this talk from J.D. Vance that was kind of left many in Europe a bit shell shocked. Actually, going back over the talk and listening to it, it's easy to get swept away by the media narrative about how horrible he was to Europeans. And I think clearly when you think about the U.S. policy right now, we're European-focused. But what's happening in Washington is very relevant to us because it influences kind of everything right now on a global basis. And I think there were some things he got wrong and probably also some things he got rights in the speech, J.D.

5:12Vance. And so firstly, maybe some of the context. So, you know, there are potential accords on the horizon with Russia, which is, you know, you could say it's maybe not the ideal situation from a European perspective that the U.S. sort of seems to have done a 180 in terms of, you know, who are really the allies and what are their objectives. And then there's also a potential trade accord with China. This is a little bit more speculative, but there is speculation that Trump really is trying to do a big trade deal with China that will sort of completely upend the global trade flows. And so on top of that, Trump has also said, look, we've got to cut the fence spending.

5:50We've sort of got to try and go for global disarmament, which in many ways is a laudable goal. If you think about some of the things maybe that the speech got right, I think there is this talk about freedom of speech. And freedom of speech is important. It's kind of not to conduct or condone terror or subversion of the state, but to discuss and find insights. And I think there is an argument that maybe the pendulum in Europe has swung a little bit too much in the wrong direction where we've become a little bit too cautious about really letting people speak even when we disagree with what they say.

6:27I think there's another element that was really interesting coming out of the talk, which is, okay, so let's say that the U.S., kind of new U.S. policy is no longer to be the sort of quote-unquote global policeman, but to pull back from some of those duties they've taken over in the past. Well, you know, we can either see that as a terrible loss in Europe, or we can see that as a bit of a wake-up call to take charge and be in charge of our own destiny. And if you think about Europe today, the European economy, even excluding the UK, but the EU economy is 10 times the size of the Russian economy.

7:05And so add UK to that, it will take a whole lot for us, I think, to match Russian level of military capability. And I think there is something about sort of saying, look, we're not expecting our, you know, the daddy that's the U.S., kind of our parent to come to our rescue. No, we've got to grow up, be in charge of our own destiny and make sure we have the capabilities we need to defend our sovereignty, our security, the safety of our citizens. And I think if we take that mindset, maybe something good could come out of this. Maybe we could be a little bit more forward-looking, a little bit less sort of looking in the rearview mirror, and a little bit more about, well, what will it take for us to be autonomous, not just from a defense perspective, but also technologically, and able to carry our own weight in the world?

7:55And so I hope that people will see it as a wake-up call and as an opportunity to step up as opposed to sort of – I think what we sometimes do is to sort of just feel hard done by and sort of slink away over into the corner and say, oh, aren't they terrible? So that was my perspective of that. There's a lot more we can go into around what has it been for European defense, what's happening with UK and AI, and we can unpack that as we go. Yeah, we're definitely going to go there. later across multiple topics. Ben, what's been keeping you up this week? What's been on your mind? Well, a little bit of that kind of stuff.

8:33I do agree with Mads. I think this is an opportunity for Europe. I wonder sometimes with these speeches that are made, how much strategy there is behind it and how much there's just looking for impact, looking for headlines. And we'll see if the US has a real strategy for Europe and some of its interactions on a global level, or whether it just changes week by week, tweet by tweet, you know, that's the only thing that bothers me. But if it comes to a good point for Europe and we take our destiny back in our own hands, I think that's great. I thought there was some really interesting points you guys made a couple of weeks ago about the US almost kind of wanting Europe to be beholden to them from a defense point of view to be able to kind of get this political power that it's had over the world and it'll be interesting as the u.s pulls back who will fill those voids you know i think there's clearly an opportunity for china to get more involved in fact i saw this week um i think there's a new tender out by the hong kong government to invest in vc funds across europe um you know and you would think well you know that's an interesting thing to do why are you doing that and i think there There is not, you know, perhaps there's a void there to be filled by Chinese money in certain locations, which will build goodwill.

9:50And in the long run, that's a shame for the US, right? Because I think it loses that soft power that it has across the world. And it does bring a lot of justice and a lot of good things. So we'll have to see how that develops in the long term. I think the US is a long term loser in that front. But other than that, you know, Europe, I think, is good. I think we spent a lot of time this week or last few weeks building deal flow in Germany. There are some fantastic companies there. I think that engineering spirit that they had from the last generation that built so many great engineering companies and manufacturing companies is there in the new generation to build technology companies.

10:29We see that same determination. And, you know, I think it's a great opportunity. It's a great time for Europe to, as you say, stand on its own two feet and prove what it can do. well Trump is definitely doing that the Trump administration is definitely making everybody globally much more concerned about their own defense security their own their own standing in the world is this is the JD Vance rhetoric and the Trump admin is it changing your investment criteria is it changing the way that you view deals are you looking at more defense for example well for us um i think clearly the amount of money coming into defense you can't ignore and we can get on to this when we talk about fundraising if you're raising a fund and you're telling people you're going to invest in defense you are more likely to raise a fund right now which means more money i think most people would assume that if you put AI on your pitch deck or whatever, AI on your startup or VC pitch deck, you're going to fundraise.

11:34But we've got a new game in town, the defense game, right? That's right. And these things come and go. You know, quantum's another one. But sure as hell, if you're going to say, you're going to raise a fund in marketplaces, you're not going to raise that fund, right? Even if that might be the best strategy out there from an investor point of view. so for sure these massive themes that the link to geopolitics is having an impact on the ground in what we're all investing in and what we're looking at i've not seen this i mean maybe i've had my head in the sand but i've not seen at a government level so much potential impact for our industry as in vc startups almost at the lowest end you know obviously we're a stage before you in the investment sphere, investing at pre-seed and seed rather than the growth piece.

12:24But I've never experienced in my career the macro really, really, almost immediately affecting AI defense, almost coming full stack down the stream to create different strategies. I think it's an exciting time to be alive. But Ben, you've been out on the fundraising tip. You've been out speaking to LPs to invest in your latest fund, which I think you just closed 300 million. 300 million, yeah, which is another 300 million client. So tell us a little bit about what your impression of the response from LPs, what they're looking at, how the industry, how the ecosystem is feeling from your perspective.

13:05Yeah. Yeah, sure. Well, I guess it's important to go back a few years to think about what's happened, I guess, over the last 10 years or so. There was obviously a great time for VC kind of post 2012 all the way through to 2022. you know you had a whole food chain operating early stage funds growth stage funds late stage funds and importantly an IPO market that was functioning this was allowing companies to make good investments and then get their cash back out and send that cash back to LPs that drove good returns. This is one thing that we talk about quite a lot which is founders especially I don't think they fully appreciate that whole stack that full recycling if our investors investors investors aren't taking returns they're not able to recycle in the next generation of VC funds and startups so that is incredibly important sorry to interrupt you but I think is that's an incredibly important part of our ecosystem that basically stopped right that's right yeah so I think a few it stopped for a few reasons clearly it got overheated um you know COVID came along I mean it poured you know rocket fuel onto the whole system you know people sat at home certain types of technology companies just went through the roof we also had you know zero interest rates at that time free cash into the system everything got overblown and then we saw you know the big blow up in the markets once inflation went up interest rates went up everyone the markets hit a full stop and came flying down and then in our industry you know private market valuations of our companies tend to mirror the listed market valuations quite quickly these days.

14:43It's not even that big a lag. So you had this horrible moment in 2022, 2023, where we were all reducing the valuations of the companies that we were holding in our funds. So all these funds that were looking super, super good on paper, suddenly were looking a lot more realistic in terms of valuations. That coincided with this big ramp up of people coming into the industry. So new funds being launched on the back of this, you know, this great run that we'd had in the late 2010s, the amount of funds out there just grew massively. And of course, it was fine that the money was coming into the system from new investors who were getting sucked into VC who potentially maybe shouldn't have been there.

15:23But there was so much news around that. Now, of course, you've got a situation where a lot of new funds raised their first fund, you know, 2020, 2021, 22, invested at the top of the market and you know now those valuations are looking pretty toppy they don't have the track record they're coming back to market now and it's like well you know can you give me another billion dollars please but you know the money from the last fund has done absolutely nothing and it sure as hell isn't coming back to anyone in cash terms anytime soon so as the IPO market has just died it means that the cash isn't flooding back into the system and you know we have this concept of DPI, which for people that don't know, that's kind of distributions to paid in capital.

16:10So that's the amount of money you're getting back from a fund compared to how much you've invested in it. And let's be honest, most funds are delivering almost zero DPI back. So a lot of money is stuck in the system. It's not coming back to LPs. A lot of LPs just don't need VC in their portfolio. You know, it's not like we're often an afterthought. I don't know if you found this i mean at our stage it feels like we're we're so the rlps tend to do publics they'll have you know some property they'll do their philanthropic philanthropic stuff and then vcs or it almost feels like the afterthought it's like one to two percent of aum i don't know if that's that's possibly not the space you play in i imagine no it is i mean we had investors all the way from entrepreneurs all the way through to institutions um i think you know what what has happened also for the institution investors a lot of that cash was coming from the US you know it was the biggest investor in VC and some of that was coming into Europe now since the revaluation in tech you know the leading light in technology has been the AI boom in the US you know the magnificent seven and then off the back of that the private companies in the AI space in the US have been doing very well also so now that big pool of capital in the US is not really looking beyond the US borders, which has been another problem for Europe, is that US investors, it's very hard, let's be honest, for a European fund to go to the US and attract investment when they've got such a big technology ecosystem over there.

17:44And that has sucked some of the fuel out of European VC. Where are most of your LPs? Are they global? Are they Europe? Has that affected you at all? Well, actually, we do have investors from the US, but in our last fund, very little new investment from the US. So what we found is, so we're kind of lucky because we've just raised a fund post the revaluation. So a lot of funds are still going out there now. Our fund, we had to kind of raise this fund in the new paradigm, if you like. And what we found is, you mentioned it, is government money. That was very interesting for us. So what has filled the gap from what used to be maybe US pension fund money is government money.

18:34And I think a lot of governments across the world have seen the potential for technology to allow them to have a domestic economic policy, to create jobs, to attract people to their region. And the way they're accessing that is through VC funds. So I think there's a good opportunity for European funds to work with foreign governments, both in Europe and across the world. I mean, we got a lot of investment from Southeast Asia. And these are great countries with good sovereign wealth and with a policy driven element to what they're doing. And so going to these nations, we're a big organization. We can do M &A, we can do reports, we can do research, we can work with their local companies.

19:18so I think to your point about government getting more more involved I think VCs these days to attract funding have to do more than just say give me some money and I'll give you some money back in four years time they need to work very closely with the LPs in terms of knowledge sharing ecosystem building to to gate that money to bring that money in and I think that's a key development that we'll see. Of course, it does throw up the questions of does government money change the strategy of the underlying VCs? Is there an issue around those VCs maybe changing what they were doing before to attract government money?

19:57And we'll see how that plays out. Some governments will require the VC to put a certain amount of money back into their ecosystem. And that can start to influence the investor as to where they're putting that money. We've managed to avoid that so far work more in terms of softer connections in terms of building and making opening offices or working within those ecosystems but I think it's an important development for VC so if you're a new VC right now going out to raise a fund you know you need to think a I need to really focus on a particular sector be very sector focused whether it's AI or whether it's defense I need to have some deep expertise in that particular sector maybe people in my team from academia etc and I need to go out and show LPs how I can work with them to educate them around that sector and that's how you're building a longer term LP base I think right now.

20:56On the quickly on the M &A IPO piece is your sense that 25 is going to open up more of all it feels like that anecdotally but I think you're closer to the to the fire than we are is that are you sensing that that's happening we're sensing it's happening it's not coming as quickly as everyone i have to admit you know um even clarnut for instance we we know we're investors in clarnut from a couple of our funds it's a fantastic company um they've been talking about the ipo it's maybe looking like april may now that they may may ipo i think that'll be a huge bellwether for what happens next but even they've taken their time.

21:36So whether 2025 is the big dawn or not, I suspect maybe it may be 26, 27 really. Okay. Okay. Yeah. I mean, it feels like AI specifically has accelerated the recovery, has accelerated LPs being back in the black. It feels like we've got this accelerating force with kind of this slight liquidity push being then unevenly distributed because of geopolitical tensions. And I'm also hearing anecdotally, a lot of Italian government money going into VC funds and being released with a very specific focus on Italian startups and a little bit going on in Spain. It just feels like this nationalist populist push, especially from the government level, is now creating a few more engines and fires in local economies.

22:28I don't think it's a bad thing but um i'd love to see how this all comes to pass now mads have you got any before we move on to like the crystal balling and opportunities in european venture have you got any any reflections on what ben has been saying or any thoughts about our experience of the fundraising environment in europe i think ben charted the path perfectly it's what we've all seen and lived through. You had a bubble in 2021, 22. The bubble burst and has been deflating. The recovery from that bubble has taken longer than people wanted or were hoping for. I think there has been a lot of focus on public markets.

23:11It's kind of, I think maybe for the first time you've been able to play this new tech wave of AI through public markets, which many people have been doing. But that said, AI is clearly a subsector within the venture capital ecosystem and startups where things are happening and a lot is happening and valuations are relatively high, dollars are flowing, investments are being made, and capital is being raised. And so maybe the truth is we're just never going to go back. Things are never going to go back to the way they were. It's a constant evolution and the markets will keep changing. And I think, you know, the insight is if you have, if you're building good companies, you'll always be able to raise capital.

23:56There's always money for good businesses. And that's been the experience even in 2023, which was not a great year. So yeah, things are tougher, but it's not impossible. And I think when people work hard and build good companies, I think there is always a way. Well, let's have a chat about the future and how Europe and LPs and VCs and startups and that connective tissue, how we think that's going to progress over the next two, five, ten years. But first, just for a little bit of background context about the European ecosystem. So last year, Germany, France and the UK, the VCs there invested around$25 billion.

24:35Across all of Europe, that was about$45 billion compared to the States, which was$200 billion. So still a fair track behind. Now over the past decade European VC has yielded a net IRR, so internal rate return of 20.8 % beating the US at 18.2 % so European funds have outperformed on an IRR basis. European VC has consistently outperformed public markets delivering a net annual return of 23 % over the last 10 years and the share of global VC has gone up from 5 % 20 years ago to 20 % in 2023. So there's a lot to be positive about in the European ecosystem. But Ben, if you were crystal balling and looking to the future, and I love your optimism because you've always struck me as this kind of super positive, optimistic guy in our industry.

25:27What do you see? Where are the opportunities? Where are you investing? Where are you playing? And how do you perceive the world? Yeah, I think for us, we do invest across Europe. You mentioned Italy, you mentioned Spain. You know, Spain is a very interesting region for us. We do a lot of investment in Spain. We have a lot of investment into our fund from Spain, from the stakeholders in government all the way through. I think we are seeing academia being more present in technology than it was. Maybe that's one of the real benefits of the last few years. I think if you look at the companies in the 2010s that were taking off, it was more kind of gaming, it was social media, it was e-commerce.

26:13It's not the dream of tech. now you're seeing AI, you're seeing quantum, you're seeing some really deep tech coming through. And I think that's really a positive thing for Europe because we do have fantastic universities and institutions. Some of the leaders in all types of technology and science are based here. That's a strategic advantage for us. And as the government's become more conscious of that and building funding around those institutions, I think it's a huge opportunity for us, not just Cambridge and Oxford, but across Europe. So we're seeing incredible AI companies come up, for instance, in Spain, where you wouldn't have thought that.

26:54And these are congregations of different types of people from different countries, using Spain as a base, and building fantastic companies. You know, the culture around work in Europe probably has to adapt a little bit, you know, they have to work hard they have to be in the office they have to be working seven days a week so that is coming in Europe you know it's improving compared to the US but you know with this government money coming into the ecosystem we all know the wonderful job the European Investment Fund has done but has always been a little bit more of a silent investor into funds letting funds do their thing but as these governments get more involved one of the huge benefits is for our portfolio companies, the connections we have with governments is really, really powerful because we can start bringing our portfolio companies to governments, maybe think about how is that government going to build its own AI infrastructure?

27:47Maybe our portfolio company can be a customer to the government. And that becomes a really powerful thing for Europe to start accessing if it can support its own technology companies through contracts, through government help connections across the world that's a real interesting thing so as all of this political goodwill and pushing and shoving starts to starts to come to a strategy i think that's a huge opportunity for europe i think people often don't fully appreciate how much the private markets and vc and startups and and the tech industry has been supported by the us government i think europe gets a bad rep where it's kind of kind of put down often by by the amount of government money that goes in but there's a huge amount of government money that goes in from the us into effectively into private markets and into supporting the the tech industry i think we it's worth just i say that quite a lot so if i'm repeating myself i apologize if that's boring but i think it's really important to see this this isn't a european thing government money this is a global thing.

28:52Yeah. Now, well, let's move into quantum. So I think there are, we're going to talk a little bit about fusion later. So AI, quantum and fusion, I think are really exciting. And there are some movements across all three. Now on the quantum side, there was news this week from Microsoft after 20 years of research. It's hailed as a new paradigm in quantum. And we're going to get into each of our cynicism about this in a second. But the Majorana One chip, which is the world's first quantum processor powered by a topological core architecture, meaning that quantum is more reliable and scalable. The qubits are.

29:26So Satya is saying that this new state of matter is pivotal for achieving more stable qubits. It's become a bit of a PR sesh from Microsoft this week. Mads, do you want to kick off on the quantum tip? Yeah, I thought it was really interesting. I mean, look, you have all the usual naysayers and it's easy to be skeptical, of course. You know, does it work? Is it a genuine breakthrough? or is it just another Theranos? There's always plenty of that. But for a moment, let's just assume that this does work. And maybe the context around why quantum is useful. There's a lot of stuff you can do with quantum computing that you can't do with traditional computing around encryption, which we all know can be used to potentially crack the RSA algorithm, which means we're going to have to think about different ways to encrypt things.

30:18But also in things like finance, you can optimize portfolios because you can simulate trillions of options in parallel. You can use it to optimize supply chains. You can use it in AI because quantum linear algebra. So basically, traditional, the AI models we build today, kind of the model that we're all super excited about right now, we can call that traditional AI, is basically built on linear algebra. That's how we make these big neural nets. But quantum linear algebra, which is what we can do when we have quantum computing, will enable us to train vastly bigger models in a fraction of the time.

30:59So it's sort of a whole new scope of what we can do with AI models. So there's so many cool applications of this once we get it to work. And we'll talk a little bit about some of the timescales in a minute. Now, the challenge is that the quantum states, these new bits, these qubits, They're not like traditional bits that are just zero or one. They're these qubits that can be zero or one, or they can have these super positions where they can be everything in between. And that means that they're very finicky. And that means that even if you can create a qubit, it might not reliably tell you what you want to know.