E445 | This Week in European Tech with Dan Bowyer, Lomax Ward, and Andrew J. Scott

0:00Welcome to Upside for the real stories behind the headlines affecting European venture. joining today is Lomax from Outsized, Andrew from 7 % and myself I'm Dan from Superseed VC today we're taking a look back at Q125 a quick look back over the last three months Q1 is now over blimey that went like in a breeze in a quick sharp shop winners losers ups downs mega rounds and some of them minors and then digging further into the impact of tariffs on Europe yes I know we're all tariff fatigued but we just have to it's so bloody important please forgive us

0:50this show is not investment advice and the hosts of this episode may be invested in the funds and companies featured gents what's new low max how are you what's your week been like what's caught your eye? I'm great, thanks. Yep. Building out the office on the beach now, getting furniture. Office on the beach. Exactly. I'll have a pina colada. Come surfing, come for some deep work, etc. It's all actually very excited about that. Caught my eye this week, Plana, the IPO that we've talked about that was slated for earlier this year, pulled their IPO since our last podcast last week. I mean, not surprising, really, given what's going on in markets.

1:30but it was one of the big European-backed exit events that we thought was going to happen. I think it's probably a slightly choppy, postponing definitely, probably slightly choppy water for Klarna now because I actually noticed that its main peer, which is listed already, a firm in the US, its stock is down 50 % this year, so now trading at a 12 billion market cap. Klarna had been aiming for a 15 billion valuation down from the 45 billion at which it raised money at the peak. I think buy now, pay later, which is what Klarna does, its main product, is something that actually probably might come in for a challenge with an inflationary or environment and a slowdown in the economy.

2:12I mean, consumer spending, buy now, pay later, is one of the first things that get hit. So I think Klarna may be taking a double hit in terms of the market, forcing it to postpone the IPO, as well as potentially choppy headwinds on the actual commercial side. And then good news, though, for Europe and for the UK is this deal that Wave, the AV AI company, automated vehicles AI company out of Cambridge, that's one of the leaders in the space and has raised$1.2 billion to date. So not many companies in Europe have raised over a billion dollars, has impressively signed a big deal with Nissan to incorporate its software in cars being released from 2027.

2:53So I think that's a really interesting big deal. And AVs, automated vehicles, obviously been through a bit of a winter the last few years, but now starting to gain a bit of momentum again. So watch this space. It always feels like Waymo and Tesla get the kind of the AV, EV credit when actually, and yeah, Tesla versus Waymo, just an example. Waymo, many more rides going than Tesla have. I think it's hundreds of thousands to zero. Anyway, Andrew, what's happening with you, my man? I'm good. Busy, busy. I actually spent a nice day with Lomax on Tuesday. We had our quarterly strategy session for Dragon Chasers, which is the European BC LP community.

3:35So that's always exciting to plan ahead when you're building. Other than that, back on the race circuit, all good. Back on the race. Do it. What's caught my eye this week? So I saw something quite lovely, And it's got nothing to do with startups investing, obviously, Europe because it's UK. But it was Universal opening a theme park in Bedford. They're looking at a 2031 theme park opening. It just kind of I thought was kind of cool. 28 ,000 jobs. The other thing that caught my eye, which I imagine caught both of your eyes as well, was this leaked memo. It was the Shopify CEO, Toby Ludger, asking teams to demonstrate why AI can't perform a job before they're permitted to ask for more headcounts.

4:19I think we're going to see a lot more of that. Presumably. Sorry, Dan. I mean, that is like every CEO is issuing that already. I mean, I'm not surprised it was even a story, quite frankly. I think it's because there was I think it was the leak, inverted commas. But yeah, you're bang on. I mean, this is going to be every single CEO startup. scale up growth company is going to be thinking how can i how can i tool up and we're going to look at some of the results from the ai report later in the pod which kind of breaks down some of the the confidence or lack of confidence of the impact of ai on recruiting on on redundancies on efficacy on productivity so i think we're going to dig more into that the other thing that caught my eye was the a very thoughtful ai thought experiment from the ai futures project now they're a small research group and they're looking at the potential future of ai and it's a bit like an asimov novel and it's if you want to look it up it's ai-2027.com and you can have a look it's a beautifully designed website and they they look at the next three four years and the potential outcomes of AI and what China may or may not do and what AI and super intelligence may or may not do.

5:37And it's just a very, it's a very kind of smart, thoughtful, cute way of just getting all of your best and worst suggestions for how AI is going to transform the world down on paper. So have a look at that if you can. It's ai-2027.com. It's kind of reminiscent of, I think, max tegmark's book i think it's called life with yes i know which has a very very similar well very similar but a beginning that was written that was that book's probably what eight eight years old now maybe 10 years old so you know had kind of massive echoes of that although this goes into a lot more a lot more detail yeah very specific i mean they've obviously there's i think it's five in the group that wrote the paper they've obviously really kind of got everything all of their worst fears and concerns and their their excitement for the topic all down it's yeah, I highly recommend having a read.

6:29I'm going to have to ask forgiveness up front. We've got to talk about tariffs. I really want to make sure that we focus on the European angles and bring it always back to startups, investing, venture, Europe. But we can't not have a look at, I'll do a quick kind of status update, but we can't not have a look at this topic. So please, again, please forgive us. But here's a quick status update. As of the 10th of April, Trump has obviously avoided an all-out war on tariffs with a 90-day reprieve. There is a global 10%, apart from on China, which is still stuck at 125%. No Christmas presents for any American kids this year.

7:09I've written down eight reasons, and I'd love your insight, thoughts, and kick back to this. I've written down eight reasons why I think Trump is doing it. Many we've talked about, many are in the wider press, but maybe some other angles that are not so obvious. So one, cheapen government debt. So lowering yields in the bond markets, which has massively backfired so far. The safe money route hasn't come to pass. Is it to weaken the dollar for international control? And if you look up Scott Besson's vassals versus neutrals versus enemies, his green, amber, red strategy, have a look at that. It's really, really interesting how Scott Besson, you know, him and Lutnicker, Trump's two right-hand men on this topic.

7:51how he's thinking about how if they weaken the dollar, they can effectively create this kind of vassal control. Is it a negotiating tactic to onshore manufacturing? Again, I can't see why Americans would want Chinese jobs and how fast can they spin up this capacity. I think it's super problematic. Number four, is it a bringing cash to balance the books, but then you can't have it both ways. It's either reshoring or it's, you know, get the revenue in. It can't be both. Is it rebalancing the trade deficits, which aren't actually, when you look behind the scenes, aren't actually all that bad in reality.

8:23Is it really to fully decouple from China? Possibly. Political signaling? Probably. Bullying and control. Purist hegemony? Yeah, because that's not the greatest, smartest way to do it. But I think that's possibly just Trump all over. Some other very quick stats before I open to the floor. Even since the bounce, European and US stock markets are still down somewhere between 4 % and 11%, depending on which markets you look at. What this means is that global markets have effectively been kicked back a year. Now, my personal take is that because the US now can't be trusted, I think that's the kicker here, is this trust piece.

9:01I think we'll see more of everything across Europe. And I've had a look for some kind of proxies or for some kind of insights into where the noises are. So on the people movement flow, the Aix-Marseille University in France have launched a safe place for science initiative, allocating 15 million euros to fund positions for American scientists. I thought that was quite an interesting play. Many investors I've spoken to this week are looking for now safer havens to balance portfolios, looking at LATAM in Europe to try and get cash out of the states and into more more safe and considered markets.

9:36And then to look at yield spreads between the US treasuries and German bonds, it's widening. China, US and the UK are the biggest buyers of German bonds, just as US bonds tank. So I'm sure there are other proxies. Lomax, what do you reckon? What now and what next specifically for Europe? Firstly,$15 million to fund scientists coming to Europe as it sort of seems like a very European amount of money, i.e. not a lot. I think I was reflecting on this because last week when we talked about tariffs and their implications for European startups, the conclusion, at least from my end, was like not much to see here, like head down and build.

10:17Little did we know that during recording the podcast, the markets were crashing. So, you know, there was a risk that we started to look a bit stupid at the back of that. But then lo and behold, a week later, we've come back full circle because, you know, with Trump delaying the tariffs and putting in this 90 day place, the markets are back up and then they're, well, now they're coming down again, potentially. But I think our position on this largely stays the same i think it's head down and build you know i think when i look at what's been happening in the kind of early stage you know vc founder community i mean firstly now as always every vc that i know is suddenly an expert on tariffs you know we see that that happens and you send that beautiful meme in the week didn't he that that you know shut up darling i've got a podcast on tariffs to record so yeah i'm i'm hyper conscious that the three middle-aged wide dude sitting here talking about tariffs oh my god we are now we are the me come here you know people have studied this for that for that you know for the whole of their academic career but you know you can you can hear the best most cutting edge you know insights here i think look you know kind of reactions amongst you know vcs have been you know anything from like kick down and build to to blind panic we've seen you'll remember in 2008 when sequoia um put out to its founders an rip good times memo i've even seen one vc put out one of those memos which you know Really?

11:39Interesting. Well, I know, which definitely seems a bit hyperbolic. I think it's headstab. Look, I'll give an example. Yesterday, I was having lunch with a founder in our portfolio, in sunny Lisbon, and he's building mixed reality games. And, you know, big long-term project, like amazing founder, talk about that another time. But, you know, one of the, you know, it's software. So, you know, no tariffs on software, right? So no kind of massive implications. But, you know, clearly there will be tariffs expected to hit, you know, X of, you know, devices, the headsets. So, you know, during lunch, we were querying what that might do to his business.

12:14You know, we came out of lunch and suddenly realized markets were back up. Tariffs had been put on hold. So my point was we spent an hour and a half worrying about tariffs and the impact, indirect impact on the business when actually, you know, these things at the macro level do not, you know, they're so removed from what founders are doing, especially at the pre-seed and seed level. I think you need to kind of keep your head down and build for the long term. So I think the message is heads down, keep building. Let's not forget that at the moment and probably for the future, there will be no tariffs on software.

12:50In biotech, there may be. So there may be some implications. Hardware, I think this is an interesting one. I think if you're preceding seed in hardware, you're probably working on MVPs and early customers anyway. way, right? So that doesn't really matter. But I think you look at Series A, Series B hardware startups in Europe, they're probably having a good old think now as to where they're going to do their manufacturing, right? And there'll be a discussion, and this is going on in some of our companies, where you'll basically be saying, well, we could do the manufacturing in Asia or in Europe, but then we'll have to hit these tariffs.

13:19Or do we move manufacturing to potentially, depending on the vertical, our biggest market, which is, say, the US, do we potentially do manufacturing there? In which case, you're probably looking at costs two to three to four times what they would be in these other geos. But of course, you then remove the tariff risk. So I think those kind of conversations will be going on in the boardrooms and between co-founders at the sort of series A, series B hardware startup as they move to kind of scale up and manufacturing. That's probably what happens anyway, to be honest, in my experience. You always have tariff risk if you think about supply chains, et cetera.

13:52So for me, head down, keep building. If I had to make one adjustment, I would tighten the belt a little bit. Think about maybe shoring up the balance sheet you know if there's opportunities to take in a safe um you know maybe think about that you know if you were planning to run into the market to make a few hires you know maybe slow down a bit i mean that's you know a lot of this choppiness can impact the fundraising markets in the in the private markets in bc and so that's something to be mindful of and watch but otherwise i think it's just you know crack down at the micro level it's the wonderful thing about what we do.

14:26It's about, you know, products and people and ideas. And, you know, that's it. And that's not, we don't need to be buffeted and tossed around as if we were day trading the stock market. We were talking about the shift of LP cash from public to private markets. And there might be some interesting, apart from cash, potentially capital inflows into Europe or LATEM or other territories. I think there will be a geography play. Well, there's that and one thing i would say look to be honest as a vc who raises money right from lps my biggest competitor in the last two to three years quite frankly has been nasdaq right because lps will say to me why the hell you know they're both eight percent year on year baby well why would i give you any money but in the last three years it's been even more and it's totally liquid whereas remember when you invest in a vc fund you're locked up for 10 years effectively so i i think you know for me i actually think when i go you know speak to lps now i've almost lost one of my biggest competitors right because yeah you know there's still there's still scope for alpha in the stock market but it's very volatile and actually you know the nice thing is we aren't buffeted around by that and if you're building for the long term um so that that could be long time good but none of this really affects short term what founders are doing in the weeds day-to-day and the trenches so Andrew what would you what would you add what would you take away Europe startup investing venture ref tariffs I think the broad brush from Lomax is right.

15:49Head down, keep going. It's a state of flux. So it's hard to suddenly pivot and change all your plans when Trump is making changes as quickly as he is. If tariffs are going to stay, then for sure, hardware companies who are selling into the US have to think carefully about what they do. It's not as simple as just assembling your parts in the US, shipping parts in and assembling and saying it's made in the USA. The Federal Trade Commission has pretty strict guidelines saying all or virtually all of your products, parts and processing must be of US origin to be labeled like made in the USA. And then I think it's the US Customs and Border Protection determines country of origin, which is defined as there must be a substantial transformation.

16:37So did the imported components undergo a meaningful manufacturing process in the US? And how did US origin parts or process contribute to the final value? How much of the value that the product delivers was created domestically? So startups that have products in market and for whom a tariff has impact on their sales potential are going to have to think very carefully about that. And to Blomax's point, that could be a significant investment in moving manufacturing or even sourcing components. So I guess there's summarized this sort of some supply chain risk, cost of parts risk, you know, bill of materials cost risk, which could affect end user cost.

17:20What area that I think is interesting is biotech and pharma and less at the startup, but certainly at the scale up level, which is, you know, where do you manufacture your drugs? OK, this applies a lot to big pharma. But as I said, it applies to emerging biotech companies is if and by the way, at the moment, there are no tariffs on pharmaceutical products. But if as expected, they might come in. You know, these are big CapEx projects and, you know, in the tens of billions. And those could actually be, you know, cancelled. And we talked about some of these projects in the past in the context of the UK.

17:54Like these are big projects that could easily be, you know, potentially moved to the US quite quickly. So that is one area. But I think that's a sub theme to the broader, like early stage tech startups in Europe. And it's funny, you know, you've seen those videos this week of, you know, Trump and Vance, like working in sweatshop conditions, you know, making socks or whatever, you know, middle stereotypical middle Americans. Are these the video memes? Yes, exactly. You know, basically making the point that, you know, it's not exactly like, you know, this is the kind of jobs that you want you want done in America.

18:28But there is a serious point, which is that, you know, and by the way, the UK and the US are on the interesting new news this week is that the UK and the US are on the cusp of potentially, you know, actually agreeing a trade deal, by the way. But if you're a startup, a hardware startup, and, you know, you have a question. It's like, do I manufacture in the US and have like a zero tariff risk potentially in my biggest market? But the cost of manufacturing could easily be three times what they would be in Eastern Europe or in Asia. So actually, maybe commercially, the answer is we'll keep building in Eastern Europe or any part of Europe.

19:00Yeah, maybe take on the chip. Yeah, but you can't ignore the US as such a behemoth. But yeah, of course, it depends exactly what market you're in, for sure. I bet you regulations come down across Europe in 2025. I mean, we've seen a couple of softening of regulations in our industry. we saw that i can't remember what that what was that what was that fca ruling they're looking to clear this year the andrew you and i spoke about it that 100 mil to five bill pe hedge regulation for for investment managers i know that there are other things across europe where it feels and looks like i think this year it's going to be there's going to be a softening of any kind of cross-border or intra-eu intra-eu regulation i think i i i by the way i mean i I don't know, you know, clearly it's part of like Mario Draghi's work and, you know, like structurally like making big change and reform to how Europe operates.

19:58I just am very skeptical of this. It's got to be the kick, Lomax. This has to be the kick in the pants. I can't think of any other Black Swan world change pant kicking episode. This is it. This is it. Trump is doing his NATO defense, you know, pullback tariffs. This is it. This is the message. If we don't get it now, we never will. Yeah, I know. I just think the message is so mollified and softened by the time it gets through to these people, you know, making these laws. I often wonder whether they're incentivized by, you know, each subclause, paid by clause. Fair, fair. But very quickly, before I come into you, Andrew, Wunderland, they imposed at 25%.

20:45And then as soon as Trump flipped on a dime, they withdrew. So it feels like the speed of decision making is going to catch up with the world's reality now. So I think these are good signals, right? Andrew, what do you reckon? That's also one of the biggest impact is the uncertainty. Markets hate uncertainty. If that's likely to increase interest rates, that's not good for VC. It becomes a less and less attractive asset class as interest rates go up when you can put your money instead of a VC for something liquid. and it's not good for anyone. I saw a couple of potential IPOs delayed on the LSE because of the tariffs coming in.

21:28So uncertainty is the biggest problem. Well, let's look at some of the reports. So there are two reports that I want to dig into. One is the state of venture and one is the state of AI in the UK from TechNation. So starting with the state of venture, this is just a Q1 2025 report. It's from CB Insights. It's a global report, but there are some European angles. And obviously the figures are very much skewed by these AI mega rounds, such as OpenAI's 40 billion last month. Global venture funding hit 121 billion in Q125. That's the highest quarterly total since the crazy Q22. AI companies accounted for 20%, depending on how you define an AI company.

22:07But again, that's a conversation for another time. that was a new high eight early stage ai company secured mega rounds of 100 million dollars or more early stage deal size rose to 2.7 million now this obviously this is a global aggregation so take it with a slight pinch of salt but this is up from the 2 million in 2024 about a 35 percent increase record-breaking m &a in q1 12 vc back deals exceeding 1 billion in value set a new record. On the not so positive side, deal counts continue to decline for the fourth consecutive quarter, a 28 % drop year over year. So there is a capital concentration, which we've seen before.

22:48Here's something I found quite interesting. A lot of CVC activity has fallen off a cliff. So Asia CBC is down 34 % year over year to 7 billion. That's mainly China. I guess no great surprise with their economic challenges. And the UK saw its lowest share of regional VC funding in over five years, France, Germany and the Nordics are now gaining ground. And on the CVC front, European CVC is down 40 % year on year. As far as I can see, only two European unicorns minted in Q1 2025. So Andrew, anything else caught your eye in the CB Insights State of Venture 2025 report? There's a lot of dry capital still out there.

23:28And at some point that has to be spent. So we can only stay in this sort of i think we'll only see this um deployed not spent retreat you gotta be careful deployed not spent giving away charity philanthropy we'll only see this um carry on for a certain period of time time and eventually the the cycle will will turn i think the the bigger macro change in the cycle is a focus back on reality from sort of momentum bubble investing. It highlights in the report a focus on profitability over growth and capital efficiency and more disciplined rounds, both on terms but also on the government side. I think that correction was long overdue.

24:14But things are still throthy in certain sectors. The generative AI sector is still incredibly throthy. I still feel that's going to be a bloodbath in the next two to three years. defense is still up across the board. I think it's looking at, I think, was it 8 billion? They're looking at being spent globally on investment in defense, which has doubled from last year and more than a number of previous years put together. So it's a bit of a mixed bag. I think climate was up as well. Lomax, what else caught your eye? This is a cracking report, by the way. I think it's fascinating. What caught my eye?

24:50I mean, And clearly, you know, of the 120 billion, OpenAI was 40 billion. 40 billion. So one third of the total amount spent deployed in Q1. And by the way, just for context, just for context, right? In Europe in 2024, the amount of money invested in the whole of the European venture market was 45 billion. So one round in Q1 by OpenAI is basically the same as the whole of the European market. It's phenomenal what's going on out there right now. I think Andrew's totally right. Where you see VCs and VC capital flock towards and coalesce around something in an aggressive fashion as you're seeing now, there's going to be a bloodbath.

25:31In a way, that's like, I think the people who are doing those deals know there's going to be a bloodbath. But they're so paranoid of missing out on the kind of one or two generational companies that comes out of this that, you know, they're going to keep doing it, right? They're going to be term sheet. I've, you know, this week chatting to, you know, AI focused fund in Europe, you know, about some of our, you know, US colleagues with much, much bigger funds throwing term sheets down in the double digit millions with literally no DD. That's the kind of stuff that's happening because in a way that the fear of missing out on another Google is bigger than, you know, the fear of losing.

26:11This is back into Zerpi bubble territory. I've got one quick thing for you on the amount of money raised specifically by OpenAI. I'm seeing more and more businesses that look at the efficiency of models and looking at compressing models. It feels quite an interesting play to see all this money thrown at infra, data, all of the AI, whether it's inference or training. or whatever it is. And I'm wondering how much of that's going to be required as these models and these technologies become more and more efficient. So do you think... Sounds pretty niche to me. What? Is that a really adventure-scale business that just optimizes one factor of the current technology?

27:00I don't know enough about the specific businesses doing that function, but it feels like... And DeepSeek was obviously a massive chunk out of this story as well. it just feels like there will be more efficient ways to get the same kinds of results that open AI and Anthropic and whomever are producing at the foundationals level. And I'm wondering how much of that 40 billion raised by, and I know it's a numbers game and they've got to go for it and they've got to go nuts, but I'm wondering how much weight that's going to give them as things effectively become more efficient. I don't know if either of you got any thoughts on that.

27:34Well, I think they'll be using that money to make themselves more efficient. I mean, I mean, there will clearly be third-party companies offering software or hardware solutions to make AI more efficient, for sure. I guess they can buy the world anyway, right? They'll be disappeared pretty bloody quickly. Would you rather have your money in one of the model companies that develops the model or one of these tooling companies? I don't know, probably in the former rather than the latter, quite frankly. But that is a whole thing in itself. I mean, you know, we talked about, you know, in the context of Europe, for example, energy prices that, you know, more or less give or take double what they are in the US.

28:17Like, this is a big constraint. So anything you can do, you know, I think we mentioned the other day that I think it's in Ireland that, you know, in 2026, 2027, you know, data centers will use a third of the electricity, you know, generated in the whole country. And that's the same in, you know, many other European countries, right? You know, I actually just chatted to someone the other day running a data center. that they're trying to get the biggest barrier to data centers, for example, in Europe. It's not like, in the UK at least, it's not necessarily planning permission, the things that we often complain about.