E466 | This Week in European Tech with Dan Bowyer, Mads Jensen, Lomax & Andrew J. Scott

28:20But I think what's happening now is a couple of things. Number one is the time to the traditional exit, which was used to be the IPO. So the initial public offering when the company listed onto a stock exchange has grown, it lengthened dramatically from say seven to eight years to 12 to 15 years. Some of the reasons for that are number one, I think the barrier or the hurdle required to IPO is much higher. In 2008, it used to be, let's say 80 million of annual recurring revenue. It's now more like, I don't know what you guys think, but 200 to 250 million of revenue is your sort of threshold to IPO in the US.

28:58So the threshold is raised, so it's harder to IPO. Secondly, there's also more capital that's entered the quote unquote border technology ecosystem, which means that founders have more capital opportunities to raise money before going into the kind of bigger public markets, right? So what does this mean if you're sitting there as sort of Lightspeed or A16Z, Andreessen Horowitz, and you've been running these traditional A16 did this seven years ago. I think Sequoia, Thrive. I mean, almost a case of who hasn't in the Bay. No, but there's a bunch of firms that are taking this on more and more. And I think the reason why is a couple of reasons.

29:37Number one is we've just talked about companies being private for longer, which means there is a sort of opportunity there to invest in those companies, take secondary shares, right, existing shares. And secondly, I think it's product mix. from their perspective in terms of their own products, right? Which is that they have a distribution capability. They sell to pension funds, endowments, big LPs, big family offices, and they've been selling one traditional product to them, which is the venture product. Now they're like, well, actually, there is all of these adjacent products that we could potentially sell to them, buying secondaries, buying out companies, starting to encroach on what is the traditional domain of what we look at what's called buyout private equity, where you actually buy and own companies, right?

30:22And there is a relatively mature market there in technology companies. And we know the players there are Silver Lake, Toma Bravo, Francisco Partners. So we're now starting to see the venture funds cap out on the traditional venture model. The markets evolved such that there are opportunities for them to deploy capital in ways not just traditionally done. And so they can start to eat the lunch of these traditional buyout private equity funds. They can take, you know, for context, most of those buyout funds are in the sort of 100 billion of total asset under management. Whereas, you know, the light speed, general catalyst is more like 30 billion.

31:01So there's sort of ways for them to bring in more capital. And just for context here, right? One thing that I sometimes see, and I'm sure you guys see this, as venture funds get bigger, everyone gets very agitated and excised on LinkedIn saying, they're never going to be able to return five times the money on a$3 billion fund? Because I think people are thinking about things in the wrong way. Because in the case of our funds, for the risk that we take at the very, very early stage, investing to own 5%, 10%, 15 % of a small pre-revenue startup or early revenue startup, in our portfolio of 20, 25 companies, we are seeking to deliver roughly five times the money gross three and a half net of fees to investors on a 10-year period which yields a 25 to 35 % IRR depending on the nuances within that the bigger funds aren't necessarily trying to do that yeah they're quite happy to take a and actually for context why this makes sense as a business owner as in someone who actually runs one of these firms is you make more money 2xing a billion when you take the profit share on the extra billion you made than, you know, 10x-ing 100 million or, sorry, 50 million, should I say.

32:16That's the context here. It's product mix for the managers. They can make more money, quite frankly. I think it's the ecosystem now can support this and needs this because companies are staying private for much longer. I think it's natural. I think in Europe, we're just much earlier in the... There are just fewer companies at this stage. So I think it will happen. This is a factor of size and maturity. I mean, I don't even know what the equivalent of RIA is in Europe or in the UK. Well, in Europe, you have AFIM and Uveca, but they're equivalent. There's sort of equivalent regimes that you can unshackle yourself from if you want to free yourself up to do the kind of products, make the kind of investments and offer the kind of products we just talked about.

32:59So is it just a matter of time before we see more VC firms in Europe doing this? I think so, yeah. but it's more on the five to ten years ago. I sort of feel this partly is an inevitable function of a market maturing. I mean, as Lomax says, the US market's been around for so much longer, but it is still growing and maturing. It's still evolving. And these are vast sums of money these organisations manage. And it makes sense to me that if you're sitting on multiple billions of AUM, you are going to need more flexible ways to generate returns than the straight sort of somewhat arbitrary, you know, 10-year-plus-two VC model, which still persists, which started way back when.

33:48When you look at what some of these organizations are now doing, having more flexibility to manage and be a financial organization makes sense outside of the GPLP model. And it's not just on the way you invest capital, but actually the services and the types of finance you can offer to these startups. I mean, if you look at someone like General Capitalist, they've got their customer value strategy, which is where they offer to companies growth capital secured against the sales and marketing efforts. It allows companies to massively expand their go-to-market, covering up to 80 % of the costs. And the repayment is tied to the gross profits generated from the customers acquired, rather than fixed schedules of repayments or equity stakes.

34:44And the risk is actually, it is shared, but actually the startup's not obliged to pay back the funds out of pocket if the customer value isn't realized. So, you know, it's an extraordinary sort of innovative model and a way of startups accelerating their growth. And so I think it's really good news from that point of view. I'm not a big fan, as everyone knows, of multistage funds per se. So that's one of the downsides of these massive pots of money is that they can, you know, it's almost a rounding error for them to spin up a scout or, you know, carve off 100 million of their 5 billion. or in the case of, you know, double digit billions and spin up a scout program and they can come and eat our breakfast for seed deals.

35:27I always tell founders, take stage appropriate capital because otherwise you have signaling issues. So I do wonder whether that is a, how busy these bigger organizations are and bigger VCs are in early stage. I wonder whether that will continue or whether that's just a sort of function of the bubbly market and whether that, whether founders just need to learn again that that's actually a bad idea and maybe it'll go out for fashion again. So it's interesting, but I think generally it's great. You know what is interesting and it's very, very relevant to what we talked about last week from Chris with Chris from the BBCA, which is that one thing that Chris said, who works on the venture capital side within the British Venture Capital Association, was that private equity has been much better at innovating its products than venture capital.

36:14It's very interesting because this is an example of the US venture funds innovating with the kind of financial products they offer to their clients and also to the founders as well, I think. And I think that's actually a very, very good thing because it unlocks more money. And don't forget that we talked about giving access to early stage technology, offering a 25 to 30 % IRR to your LPs, to your investors. Well, there are products that sit lower than that, that offer a better rate of return than, say, the public markets, where you might expect 10 to 12 percent, that offer the kind of 15 to 18 percent in the middle that are less risky.

36:57And these are sort of these could be secondaries in EBIT, like technology companies that have, you know, lots of EBITDA, for example. It's great for technology that more people want to have exposure to it. And they may not necessarily want to invest just in the kind of funds that you offer at the early stage. They might want a different kind of product that gives investors exposure to more mature technology companies that are still private, not yet public. And also, it's all good for us because as all of that matures and more money is raised in that ecosystem, we then have an opportunity to exit our positions in the secondary market, which is maybe something we're going to come on to in a minute.

37:37Is it a new venture capital model or is it a whole new category? It doesn't feel like we're innovating in VC. It's a whole new category. I mean, effectively, there are three things that are happening here. Outcomes of technology companies have grown to a size that is unlike anything we've ever seen before. And it's not just that tech companies are a little bit bigger. It's that we are now talking about unicorns to decacorns to bona fide trillion dollar companies, which is what we're looking at, the likes of OpenAI and thinking, well, that is probably what that could become. At the same time, the hassle of being a public company has gone up and it's become a lot harder, a lot more onerous to be a public company.

38:26And so companies can absorb more capital than ever before. the place they would have done that in the past would have been public markets, but it's difficult. And if you're a founder, you can either choose between going to the types of public funds that you would have underwritten your IPO in the past, or go to the likes of Coatu that will underwrite you or Lightspeed that might underwrite your next private round now, which is much easier, much less hassle. It's expensive for investors because as an investor, you might have invested at 50 basis points or less, right? The 50 basis point might've been for a managed fund.

39:06You might invest in a tracker to get just the largest stocks and public enlisted equities. But in private capital, you're investing 1 % to 2 % plus 20 % performance fee. So it's extremely expensive. And my main concern with it is, you know, two things. The pension investors should be able to invest in these companies without paying so much when they're very late stage and very mature, and you probably don't need a private capital regime. I put the regulators that I put made it difficult to be a listed company. I hold them responsible for that. The second point is private savers, it's much harder for them to get access.

39:46Even if you're talking about offering some of these products up through wealth managers and selling it through UBS and whatnot, a lot of people don't have access to those channels. so a lot of the wealth that is created in these companies is just out of reach for miss and mrs jones but i think it's inevitable i think it's a new it's a new category and for sure it will come to europe i mean it's just a question of time when when when what was your what's your what's the crystal ball saying 10 years within i love the fact that there is a a new way a new version a new kind of and it's all kind of been when lightspeed have brought this to the fore.

40:25I just can't see how it's going to affect us in Europe as early stage venture capitalists. Well, hang on. I mean, hang on a second. I mean, it will affect us. And I think it will affect us in a good way because there are more people to buy the shares in the companies that we've invested in early stage. Yeah. But you also see more seed deals being done as five on 20 or six on 24 when actually for our fund size, the economics just don't make sense. I mean, it might make sense if you can follow on in all the successive rounds in your winners and everything is just an option. But I do think it messes up economics to some extent for early stage investors.

41:04So there are positive aspects to it, but there are also issues with it. And it's as with any market development. okay although that's a slightly different point in the sense that what what like what we were talking about with this with the ria you know with these registrations or with these um funds moving into different types of investments in a way they're moving upstream or depends how you define upstream or downstream they're moving like downstream rather than upstream do you know what i mean we're not talking about them coming back to do to our world which i think is a separate thing that is happening because they have so much money that's the point that's the point is they're doing both and because they can raise and they have more money than god as andrew says it's very easy for them to set aside you know 100 200 300 million for an early stage program because it's just optionality do we think this is just a natural part of a natural part of like both you know capitalism and the way that humans buy it's just you know tech the technology investment market has grown significantly in 20, 30 years.

42:10And, you know, these are, you know, investors are coalescing around big brands in the same way that we had in private equity with Blackstone, with BlackRock, in the same way we had it with Fidelity and public markets and, you know, like, and Vanguard, et cetera. Like, is this not, is this just natural part of how the world works, isn't it? And now the numbers are just getting really, really, really big. Does that not mean everything will become, all VC will flow in the same direction? Or we get squeezed out? No, I don't think so. No, no, I don't think so. I don't think so at all. I do think it messes up the economics on some deals.

42:45And I actually think it will do some founders a disservice. Because we all know that sometimes too much capital can kill a good guy and kill good outcomes. So I think there are founders that will struggle with this. I think there are managers that are struggling to carve out a niche and be value-add and be specialized and expert in something that will struggle. But I think there will be rich opportunity for specialized early-stage managers because even with the best one in the world, no light speed can do six on 24 on every single contrarian bet. So there will be a lot of opportunity and the industry needs it because what they're going after are all the obvious things.

43:27It's the second and third time founders coming out of open AI and starting something new. I think that's where you're seeing issues, but there will still be opportunities. But come on, look, how many engineers, how many smart people do you meet every month that are struggling to raise capital for what could be a great company? but i'm also trying to think of how many how many of those wouldn't want you know do it do a deal with somebody that can see all the way through and and give them more optionality and give you know i i cannot help but think that's it we've got more bifurcation happening but there's no option there's less optionality from the founder though because if like if all goes hunky-dory and you know you take a seat check from a16 and then they can they go oh well i took the money because they can leave the series there it's like yeah but if they don't like what you do or you fall out with part of the board, they're not going to lead your Series A.

44:13And then everyone's going to look at you and go, why isn't A16 leading your Series A? And actually, if you're an amazing company, they'll lead your Series A anyway. So there's far reduced optionality from a founder perspective. So I don't think it's good actually for, as Matt says, for a bunch of reasons that these big firms do seed deals. The RIA structure specifically or equivalents in other countries probably won't filter down to medium-sized firms because the cost of management, the transparency, the regulatory overhead and the operational complexity of doing it, essentially as a former sort of public finance house, is such that it would be awful to do that as a VC.

44:52It's bad enough as a VC anyway, especially if you're on the lower end of the fund size like we are. So I don't think you're going to see it filter down. I think it is a function of them becoming a multi-asset class finance shop. and uh you know as i think as the uk and europe continue to increase at the top end you know the billion dollar dollar or two billion dollar borders of fun next time becomes a four billion they'll probably go the same way what's more interesting is will the existing as you've touched on dan structure for us change i mean there's two and twenty gplp model has been around donkey's years when i first raised uh look to raise a gplp fund we look quite closely at other structures i thought surely there's a way to innovate on this i took my sort of entrepreneur's hat on and thought there must be a better way doing this all these people this seems really archaic and pretty soon realized that it's hard enough to raise a vc fund using an established model let alone try and sell yourself your thesis and a new model which is unproven and i think that's probably as big a reason as any why the model has not changed despite everyone complaining about it because it better the devil you know.

46:08I want to stay on a similar topic and talk about secondary so this is liquidity has always been an issue uh you know especially now with everything staying private for longer and illiquidity is a feature not a bug invention is a pocket phrase that's thrown around quite a lot and let your let your winners ride is another one I've read a lot recently but Lomax you wanted to have a quick check-in on secondaries I guess that you're following on from RIA and new models and how things are evolving where would you take this topic I just think it this is in response to a couple of you know interesting pieces that have been put out by prominent VCs of late so Thomas Tungans and Hunter Walk in the US and I think just making the point that last year's 78 percent of venture exits in the u.s came by way of secondary so we talked about earlier the traditional exit route was either an ipo which was three percent of venture exits last year or mna we talked about that plenty on on this on this group before the ipo windows are clearly very sentiment and public markets driven by definition and you know that with Klarna, which had to defer its IPO six weeks ago, eight weeks ago with all the tariff nonsense that kicked off.

47:25So we've also touched on the fact that the Bar 2 IPO has massively, massively risen from the sort of 80 million to the 250 million ARR. The point that Mads elegantly brought up is the pain of being a public company and the sheer cost of IPOing, depending on how much you're raising it's in the 20 30 40 50 million range for founders the public markets have become less appetizing appealing mna also depends on cash on balance sheets of either old economy incumbent incumbent companies or new tech companies and are subject to you know our friends at the ftc who seem to want to scrutinize every single tech piece of tech piece of tech mna so i feel that has led to um the secondary market which you know means that i you know we as event early stage backer of a company would be selling our shares to another fund one of these you know ria funds like light speed etc secondaries is now a big big feature of what we do and i don't know about you guys but like getting on the phone managing your book of investments working with founders like secondaries is absolutely critical and this this this is relevant for founders because you know often you know as a VC the secondary needs to be blessed by the company blessed by the founder right they want to know who is exchanging shares within within on their cap table so this is a big big feature of venture at the moment and it's only going to continue to be you know as a reminder you know a venture fund is 10 years sometimes gets extended to 12 years And as all of these timelines get pushed out for growing companies and for waiting for IPOs and exits, et cetera, I feel that this is a new structural reality that we face today.

49:11And I think we actually think a lot of managers are not skilled up enough at this at the moment, quite frankly. I don't know what you guys think. I certainly still have stuff to learn. I mean, when I look at some of the exits that we're looking at now, a lot of them are potentially by secondaries. Well, I think as a low-stage manager of other people's money, you need to think about how to realize those people liquidity. So we have a strategy internally where if the asset reaches a certain multiple, we'll look to sell a little bit of that asset. We've not done much of it. as a function of the fact, you know, our current fund too is only five years old.

49:49So that's those, some of those companies coming to that series B stage now, or series C where you'd think about selling some of that asset. I think that's the smart thing to do, a bit of a hedge, but you also don't want to sell the core of your crown jewels. You know, we all talk about the power law game. I think I saw a stat, something like 80 % of returns coming from 4 % of your deployed capital. I don't know if that's still true, but the general sentiment's definitely right. And so you don't want to be selling off stuff, which could give you a 100X at a 10X. One of the good things about more VCs is that there's a bit more liquidity in the market, either from secondary specialist funds, or just there's more of a market for people to play in.

50:32And as the ecosystem continues to expand, that will make it easier for us to sell secondaries. I must have seen, you know, 15 or 20 alleged secondary platform markets like software players that are trying to match, you know, secondary assets to third parties. I've only tried a couple of them. They're pretty bad, actually. There's not much liquidity. And it would be great if there was some easier way to sort of offload your asset or a secondary for an asset rather than going through what is a very backward sort of placement agent approach often of engaging someone who emails all their address book.

51:12And, you know, I'd love to see that change. I don't know how we get there, but so far, none of the platforms I've seen that claim to do that do it very well. It's a natural evolution of a market where companies stay private for longer. Of course, it's capitalism. We're going to buy and sell things. And so, of course, secondaries are going to become bigger over time. I am extremely suspicious of secondary platforms that offer to do business on a retail or retail-like basis. Venture capital is a really difficult sport. You go in early, you need to get to know companies and industries and management teams and try and form a view on the basis of no publicly available information, right?

51:57Just on the basis of the research you can do with the people in the market. And secondaries, you are then buying from people that have done that and have all that insider information. And you're trying to create a market in a world that's effectively a market run on insider information. And it just goes totally counter to all the reasons why we have public markets and why there's some regulation around them. For my book, it would be much better to lower the threshold for companies to go public and try and get more companies public. And then you have exchanges and you have good mechanisms than to try and create these weird pseudo exchanges for private companies.

52:39It's exactly the wrong answer to this problem. But secondaries in general, yes, of course, it's going to be a thing when companies are private. It makes sense. And I would say that, yeah, because, you know, and Carter, by the way, in the US tried to do this and then gave up. But because what you're really, you know, trying to create, if you really want to kind of liquid secondaries marketplace, well, there is a thing that exists for that. It's called the stock market, right? And it's heavily regulated. And there's a whole infrastructure that sits around it. So what are you going to do? Create this other infrastructure that's like maybe less regulated or less regulated stock market?

53:11Well, you've already got one of those. It's called AIM, for example, in the UK. So like, actually, yeah, I totally agree. You don't need to reinventing the wheel. But what I was just reflecting on this is, what does this mean for me in my day job as someone running a fund? Because I have a fund now that's going to be maturing in two years time. So I'm starting to think about this, right? Some of the positions in the fund is so for the good assets in the fund, you have generally no problem. You can always find a buyer for the companies that are flying, right? right the for the companies at the bottom you might as well give up on and you know you just don't waste your time but there's like a middle of your as a venture manager there's like a middle bunch of cohort of companies say five to eight positions where you can go and try and like manage a secondaries process or try and sell some secondary one thing i would tell you is it's really really really it's a lot of work yeah because you don't want to rely on all of the inbound brokers that you know ping you because they're like generally not reliable and not trustworthy and generally unregulated.

54:09None of the platforms for the reasons we just talked about are either any good or a bit shonky, et cetera. So it requires a lot of phone calls, a lot of emails, a lot of like, you know, in the case of what the project I've been working on is I will yield liquidity for my LPs and it's going to be great. But that is becoming a sort of a area that I'm spending more and more of my time of as a venture manager. And I'm expected to continue to do so. And maybe as we grow our firm, we end up firms will have, you know, head of, I think, some of these firms have now, is it Speed Invest who have ahead of DPI?

54:41I think it is. It's DPI being distributions to paid in. So actually like cash delivered to LPs from exits, which a lot of which will be secondaries as we just discussed. So maybe supersede your next hire will be ahead of secondaries. I don't know guys, but I think this is going to become a big part of our jobs for the next 10, 15 years. Mads, anything in AI Corner this week caught your eye? always a lot going on. Google have now said that yes, for sure. Now their model, which has got a name so long, I can neither remember it nor pronounce it, is definitely better than Anthropics. Claude Sonnet 3.7 at coding.

55:22So Google is saying we are now on top of the leaderboard. That is remarkable for a number of reasons. First of all, Anthropics is obviously hot competition, but also because it juxtaposes with Google's overall position in the AI market, where despite being the inventors of the transformer technology, they've now let themselves fall so far behind OpenAI that just powers ahead. And yeah, they will have to make some rapid moves now or get completely swept away and have their search business killed, I think, if they're not careful. OpenAI, of course, still mired in controversy around their, shall we stay a non-profit or shall we become a for-profit?

56:08They've now said that they definitely will stay a non-profit for now. And they're trying to renegotiate their deal with Microsoft to give them less of a profit share. The fact that they remain a non-profit puts their funding round announced earlier this year at risk. It was agreed with SoftBank in the lead. And kind of part of it was, well, you get 10 billion of investment now, another 30 billion by the end of this year but only if you manage to convert to a for-profit which it now looks like they're abandoning those plans so on one hand it's an incredibly impressive business that keeps growing growing growing but on the other hand yeah there's just controversy all around in terms of the company so it will be interesting to see how that shapes up loving it low max deal of the week two deals of the week i think mads you had most notes on these Yeah, so two amazing European drone companies announced new rounds.

57:03They're both unicorns. You have Tegeva, which is a Portuguese company, actually, so from Lomax's Nega the Woods, founded by Ricardo Mendes and Pedro Senogas. Am I saying it right? About 25 years ago, they specialize in autonomous maritime drone systems for coastal surveillance and security, and they've raised what I believe is a 100 million Euro Series B funding round They're expanding as part of the round into the UK. And this is interesting because, as we know, the UK has had huge issues around immigration and monitoring our coastline. And effectively, the drones here are special purpose-built for marine surveillance.

57:43So the idea is you could potentially add two and two together and say, well, the idea is probably to sell them to a UK government for coastal monitoring. In parallel, you have Quantum Systems, which is a German company that doesn't do quantum, but also does drones. Founded in 2015 and now also a unicorn. They produce drones that have vertical takeoff and landing capability. And they're purpose engineered for battlefield reconnaissance. And I think, obviously, we've talked about on previous programs how China is well ahead in drone technology. The question is, why aren't we just buying their drones?

58:21Well, there are all these issues around data privacy and are we going to let our security forces use drones that have called home systems to the Chinese Communist Party and all these things. And so the fact that we have some really strong European drone manufacturers here with strong financial backing seems super relevant. And I think one aspect, one other news piece that came up around drone technology is the Ukrainians. They had a naval drone that was reported to have shut down Russian jets. And to my knowledge, it's the first time kind of a sophisticated fighter jet has been shut down by a drone.

59:00So something we've been talking about coming for a long time, but clearly a sign that it's here. It's going to totally change how warfare is conducted. I think a couple of observations there as well is we just talked about the length of time that it takes to build big companies. Well, TechEvil was founded in 2001, as you said, Mads, and Quantum Systems was 2015. So both of those have gone well past the standard 10-year fund, or Quantum Systems has just gone past it. As was OpenAI. it also it's also good to see sometimes in venture being around for too long is perceived to be a very bad thing because everyone will look at your company and be like oh you've been around for ages why haven't you like done anything have any yeah just like if you're a VC Lomax correct you've been around for too long why haven't you where's your thousand x exit that's right exactly so i and i i feel that you know we all we all on this on this group i'm sure realize this is a very very long-term game whether it's you know investing and company building and sometimes in you know often in specialist areas like this it just takes time and to build real substantial meaningful value and now clearly there's more of a need for their products now but stuff takes time let's just not forget that and not lose patience andrew anything else that's on your mind this week that you wanted to talk about i'm off to uh marrakesh next week i'm already here so yeah looking forward to spend uh two two days with you know 80 of my peers it's always great to to talk to someone who feels the pain but has the wisdom and uh yeah not not to be always they're always great events all power to you and Lomax for setting them up and I will join you there obviously I'm already here with the family so I'll be here by the pool after this and then I'll see you next week and we're going to be doing a special upside with Dragon Chases and speaking to people from the community and bringing some stories to life there Lomax you'll be joining us soon I will be joining you in Marrakesh yes we have yeah as Andrew said we have 50 GPs 30 LPs European early stage venture spending high quality time together away from laptops away from phones i am going to be paragliding in the atlas mountains on thursday with five gps and four lps so i hope i come back from that there is a lot to a lot to look forward to yeah i was super looking forward to it man there's a very serious yeah it's a very serious outcome to what what what we do with dragon chasers and it's exciting to really really actually spend time with with people as individuals yeah and really get to know them yeah it's important building relationships.

1:01:52Mads, what's happening with you? I'm with the other lot. So that's the EUVC crew. They have their annual get-together in London next week, and I'll be joining them, and I'll be looking forward to meeting many other peers here in London town. Whittling armoustaches. Lovely. Thank you, gentlemen. I will catch you all next week. See you on the flip side. I'll see you on the flip side. See you on the flip side.

1:02:22It's more than just an alliance. This is a union of values. Let's start acting.