E488 | This Week in European Tech with Dan, Mads & Lomax

0:00Welcome to Upside, where we dig into the real stories that live behind the headlines affecting European venture. Today it's Lomax, Mads and myself and we are talking about the ECB cutting interest rates. We're going to go into a bit of IPO talk there. It's a tale of two cities on the IPO front. Dig into that. We're also talking about AI copyright and usage and lawyers doing naughty things. And then we're going to tail it off with the UK Strategic Defence Review. Oh and a little bit of liquid biopsy news from the NHS.

0:37It'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. We are going to go straight to the top and it's the ECB cutting rates. What does this mean for Europe? What does this mean for the UK and in the global context? So to set the scene, the European Central Bank has cut its interest rate for the eighth time in 12 months from 2.25 % to 2 % as it warned about continuing pressure on the eurozone from Trump's tariffs. What does this mean for us, startups investing?

1:16Mads, I'm going to kick off with you because I know you know all of the real juice. Well, you know, it's not only good news, but it's mainly good news. And if you've got it, flaunt it and present it in the best way you can. So let's do that. Let's put a positive spin on it, at least to begin with. The story here is that the ECB is cutting headline rates from two and a quarter percent to two percent, which is the eighth cut in 12 months. And that's good. You know, rates are coming down. I think kind of the wider story is that the EU has fiscal headroom and the US does not because Trump desperately wants rate cuts, but he can't get them.

1:59The reason he can't get them is twofold. One is that EU inflation is now sub 2 % and heading in the right direction. And US inflation is at 2.3 % and not really heading in the right direction. partly for all the reasons we know. He's got Trump, the Trump tariffs that are adding, you know, costs on imports that are pushing up inflation. But on the top of that, they are also running a terrible fiscal deficit. The U.S. federal deficit is close to 7 % of GDP. It's an astronomical figure. It's sort of a wartime figure in what should be peacetime. So this U.S. growth, you know, the U.S. debt, a fiscal deficit pushes up growth, of course.

2:41And that comes from fiscal stimulus, which is why the GDP is growing faster. But it also adds strain to the long-term outlook of the U.S. economy. And the debt of the U.S. is now 50 % higher than the EU average. The U.S. at 124 % versus EU at 81%. And this means that the EU is just in a better fiscal position. Now, you could say there's a trade-off. The U.S. is growing at 2.6%. The EU is up 1%. Would it be better to have the growth? And yes, that's back to the, it's not only good news story. But there's no doubt that you would not want to be at 124 % debt to GDP with a near 7 % deficit. And on top of that, what they're trying to do now with this quote unquote big, beautiful bill is to add a further lump of stimulus, $2 trillion to$3 trillion further to the debt levels over the next several years.

3:43As we've seen, Musk did not like that very much and has left government doors slamming. I don't know whether we're going to come back to that today, but there is a real scarcity in the US. Are you going to stay clear? I would love to. I just don't think we can go there. I think it's just... my wife was saying to me that but it almost feels like comedy it's we've almost gone into like the the the wives of hollywood or whatever these awful reality tv shows is i don't even know where to go maybe maybe a low max you might have some words on this but mad sorry but before we go there on parody yeah yeah i mean just before we go there just i mean touching a little bit on where i think the opportunity is because being in a better fiscal position means we have opportunity in Europe and in particular around investments.

4:34Now, I'm not suggesting that we should let rip and just completely abandon all fiscal discipline, but we're seeing around defense where there's a real willingness to invest in our strategic defense capability. We could not have done that as easily, especially powered by Germany, if the European Union's fiscal position had not been as strong. That's one thing. The second thing is we have world-class capabilities in manufacturing, and manufacturing like AI is energy dependent. We've got amazing energy technology. I mean, Europe is great at things like nuclear. So kind of my take is this is a chance to use some of that fiscal headroom to invest strategically in energy, to bring down the cost of energy, and to provide more energy to manufacturing and to the AI sector.

5:28And I think the EU rate cuts show that that headroom is there. So that's really kind of would be my suggestion here, is that we look at that in an aggressive and strategic way. What about the flow of capital, Mads? This is the one thing you could argue almost from both directions. Obviously, weakening of the euro, does that mean that we'll see more money going into privates, more riskier assets? Will the yields in the States mean that we'll see more flow of capital back from Europe into the States as interest rates drop? So I don't know quite how to see it in that context as from the flow of capital context.

6:08I think those chains have slightly longer connections. And I think capital is global. So the fact that Europe has lower rates does not mean that European startups will get more funding. It's the thing we all want to see, but I just don't think it happens that easily. I think it's much more around providing the opportunity to create the foundation for more successful industry and tech sectors. And that is football attractive funding and then we just have the pure sentiment here which is do you really want to be investing in the states right now with such volatility and with such a volatile leader correct correct the counterpoint is europe has sub one percent gdp growth do you want to invest in a low growth environment and the uk even less right and the uk was downgraded even further last week so i just i have there's so many opposing forces yeah i mean you know let's talk about ipos and the stock markets in a minute but you know us is pumping at the moment i understand the volatility point dan but where do you want to invest i don't know the us still pretty compelling proposition there but i think mads just just to pick up on what you're saying i think you're very optimistic in what you say which which is good um i think my job there are of course yeah well i I think we're supposed to be optimists and pessimists at the same time.

7:31But yeah, exactly. I think certainly optimists generally. They're both long-term indirect consequences of what you just described, the rate cutting. I do actually think if you move back to a sustained period of low interest rates, then there is a rotation into riskier assets. And there is more funding available for startups. But if you think about it, basically interest rates for a sustained period, decade plus, were almost below zero. and then went up to, in Europe, this has went up to 4%, now back down to 2%. So for that, if we're seeing a sort of secular change or a shift back to a decade of very low interest rates, then I think on a five to 10-year lens, it is actually, it bodes well for European, for investments into riskier assets, which includes startups.

8:16I think on the investment into the critical things that you talk about, yeah, I mean, it's absolutely needed. We're going to, I think, talk about a day to 10 a little bit today, and the energy costs are an absolute abomination in europe and they need they need investment and it's it's great all of this just takes a very very long time but you know the governments with germany's big infrastructure spending bill and europe uk has got its um you know spending review coming out this week all those kind of investments are going to be necessary for for upgrading the infrastructure which will also unlock potentially you know significantly ai going forwards the us okay it's volatile there's a whole bunch of stuff going on across private and public markets.

8:57But just looking at the IPO piece of the picture, I mean, looking at the States versus the UK, it is absolutely two different stories. So US activity is about 80 % up on 2024 figures. And UK is nearly the same percentage, but in the wrong direction, with loads of green shoots happening in Europe. And here's a quick fun fact for you. Three out of 10 of the biggest IPOs of last year were in Europe. So that was Puig, the fashion and beauty brand on the Spanish exchange, Galderma, the dermatology company on the Swiss exchange, and CVC Cap, the PE firm who listed in Amsterdam. But Lomax, tell us more what's happening in IPO land.

9:37It really is kind of massive, massive stuff over there. Nafal over here. And then let's bring it back to how this affects our ecosystem, how this affects startups and investing. Well, I think there's a big headline grabbing numbers in the US and lots of walls of money moving, both being raised and being made for equity investors and pretty slim pickings in Europe. I mean, looking at some of the numbers, right? So if you take the US has done 143 IPOs this year. Take the UK, for example, has done five. And then one number that was really shocking to me is in the IPOs in the London market this year, only 75 million, total 75 million has been raised, right?

10:17Raised in fresh capital. whereas that number is about 13 billion in the US. It's quite depressing. I think this year there have been, I think no venture backed IPOs in London. In the US there's been nine. So significant ones we've seen. Hinge Health, CoreWeave, Armada, Circle Internet. You know, they had the choppy times earlier this year with Planner and StubHub postponing their IPOs but it seems to be back now. CoreWeave, one of Mads' favorite companies, has soared since IPO. It's up, you know, three times now, listed at$40, now$150. But it took a recent dip there, didn't it? I saw a recent dip.

10:52Gangbusters. Yeah, I know. It's up over 3x from IPO. Armada was up significantly up 50 % on its first day. Armada Health just IPO'd another tech-backed venture company. Or venture-backed tech company. So I think the story on the IPO scene is definitely very, very different. I think then couple that to some recent news where two UK listed companies have announced big changes in their listing. So Wise, which is the challenger bank, has just announced that it's moving its primary listing to the US. And Indivior, which is a pharma company, it was already primarily listed in the US, but it's cancelling its secondary listing in the UK.

11:38right so those two kind of big hits to the to the uk stock market in the um uh in the last week and i think why does this why does this happen well there's just much more money in the us right so it's easier to raise money there's significantly more analyst coverage one thing you can do just as a reminder is you can list in europe or list in the uk and you can still tap the us markets right so you can still have these things called american depository receipts if you're a european or UK company, but they are less liquid, less easy to raise money, as they don't have the analyst coverage and don't enable you to get into the relevant indices, S &P 500, et cetera.

12:14So it is very much a kind of secondary access to that capital market. And let's just step back. The US public capital markets, I think, is 50 trillion. And the UK is 3 trillion. So sometimes we think in venture that we talk about UK to US disparate, the difference is five to six, seven to eight times. The US is 17 times bigger when it comes to the size of the capital markets. And there's a really astonishing one, which is liquidity. US turnover per day is 500 billion of stock, 500 billion per day. In the UK, it's about eight to 10 billion per day. It's 50 times different. It's astonishing. So I think if you're wise and you're looking to raise more money, raise your profile in the US if you've got to go to market there as well, I think this is a bit of a no-brainer.

13:07It's just walking into a wall of money and exposure and profile, et cetera. I think the individual thing is a little bit secondary. They have most of their shareholders are in the US, most of their businesses in the US, all they're doing is canceling their secondary listing in the UK. Why is this relevant to tech and startups, guys? Because I think everything that happens in the public markets flows back to what we do. Ultimately, we are investing in early stage startups. Where are they going? They are going to the public markets and or private markets are valued by reference often to what's going on in the public markets.

13:40So it's incredibly important, both in terms of what's happening, the valuations there, that all flows back to what we do. Because ultimately, what are we doing? We're investing in startups and building companies that can become big standalone technology companies, which ultimately would be listed on one of these markets, right? And I'll just say one final point. In the UK, technology is 1 % of the FTSE 100. In the US, technology is 30 % of S &P. So when you think about it in the relevance of us and where our founders might want to go to IPO in the same light as Spotify, UiPath, Auto One out of Europe, the difference is...

14:24I think when we talk about US-EU difference a lot, it's this public capital markets piece that is staggering, I think, about the difference. The good news, really, of being an optimist, is, as Mad says, capital is global. It's not certainly not frictionless, but it's boundless. So you can take your European company, you can build hundreds of millions of revenue here, and there's a market for it in the US. So I think it's depressing that these companies aren't IPO-ing here and giving, enabling, for example, European pensioners to invest in these companies so much. But it's not the end of the world.

15:02I want to have a very quick sidebar conversation around Pisces. Not really on topic, but it just came to mind as you were speaking, Lomax. Now, Pisces, I can't remember what the acronym stands for, but it's a way effectively of getting stock options. and I guess it would be series BC startups or later stage startups to get more liquidity for founders and for stock options holders. So getting private markets, some version of a public market trading facility. But do either of you know any more about it? Will it be relevant at all? Will it work? I don't know if anyone knows anything on the Pisces topic.

15:46I think it's coming, it's now June. I think it's coming live in June. Really what Pisces and other schemes like it are trying to address is the symptom of a stock market where it is difficult to go public. Companies stay private for longer, but we still want to have liquidity and get people access to trade these underlying companies. And so we create these quasi-public markets or liquid markets or try to do that in private companies. and it just seems to me to be absolutely the wrong remedy and prescription for the symptom. Because public markets have their strength and private markets have their strength.

16:27And private markets are all about inside information, knowing the company closely, and being able to make quick decisions based on working closely with management teams and having that very intimate knowledge. That obviously does not work in a public market. You have insider trading laws, and people need to be able to trade on the basis of an equal access to information. And so the response to the public markets not working can't be to try and make public markets out of private markets. It's just bound to fail. It cannot work. Well, you can't raise fresh liquidity. I mean, you can't raise new capital using the Pisces scheme, can you?

17:07No, but you can still trade. You can trade. You talked about Carter, for example, trying to do this, like trying to create some little sister or little brother of what is a very well-established, highly regulated, centuries-old system. I'm sorry. I'm all for like optimism and new things and whatever. I don't think it works. And then, well, Carter pulled out of it. It's the thing you do with optimism. It's just a fundamental misunderstanding of how the markets are meant to work. The people that sell, by definition, are insiders. They're holding something. They're closer to it. and the buyers are outsiders.

17:40It's just, it's totally the wrong remedy. It's just, I was just wondering if there was any leaning in from this new scheme into the IPO discussion. I knew it was always going to be a bit of a sidebar. Yeah, I mean, so let's look back around the real story here, which is London's systematic failure as a public market. Endless delistings, very, very few new listings. You know, we talk about how much bigger the public stock markets are in the US than in the UK. And Lomax, you shared some great stats there. But one stat that is staggering is that you think about the US market as 16 to 17 times the size of the UK market today.

18:25But that's a new phenomenon. Yeah. If you go back 15 years or go back to 2007 before the great financial crisis, the S &P 500 was only about three times the size of the London Authority Exchange. So there's been a dramatic hollowing out of London's position as a financial center, especially on the equity side. Now, part of that is due to the weakening of the sterling. Sterling is down about 40 % over the period, but it just doesn't explain the whole difference. And so there are all these things. Lomax, you mentioned about liquidity crisis, you have much less daily turnover in the UK. You have a regulatory burden, which makes it hard to list.

19:08And I think to some extent, the whys and kind of move and the Circle IPO are perfect in yet, sir. Because if you go back 50 years, London was the go-to hub for fintech companies. And in so many ways, Circle is an example of a company that could have been and should have been built here, but was built in the US instead. And wise of a company that was built here and is here, but now is willing to listen to the US. There are missed opportunities all around. And just double clicking on what's happening here with crypto and stablecoins. So stablecoins are really becoming part of the global financial infrastructure.

19:49And we've seen with the new US Genius Act that's going through committee currently and kind of the role stablecoins are taking, today, Stripe is offering stablecoin accounts across more than 100 countries. So this is not about Crypto Ponzi, Lala. This is about using stablecoins as an alternative to traditional FX rails like Swift. And stablecoins have got a huge volume. I think the volume now is as much as Visa is processing on an annual basis globally. It's become a real thing, and we should have that here, but we've been fiddling, and the U.S. is capturing some of that. So we can go on to what can be done.

20:32I think it's clear that we need to strengthen the financial markets. I think so much of that, of course, is regulatory, multiple share classes, dual share classes for founder control. simplifying regulatory issues, but we also have to talk about money. And the truth is, 25 years ago, UK pension funds had 50 % of their assets in UK equities. And today it's less than five. You know, some of that people are saying is driven by a lack of tech companies in the UK. And yeah, that's fair. We need more. And some of that is driven by the fact that you have the global tech leaders and they're in the US and they're driving indices.

21:13and if you want to follow index performance, you have to be in these behemoth companies and so capital shifts to the US, right? And that's fine. I'm not proposing that we should stop that. But we're sitting in a death spiral here. When you go from 50 % to 5%, that is beyond the alarm bells. That's like, this is near terminal. And I think it's an excellent example of why we need pension reform. Now, I think this should cover both public and private markets. On the private market side, we've talked about how difficult it is for pension funds in Europe to invest in venture capital and private assets.

21:52And there is a long list of reasons, kind of their fee caps, their some of the fiduciary rules around what trustees needs to do and kind of not giving them a safe harbor provision that could protect them. And there's also scale fragmentation, but too many small schemes. All of that can be addressed. But I think coming back to the public markets discussion, I think there's a wider point here, which is that today the UK gives very, very generous tax incentives for pension savings. So it costs more than 50 billion pounds a year. It's equivalent to almost 5%, 4.5 % of all public spending is the equivalent of the tax incentives that go to pension savings.

22:39That's the same as the defense budget, basically, yeah. Right? And so I don't think it's unreasonable to say that in exchange for these very generous tax breaks, that some of the funds have to be put to use to invest in productive assets in the UK, both in public and private. And so I think there's a huge opportunity here. I mean, it's going to take some political will. And I do think the government has sight of some of this. But again, we just need to move a little bit more decisively. we're into overtime here and it feels like we're taking our sweet time working this but you know what mads you know you know sorry just to jump in i from memory there's there's roughly i think three trillion of assets in combined in uk pension right i think across the defined benefit and contribution schemes so even if you increase the allocation of those you know that three trillion of assets, you enforce a rotation out of the US into the UK, still not really moving the needle massively.

23:44But I guess, you know, in the context of, yeah, I guess in the context of London, which we just said has roughly three trillion of market cap total, right? So you could potentially move that significantly. But in the context of the US is 50 trillion of market cap, you're not even And you're not really helping the UK. I mean, you're helping it, but you're not bridging the gap in any meaningful way at all, right? There are two things out there. There is market cap, which is kind of the value of the total market. And then there's money that's put into a market. I think part of the argument I would make here is that the value of a company is often determined on the marginal supply and demand.

24:30not the total supply and demand. So we don't have to put 3 billion pounds more into UK equity to increase the value of UK equities by 3 billion pounds. Okay, just by having more marginal demand, you can increase the multiples, and that will increase the total value. But that's one point. The second point is we need more capital across not just Publix, but the full stack. So we create more IPO candidates. and that's especially around growth it's kind of the pre-ipo phase whereas if all the great tech companies go to the uk and list well then obviously the uk to raise their growth round they're also going to list in the uk and if we can put more capital to use in the later venture phases here i definitely think that will help the ipo funnel it's all about more money i want to change tack i want to just dip into a couple of ai stories that have cropped up this week so one being the creative industries have according to Baroness Beban Kidron of Bridget Jones fame she was the director of one of the Bridget Jones movies so she's in the Lords and and she has basically said that the creative industries are being shafted by the UK government so the UK government is trying to pass a bill that will allow AI companies to use copyright material with an opt-out and the Lords has rejected this proposal for the fourth time and the second story that I wanted to dig into and I'll tell you why in a second was that lawyers are now facing sanctions if they cite cases after using chat GPT that don't actually exist.

26:03There have been a number of high profile cases of lawyers using citing cases that don't exist in the real world. So AI is now obviously butting heads in the real world and there'll be much more to come. What sector is next? Who will the winners and losers be? There are so many questions around this kind of where AI meets the real world. You know, to be honest, I don't have a strong opinion where this is going to go. You know, there's this new data use and access bill that's been battered back and forth between the House of Commons and the House of Lords in the UK. I think the Lords have sent it back three times.

26:36The Commons can push it through anyway, so it's largely academic, quite frankly. I think the major sticking point now is it's not the concept of the AI companies being able to use copyrighted material, but it's around disclosure. I think the Lords really wants to force the AI companies to actually disclose where they've used copyrighted material. I mean, okay, fine. I mean, I don't have a strong opinion where that ends up. Hasn't the horse already bolted? Hasn't the internet already been absorbed? Yeah, okay. I wouldn't necessarily take, I mean, I think if there was, look, I mean, this is a big industry.

27:11Take the UK, but it will apply across other economies too. This is roughly contributing. The creative industries contribute roughly all, you know, the size of them is roughly 135 billion pounds in the UK. So these are not insignificant parts of the economy. And I think just to not protect them and let them go up in flames is clearly, which, by the way, is not going to happen. I think that's hyperbole. Is there a way in which, you know, compensation can be managed? I think it would need to be a commercial thing rather than like a regulatory thing. I don't know. I don't know, Mads, if you have a strong view here, but I'm just, I don't know where this ends up, quite frankly.

27:49Like in the US, it's a little bit more permissive. They have this concept of fair use when you're using copyrighted material. And as always, as you would expect in the UK and the EU, it's more restrictive. I don't think the government should be mandating payments. I wonder where I would love it if there was a way for the creators to make money out of this. And to be honest, the commercially savvy ones will probably find a way to do that. The tension, right? The tension is between the freedoms around AI and the economic boon therein and protecting copyright holders. That's the tense piece. But Mads, where would you take this?

28:28Yeah, going one step further in the context of what we've just talked about, creating more great technology companies in Europe and in the UK, if you have competitors where in China you have, should you say, a very relaxed interpretation of Western IP protection laws. And in the US, actually, people talk a lot about the US fair use, but there are a lot of lawsuits now underway. But you have an environment where you have a lot more capital. And so the large AI companies can count on A, massive war chests, and B, almost infinite investor backing to weather. Isn't Reddit suing Anthropic? Who's suing Anthropic?

29:12Yes, Reddit is. But Anthropic can go into this knowing that they can raise probably as many billions as they need at the end of the day. It will be litigated in the US, and a solution will be found. And that's just a really cut path. Well, and also, by the way, Reddit and their lawyers will know that, right? So in a way, it's all just part of the kind of US, like the very, very commercial way they approach litigation in that jurisdiction. There is that. But we also need to think about it from the perspective of investors, because our investors are going to fund that business model in Europe, knowing that there's much less capital available.