E482 | This Week in European Tech with Dan Bowyer, Mads Jensen, and Lomax Ward

0:00Welcome to Upside, where we dig into the real stories that live behind the headlines affecting European venture. Today is Lomax, Mads and myself. Sadly, no Andrew. He is off on holiday with family. And there's been a lot of news. There's been a lot of news this week. And I don't even, I kind of don't even know where to start. And what we are going to talk about, and I don't want any groans from the backseat, is tariffs and EU and US and trade deals. This would have finally done. Tear down this wall. It's more than just an alliance. 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.

0:51So we need to talk trade deals. We need to talk tariffs and how these things are going to pay back to Europe and how they're going to affect us. And I was reading this week about taco tariffs, as in, what is it? Trump. Trump always chickens out. It's been a great trade. Which he was sincerely offended by, which made me smile. And I know that they're at time of press. Now, this is the Friday. This podcast goes out on the Sunday, which is the beginning of June. Yeah, just the beginning of June. But there were federal judges that were trying to block some of the tariffs. But I read last night that they're not able to.

1:30And all tariffs are on the table. and there were always going to be tariffs targeted on steel, aluminium cars. They were going to stay in place regardless. But there may be some trouble afoot for tariffs and Trump's plans, although I'm sure he'll get the Supreme Court to do his bidding. There is a EU-US trade deal. The promise of tariffs has cajoled some activity, which we've always said is part of the plan. What does this mean for us as investors? What does this mean for startups, short, medium, long term? Lomax, I know you've got some more scene setting detail for us. And then maybe you could share your take.

2:09I've been trying to think about what this means for us as early stage investors and startups. I think that's the key thing here, because I think you can get a lot, a lot, get stuck a lot in the geopolitical weeds here. But stepping back just to set the scene, the US-EU trading relationship is the biggest trading relationship in the world. 1.5 trillion of exports and imports total, which is nearly three times or certainly more than twice the US-China trading relationship. So this is a big behemoth of a relationship. Funnily enough, one of the questions I was asking myself is, we're talking about trade deals now.

2:47Why has there never been a trade deal done in the past? I mean, surely this is such a big trading relationship. It would have made sense to have a trade deal in the past. And this has been attempted, 2013 to 2016, there was a big attempt called the Transatlantic Trade and Investment Partnership, which fell over. Of course, it's back on the table now. Do you know why it fell over, Lomax? Do you know what happened with that? Yeah. I mean, our old friend, you know, regulation is one of them with the EU and the US having such a divergence in the way that they regulate things. Whereas the EU tends to have a precautionary principle of banning something until proven safe, where the US is more risk-based of permitting, less proven dangerous.

3:27So I think you had kind of a different regular, because don't forget, you know, trade, it's not just about tariffs. You know, the more you want to harmonize trade, you can create free trade, but you also want to make it really frictionless, have, you know, harmonization of standards. So similar regulatory frameworks, principles. And so the more you can kind of harmonize on that side, the easier it is to do trade. So these kind of deals, that kind of stuff is on the table. So there was a big disagreement there. And, you know, there's been a history of sort of subsidy wars. So where governments, you know, are giving subsidies to local champions and the Airbus Boeing example was a big kind of stumbling block there where each geography was popping up or supporting their local champion.

4:11So this, you know, a deal hasn't been done in the past, but that's no problem because, you know, the tariffs have been relatively low. This is now back on the table because tariffs are up. Now, why is this relevant for startups? I I think, look, in a way, we've talked about it before. Most startups sell software. Roughly 10 % of European startups are hardware. So for them, it is relevant because if we're talking about 50 % tariffs on European hardware, then, for example, in my portfolio, the new manufacturing startups that are selling goods into the US will really, really struggle off the back of that.

4:45So that's clearly a big thing and needs to be discussed and parked at the moment. there are only tariffs on steel, aluminum, and automotive. So we need to make sure that is kept low for new innovative products. But there is actually a really interesting one where I think this is very important. Something we actually haven't discussed on this pod before is going back to that harmonization of standards piece, which is, that is actually a much bigger deal than I think is made in the tech press. It's that, you know, in the context, take, for example, med devices. you know, you have to go through a whole regulatory regime in Europe, then you have to go through a whole other one in the US, right?

5:22So if they can actually, or any kind of product that requires a CE mark, like actually, if as part of any broader trade deal, you can get rid of tariffs or reduce them, et cetera. But, you know, historically, we haven't really had many. You can actually harmonize things between the two jurisdictions to remove friction to doing business, then that would be an amazing thing. I think there's still massive stumbling blocks in the way, for the reasons I've said in terms of the different way that we approach regulation in the two continents. But that's the kind of thing I'd love to see. Clearly, you know, these meetings are only just going in the diary now.

5:56So this is going to take a long, long time. But something should and ideally would be done. Why is this back on the table now? You know, we have the increased threat of China. We have the increased threat of Russia. The reminder that the EU-US trading bloc is massive and important. And so someone should do something about this. Lomax is obviously right. It's a massive and massively important trading relationship, yet one Trump has thrown into disarray alongside the rest of the global financial and business system. And even with all that chaos, the stock markets are now up 4 % since the quote unquote liberation day tariff announcements.

6:38And so you mentioned the taco trades earlier. I mean, the taco trades was what allowed us for a brief moment in time to buy NVIDIA stock at$95 a share. They're now close to$140. And that's just over a few weeks. So that's been an incredible trade and one that's made at least some of us very happy. What will happen longer term here? I think here's the thing. Whatever happens, it seems likely that there will be some residual tariffs. Trump's been talking about tariffs for 40 years. He's not necessarily consistent about many things, but this has seemed to be one of the bedrocks of his political, economical philosophy, if you can call something that comes from him that.

7:22And even a 10 % de minimis tariff would add between half a percent and a percentage points to US inflation. And so on top of that, you've got Congress. They're looking to add$3 to$4 trillion of federal deficits over the next 10 years in the kind of this big beautiful budget that one right so so and yes it just squeaked through it was on 250 to 214 votes in the house and now waits in the senate it's going to go through the process there and and it will come to some version that will go to to trump they're hoping to get it done before the july 4th recess so you know on one hand you You have at least some residual tariffs looming, no matter what happens with all these negotiations.

8:09And you have these fiscal deficits, and that's going to drive inflation. And so I think markets are looking at this and sort of saying, look, this is anything but prudence. We know Elon, again, say about him what you will, but he's kind of left government now saying that Doge was an important idea. But it's really hard to push through the savings that were needed. So the net net is US inflation is now down to 2.3%, but it's unlikely to come further down and interest rates will likely stay higher for longer. And so we talk about what does that macro really mean for us as startup land? Well, it means a ton of things because macro drives interest rates and interest rates drive M &A and financing.

8:53And that drives the money we have to invest in companies. It drives the exit environment and liquidity and DPI that are pushed back to investors. So this is not really helping anyone in business attack at the macro level. So what can be done is the question. The UK had, I don't know if you can call it negotiations. I mean, I think the UK folded fairly quickly, kind of this brave new world of global swarsparkling and global Britain and all that stuff. The UK basically went from a situation where we had 3 % to 5 % tariffs on US goods, and the US had an average 1.8 % tariff on UK goods. And we've now reduced tariffs on the US goods down to about 2.5%.

9:38And US has increased tariffs on UK goods up to about 10%. So what a fantastic trade deal that was. Win. Boom. It's really important that the EU doesn't fall into the same trap. And I think the good news is the EU is probably the most sophisticated trade negotiator in the world. You have mapped out exactly down to the constituency level what areas will be most heard in the Republican Party in the midterms if selective tariffs are slapped on specific U.S. goods. So very, very sophisticated machinery that's been put in place, kind of a little bit sort of the anti-Trump, the anti-chaos. and I think that the EU will probably be able to get to a good outcome because of that.

10:22But there will be volatility and it can be painful short term. Of course, the alternative is just to accept that the bully bullies and slaps more tariffs on us and we reduce our tariffs. But I'm not sure that's in our interest either. I think the takeaway here is basically for me, there's the direct impact of tariffs and the indirect impact. The direct impact is, you know, do I have a tariff on my product as a startup? You know, would, if there is a trade deal, you know, if there's harmonization of data standards, will that make doing business across, you know, across quarters easier, et cetera.

10:56And there's the indirect one, which is the one that Mads, you just so eloquently covered, which is like, well, you know, if tariffs indirectly push inflation, affects interest rates, affects, you know, rotation of assets of capital into equity, into high risk assets away from it, if it rotates money out of it or into it, depending on which way interest rates are going, that all affects the capital that we have and the founders have. So there's sort of this direct and indirect impact, both incredibly important. Well, public markets have kind of rescued private recently, haven't they? So the fact that our investors and their investors have been able to balance the books a bit more after the recent downturns meant that privates have stayed up.

11:36So venture capital has stayed a little bit more buoyant, in which case they wouldn't have done had public markets carried on the trajectory downwards. I think you should just go there for a second because there is a seemingly complete schism in financial markets. You have bond yields that have gone up and up, especially US bond yields, right? You now have treasury kind of 4.6, you know, within striking distance of 5%, which is a lot. They hit 2007 levels, didn't they, Mads? They kind of like back, we kind of went all the way back to the crazy times, 2007, I think. And at the same time, you have stock markets back to near record levels, kind of completely having wiped out the tariffs crash.

12:22And so how can that be? How can bond markets fret and worry and sort of be not quite panicking yet, but certainly not in a good place and stock markets be so seemingly, you know, not only benign, but actually very positive, very optimistic. And I think it's really down to how the two constituents, they look at the world. If you're a bond trader, you get paid not to lose money. And you look at this looming federal deficit, you look at increasing inflation or at least the risks thereof. And you say, gosh, there's just so much risk in the economy right now. I get paid not to lose money. I'm going to be really cautious about how I deploy.

12:58But on the other hand, if you're an equity investor, and that's very much the camp we're in, you look at the world we're in today. You say, gosh, we have all this chaos, confusion, all these threats. But we have AI, the biggest economic transition and transformation in our history, in our lifetime. And so the potential of that is so great that it can outweigh the world's leading economy seemingly on the trajectory to sabotaging itself. And I think it's just really interesting to see how that's unfolding. You know, we talked about NVIDIA is now neck and neck with Microsoft, again, vying for the role as the most valuable company in the world.

13:44The AI economy is here and there will likely be a reset at some point because of the precariousness of the U.S. fiscal position. But medium to long term, the markets are clearly telling us that there is so much potential. Very similar to the pattern we saw in 1990-2000. How much of this is being amplified by people perceiving Trump to be quite reckless and very kind of anti-regulation and will push the barriers for them? How much of this kind of bifurcation is a Trump amplifier effect, do you think? I think there was certainly some of that earlier in the year, right? Even post the election, there was kind of the whole run up to the inauguration.

14:30and people were just very, very excited about a kind of, frankly, more benign environment in which to do business. I think some of that has gone away today. There's just too much chaos. Businesses can't plan. Everybody knows that. But even so, even with all the chaos, even with the fiscal recklessness, even with global trade wars, stock markets are still saying, wow, the price here is incredible. There's just no way we can be out of this market. So I think it's interesting to observe. And of course, we see that from our vantage point, kind of early stage investing, the companies we're in, the potential is a nearly limitless.

15:10I think a lot of this is both fundamental and there's a huge amount of sentiment that's driving global markets at the moment. For example, in the beginning of the year said, well, you know, it's going to take one earnings missed by NVIDIA to reset things and cool things off. And what have we seen yesterday? I mean, NVIDIA smashed it out of the park again. So actually - Even without China, right? That was with all the China concerns. You know, you can talk about bubbles and.com and all this kind of thing, but there are still some pretty compelling fundamentals on the ground. And Mads, bless him, gets incredibly excited about what's going on in AI, as we all should.

15:50And, you know, there is reason to that. You know, it's not just, it's what we're seeing on the ground day to day and what we're seeing with these companies and their numbers, it's real. Clearly, the multiples are high and lots of people want to cram into these companies, but these are pretty compelling growth rates, right? Well, the EU seems to have woken up. I don't know how much has been charged by... Has it? Has it? Well, let me finish and then shoot me in the face. So we've got some plans afoot. We don't know what was in the oven pre-threat of tariffs. Obviously, commerce and trade has always been on the table, but it feels like there's a bit more of an accelerating force to be debated.

16:35And by all means, shoot me in the face. So the European Commission has unveiled the EU startup and scale-up strategy, which is a streamlining of member states approach to startups and investing. There is a scale-up Europe fund, which is a blended investment vehicle expected to exceed 10 billion euros. and we could talk about where that fits in context. There is to come some regulatory simplification. There is a blue carpet initiative, which is all about attracting talent, simplifying tax rules and streamlining employee stock options. There's a Lab2Unicorn initiative, which is looking to accelerate the transition from research to market by connecting universities.

17:13And there is better infrastructure access in this directive, whatever that means. So I have a whole bunch of challenges with how the EU is presenting this. Will it move the needle? How can the UK and other non-European countries engage? What does all this really mean? But Mads, do you want to give us some more of the inside scoop as to what's happening with this latest EU kind of strategy thinking? Yes. So the EU has put forward, or the Commission specifically, has put forward a strategy document, 21 pages, not terribly long. It's got the usual four pillars, kind of reduce regulatory burdens and admin, more money, better access to talent and better access to infrastructure and customers.

17:58So sort of the usual four suspects and not too dissimilar from, for example, the UK AI policy that we saw unveiled last year. There's some really good initiatives in there. The 28th regime, which we've talked about at some length, kind of this idea of creating a new way for European startups to incorporate. So instead of having to incorporate every single member state, they can incorporate once using 28th regime rules and then operate across the union. There's also this idea of a European business wallet, which is a digital business identity. I think it's a great idea. We just see how arcade the process of engaging with governments are in various countries, kind of digitizing all of that, making it simple, having a simple digital identity, I think is great.

18:43There is the European Innovation Act with regulatory sandboxes, which is something we've experimented a lot with in the UK. We had that around the kind of the whole fintech boom and all this way to have a faster path of access to a regulated market so you can experiment as a startup. So there's an idea to kind of scale that up in various guises across the EU. I think that's great. I kind of channeling our inner Jerry Maguire's, right? I mean, show me the money. There is this idea, you know, we need more growth capital. We need to be able to do what our friends, the Yanks, are doing with kind of big growth funds that can put billions into cool things.

19:22And the timeline that's being talked about right now around the European Innovation Investment Pact and some of the other vehicles that are being discussed are 2026. So I still have a sense of the approach some administrations take when they look at this stuff is they get the right people in the room and they announce it and the money's there. We've just seen Trump come back from the Middle East and having a slew of amazing announcements around how both the U.S. would invest in the Middle Eastern region, but also Middle Eastern money investing back into the U.S. I don't know. I don't understand why we're not taking a little bit more of an aggressive approach here and moving faster because frankly, 2026 is light years away.

20:04I thought it was two years out. I read that some of these initiatives weren't penned until 27. Yeah. Well, so there you have it, right? So you're sort of talking about just getting rules into place in 2026 and then money will flow after that. It almost doesn't matter. It's too long. It's too far away. Like get the right people in the room we know where the money is right it's the opportunity is here and we know it is you know show the data talk about the case and let's get let's get the money into the system so we can start getting to work. Well Max you're a bit more of a cynic on this topic aren't you?

20:37Well I have if there are a couple of green shoots in this in this report the match didn't that maybe it worth pulling out so they're not there's the 10 billion whatever these numbers are so small I just like as you know as a reminder OpenAI raised 40 billion in its last round right so So the EU announcing 10 billion of also not even its own money, like other people's money, private money. It's a glint in the milkman's eye. However, a couple of things that were interesting to me. One is Mads did touch on, which is the talent, what they're planning to do around talent is to try and make it easier for non-EU founders to come to Europe and build companies and to also hire people for their startups from outside the EU.

21:19I think that's clearly great. You know, the U.S. is built on the back of immigration, both like literally and also startup industry is. And so we could take a leaf out of that book. You know, clearly the Silicon me is like, well, you know, the Kikles, the AFD, the Chegas, the Vox, the Farage, you know, Bratelli, whoever they may be in whichever country are going to kind of really try and shout down those initiatives. But, you know, let's see. I think it's great that they're trying to open the taps on talent. The second one actually was in the detail, which is around employee stock options. It was great to see the EU recognizing that there is a major issue with the way that employee stock options work in the EU.

22:05So as a reminder, this is the key way to really incentivize your talent and your company. And we've seen thousands, maybe even millions of engineers in the US become millionaires. You know, the top engineers at NVIDIA all have tens of millions of dollars worth of stock options now, right? And so, you know, stock options has been a way to attract talent out of traditional industries into startups. And we know in Europe, we have major problems around the fact that each country has different regimes. But more importantly, they have very onerous tax consequences. For example, in some countries, including Portugal, for example, you can get taxed.

22:43when you get given the option on grants, which is just totally crazy, right? So you're just receiving an option or getting any cash. And then there was like the, do you get taxed on exercise? Well, that can happen in some countries. Are you getting taxed as income or capital? Obviously at different rates. So in the US, it's much more favorable. In the EU, it's not. They recognize that it's great. They're going to do something about it. The cynic in me is like, well, actually tax is a national competence within the European Union, which means you're going to need to get every single country to basically align, which is not easy.

23:15But I think it's great that they're tackling that. And I think that's absolutely key. It's really, it's actually not talked about enough. Can I just say on this, this 28th regime stuff, which sounds like a kind of Robert Harrison novel that, you know, Andreas Plinger, bless him, has been working on. I'm amazed how much, this is actually great to watch a kind of founder, GP, really actually, he's been working on this for the last like 10, 12 months. He's already got the EU to make announcements like this. He's got members of the European Parliament pushing this stuff through. So this is the push to create a legal entity that is a single standard legal entity that can be used by startups to make it easier to raise money and do business, etc.

23:58That is making progress. And that's legal rather than tax. So that is actually a competence of the EU. So that would be great to get it done. Again, the cynic in me is like, did you already know, guys, that there is a concept of a single legal entity? It's called the Societas Europa. Have you heard of that thing? Yeah? Never. That's existed since the beginning of the EU. There are only, well, apparently there are 3 ,000 registered, probably about 2 ,500 of those are zombies. So you've only actually got a few hundred. That is, to be fair, for more public companies. But my point is, this concept has existed for, you know, larger corporations and hardly anyone's used it.

24:35So let's see what the kind of new little brother, little sister, the adoption that it gets. But I think it's a great initiative and I'm really hats off, Andreas, on that. But as I said, I'm excited about the potential changes to the employee stock options because that is such a needle mover for hiring and incentivizing talent in companies. I want to talk about big tech. I want to talk about some of the big announcements. There's been, over the last few weeks, we've had Google's I.O., we've had Microsoft's Build. There have been other large announcements from Anthropic. And I love the VO3 videos have blown my mind.

25:08AI mode. I know it's not in Europe yet, but that as a potential chat GPT challenge, I think is really, really cool. Anthropics, Opus and Sonic models could vibe coding actually work. Then I saw also that in the UAE, the government is offering free access to chat GPT Pro to all citizens. And then that made me think, should Europe be doing something like this? Should AI learning, be a compulsory at school. But there's been a plethora of big tech, very impressive announcements. I'm not quite sure where to start. Mads, what would you focus on first? Where would you pick this up? I think we have to focus on the bellwether, which is NVIDIA.

25:49We touched briefly on some of the impressive results before. I mean, they delivered 44 billion of revenue in the quarter just ended up 12 % on last quarter. I mean, that's a$160 billion company that's growing as fast as a$100 million company. It's just unbelievable. They're neck and neck with Microsoft now for the most valuable company of the world. And that was a super strong quarter, even with China export controls that they said cost$2 to$3 billion in the last quarter. And even when they said that they thought the impact could be as much as$8 billion in the next quarter, the market is still super excited.

26:29And we've talked about at a macro level, kind of the longer term story about AI. The shorter term story is, if we go back six to 12 months, many people were questioning whether NVIDIA could keep growing. Is there enough workload out there to justify all the processor spend? And what's happened is that AI processing is exploding. Now, Google at Google I.O. revealed that they're processing nearly 500 trillion tokens a month. Now, what is that? Does that mean much? Well, I'll tell you, it's 50 times up on a year ago. So it's a 50-fold increase in the volume transaction of a volume that Google is processing.