E500 | This Week in European Tech with Dan, Mads & Lomax

0:00Welcome to Upside, where we look at the real stories that live behind the headlines affecting European venture. Today, it's Mads Lomax and myself, and we are talking about war, very sadly. We're talking about war, we're talking about how the EU is navigating this new defence push. Lots of money being spent on defence. We're looking at the European Space Agency. They're looking for money to build a new satellite network with military capabilities. We've got a bit on the US, China slugging it out and what's happening with Europe. What does that mean for us over here? we are going to look at a pumping american ipo market and then one from lomax a very cool british surgical robots tool which we're going to look at how that's going to how that's going to make waves and and create some surgical magic

0:50tear down this wall it's more than just an alliance this is a union of values

1:03This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Now, starting at the top, Mads, I think we're going to lean on you heavily for this one because we can't not talk about war. We can't not talk about what's going on in Iran, what's happening with Israel, what's happening with the US, obviously Russia, Ukraine. and how this reshuffling of the world order is going to pare down and affect what we're doing at an investment at a startup level. So can you kick us off with war? There is so much to unpack there. I think everybody knows what's going on right now in Iran and Israel.

1:43I don't think we need to talk about the specifics of what's happened this week. But maybe just taking a step back, I think it's worth reflecting on how we got here because this is a completely unpredictable turn of events that I think, you know, going back just 12 months, none of us could have seen that we would get here. And so, you know, just going backwards to February 2022, Russia invaded Ukraine, expecting a quick victory. But Ukraine's resistance really decimated the Russians' offensive capabilities at the time and forced a resource prioritization for the Russians. Now, throughout the war that's ensued since then, Iran has supplied attack drones to Russia, and they've done that in a quite meaningful way.

2:26Fast forward to last year, September 2024, Israel severely weakened Hezbollah. They killed Nasrallah on September 27th, reduced capabilities by up to 70 % of Hezbollah. That has previously been a huge threat to Israel, the state-sponsored terror organization that was seen by Iran as the boot that was there to choke Israel and threaten the country. And so by December, Assad's regime collapsed because Russia, now bogged down in Ukraine, was not able to support their old ally Assad. And Hezbollah, that was now decimated, couldn't come to his rescue. That meant that Assad fell. That cut Iran's land route to Lebanon and meant that rather than having two adversaries on Israel's borders, now both of those adversaries within a few months were gone.

3:24And so this is really what enabled Israel to strike at Iran's nuclear facilities. So 200 fighter jets targeting more than 100 targets last week and have been, you know, sort of, you know, in this process of dismantling the nuclear capabilities since then. I think it's worth reflecting on the role of Iran, not just in the region, but on a global scale. Over the past several years, Iranian terrorism has reached, you know, all parts of the world. We've had terror attempts in the Netherlands, in Denmark, in France. We've had attempted kidnappings in New York, not to talk about what the country has done to and for the stability and destability of the Middle East.

4:08You know, we've had you have a huge Iranian diaspora, kind of more than four million people. You know, from what we know, the vast majority supports a new regime in Iran. And so you've got these very, very interesting dynamics happening where really all of this started with Ukraine's resistance that weakened Russia, that meant that Israel was able to strike at Iran at this time. And look, there are lots of risks on the horizon here, but there is a potential, a possibility, I think, for a reorientation of the Middle East. If you could get a more benign, a more productive regime in Tehran, that would be a huge outcome for everybody.

4:51Yes, risks, but certainly also potential for upside. And I think it's worth, you know, we often talk about defense on this show, obviously goes to show that defense is as important as ever. This is certainly not a peaceful world we live in. We're going to talk about defence a bit more later. Do you think that World War III or the proxy World War III has already started? I don't think so. I think Putin has already been out to say that this is a matter between Israel and Iran. I think the Chinese are too smart to get involved here in a meaningful way. So no, I actually don't think so. But everyone is selling drones to everybody.

5:28It feels like there's quite a clean divide with this proxy war going on in the Middle East. It just feels... Look, there are risks. There are risks for sure. I do think the upsides at this juncture are possibly bigger than the downsides. I think the Duranian regime has been terrorizing the region for 40 years. It can hardly get much worse. And being on the threshold of nuclear power was obviously, you know, nuclear weapons was obviously a bridge too far for pretty much everybody in the Western world. I mean, even beyond, right? Maybe even Japan kind of was out saying that there's just no way that Iran can get nuclear weapons.

6:08So I think everybody's agreed there. Lomax, this obviously has ramifications for us, for oil, for stability. What else would you add? Yeah, I think apart from just being a little bit more nervous, generally around a more unsettled world, is what does this mean for financial markets, right? Both public and private. So Brent crude oil is up. Shot up 10 % this week from$70 to$77, maybe touching 80-something. That doesn't seem like a sizable spread for such a massive... It's already high. It's already been driven up high. Some of this was already priced in. Clearly, Iran and the US have been in negotiations over the last few months.

6:47And also, it's also priced in by the fact what's going on with the Houthis in Yemen. Right. So I think that's had some impact on price. But some are saying this could now go up to 100, 120 million, 100, 120 dollars per barrel. Just as a reminder, you know, a majority of the world's oil that comes out of the Gulf obviously comes through the states of Hormuz, which is which, you know, is between Oman and Iran. So 15 million barrels a day. so the heightened risk in iran puts pressure on this will increase shipping rates etc what does this actually mean for us well look as i said more instability a little bit more risk off on the investment perspective so you can see that in the markets today so u.s dollar swiss franc gold all up areas where you traditionally fly to safety when things get more choppy um equity markets in in the in the eu and the u.s down i mean not down by a lot like single digit percent what does this also mean more importantly i think is on a longer term basis if oil oil prices stay high is inflation the higher oil rises the more generally um the more we see inflation so this will therefore as we discussed here before potentially impact interest rates um and you've seen the bank of england today have held and not cut which looking back two three weeks ago there was the potential that the Bank of England in today's announcement would cut by a quarter of a percent.

8:10They haven't done that. So they've held at 4.25%. And the Fed is still holding fast as well. I saw Jerome Drenth power yesterday blaming. The EU have been cutting, right? We talked about that last time. And there are other reasons, particularly behind that. In the UK, there was an expectation, possibly there was going to be a cut, but that's been held. And they quoted this unrest and unsettled Middle Eastern situation as one of the reasons for that. So, you know, this is all big macro stuff. Does this really impact founders down in the trenches and GPs investing in those founders on a day-to-day basis?

8:41No, but if it leads to a flight away from riskier assets, i.e. equities, then there'll be less funding available for us in the long term. But it's too early to tell. We'll see where this gets to. Yeah, a lot will depend on how protracted the conflict is. Yeah, and Mads, I mean, you're very optimistic on what could replace the regime in Iran. But, you know, I mean, fingers crossed it could be worse. I mean, I don't think it would be worse, actually, but it's hard to imagine. That's true. I've seen Netanyahu supporters in Iran. I don't know how popular the regime is. I guess we'll never get any kind of proper, honest overview as to, what, 90 million inhabitants in Iran?

9:25I guess we'll never know. So I've seen, and maybe it's good old solid Israeli PR, but I've seen BB fans in Tehran. Well, of course, if you're against the regime, Israel is the quickest way to get rid of the regime, right? Let's stay with defense. So defense, my personal take is the defense is going to save Europe financially. I think we're going to see so much because of resilience tech. It's so deep. It's so wide. There's going to be so much money flowing because of this new isolationism that Trump has given us permission to get out there on our own. And I think that activity is going to come all the way down to what we're doing.

10:03I think even though I hate the notion of war, I think, you know, upside, obviously money and flow will circulate. Downside, it's a really sad time for humanity. However, for investors and startups, there will be activity. There's going to be more stuff coming down the track. So there are lots of stories this week about how the EU is navigating this new defence push. Lomax, set the scene a bit and let's dig into some of the details. Yeah, well, I'll just start. I mean, reflecting on what you just said, I mean, I think that's a little bit optimistic, Dan, to be honest, especially in the context of venture and technology, if you're thinking that defence is really the silver bullet or certainly a big growth factor.

10:42I think money's going to flow. I think it's going to create money flow. So defence tech within VC was 1.7 % of the market last year, right? So it really is a very, very small part. So even if that increases fivefold, it's still not moving the needle at the cohort level. But defence is, my point is defence is not just defence anymore. Defence is energy. It's food security. There's a whole layer to the onion that I think comes with this renewed resilience tech. Yeah, I guess that's the broader resilience category that VCs are now touting. And yes, and energy sovereignty, etc. But yes, if you include that category, then you're talking about more like 25 to 30 percent of overall European venture investments are touched by that kind of resilience, sovereignty angle.

11:25But I mean, if we're talking about defence specifically, right, it is still a very, very small component. Now, of course, the budgets here are increasing significantly. So the UK, of its spending review, as we talked about here two weeks ago, has now pledged to spend up certainly 2.5 % by 2027 of GDP on defence, increasing to potentially 3 % in the next parliament. So actually, in real terms, looking at the numbers from, say, 2015, the UK annual defence budget will have jumped from£35 billion to roughly£85 billion. So nearly a kind of 2.5 to 3x increase in 10 years. The EU is increasing as well, going from 1.6 % of GDP in 2023 to ideally 3 % in 2030.

12:06So these are big numbers. So actually in the EU, defence budget is going to increase from$280 billion to$426 billion. So these are big, big numbers. What are we seeing at this? How are we seeing that trickle down to startups? Well, actually, there have been three unicorns minted in the last 24 months within EU and UK defence. So Helsing, how much are they? 600 million at a 12 billion. 600 million euros at 12 billion. 12 billion valuation, which is quite incredible, making it one of the top five privately valued startups in Europe. So that's been a phenomenal, phenomenal and very, very quick ascent.

12:39Takiva, Portuguese company operating in drones and quantum systems out of Munich. So those are three kind of newly minted, newly minted unicorns that are riding this wave. So I think, you know, we're seeing we're seeing that down now at our level. And Helsing, interestingly, now has started out within software is now producing its own drones, looking to go into submarines and aircraft. So it's going from software to all domain. There is a general rush of VCs into this category, which, you know, I think I've said before, when I see VCs rushing towards something, I tend to rush in the other direction.

13:14Like, what does it be? My initial reaction. Avoid the Patagonia vests and the paddles. Yeah. And I think this is great. Look, I mean, if you look at the market size and the headline numbers I just gave, you've got very, very big budgets increasing pretty rapidly. You know, you could probably find markets growing faster in other sectors, right, that are potentially sexier from a venture and entrepreneur perspective. But this is still, you know, these are doubling, potentially trebling on a kind of decade basis. So the CAGR, the compounded annual growth rate of these markets is not something to forget about.

13:47But just to put that in context, you know, health in the US is 20 percent of GDP. Defense is two and a half to three percent of GDP. Right. So it's still a lot smaller than these other big areas. But still, it's nothing to shy away from. However, I think just a few words of caution. Let's not forget technology, which is really what we're talking about here, is only roughly 10 % of these budgets, right? So all of these big numbers we just talked about, you need to cut in 10, right? Secondly, these are very atypical investments from a venture capital perspective in terms of they have a number of obstacles, which can both be benefits if you surmount them, right, because they give you a moat, that other traditional, for example, business-to-business B2B software companies didn't have, right?

14:30So, you know, including, these are the sort of problems that I think through when I think of defence, very, very, very long sales cycles where often distribution trumps innovation, small buyer universe, right? You've only got 25 to 30 potential buyers, and that's complicated by joint procurement. So in the EU, everyone joins together to procure. So in a way, you've suddenly taken 20 countries and combined them into one, right? Highly political, highly regulated, you know, export controls on weapons, et cetera, and a constrained exit environment. So I think all of these are tricky issues to navigate.

15:03Clearly, you know, there could well be a kind of winner-takes-all aspect here, which is what clearly a lot of VCs believe Helsing could be. But look, I think there's something very, very interesting here as warfare gets upgraded for the modern age with the adoption of robotics and AI, autonomous systems, et cetera. You've seen the big first movers, Andura, which is now valued at$31 billion in the US. Helsing now valued at$12 billion in Europe. This is all exciting. These are potentially very, very big companies, but I think definitely buyer beware, caveat emptor with respect to just rushing into the latest defense craze and thinking you want to make money.

15:40I think Lomax captured it well. An angle I thought it was worth just noting is looking at the consortium that's come together to fund this Helsing round. So it's Lightspeed Ventures. So that's U.S. money. It's Accel. That's U.S. money. It's General Catalyst. U.S. money. So the two main European investors are it's Plural, which is Tavid from TransferWise, his shop. And then it's Daniel Egg from Spotify. Yeah. And so in many ways, kind of this defense VC taboo has been broken. But even so, Daniel Lake, he's been criticized. But he's also said, look, I firmly believe that this is the right thing for Europe.

16:25I thought Saab was in there. Saab is a defense company. I mean, I think that makes sense, that a defense company would invest. But if you talk about venture, kind of these are the venture dollars. And I think what's interesting is there's been lots of US money coming in, but it took some homegrown capital to prime the pump. And especially Daniel's work here has done that. And that's why we need more homegrown VC firms if we want to build these champions. So, you know, I think Lomax, to your point, we still have a 10X funding gap versus the US when we look at the defense tech ecosystem. So there's still a lot to do.

17:01And later we'll touch on the China and Europe trade challenges that are very connected to this. I think it's very interesting you pick this up, Mads, mads in respect of the u.s venture money coming in let's not forget that in european venture capital the eif is roughly the european investment fund is roughly 50 percent of the capital into the venture funds in europe and in the uk the british business bank the equivalent is roughly 35 to 40 okay when those funds invest in a venture capital fund they put restrictions and they say no sex no gambling no weapons yeah you look in the schedule of the limited partnership agreements of the funds in which those people invest you cannot do those three things they're absolute prohibitions which is why for example when you see funds like boulderton which i think have government money i don't know but i think yeah the big fund in the uk they invest in quantum systems which is this munich drones company it's billed as a dual use investment yeah because they and And in the press releases, they emphasize the civilian use cases because I suspect the wording will say something like, you cannot invest in companies that primarily make weapons and arms and ammunition.

18:14So they kind of get around it on this legal technicality. So obviously, Daniel Ek doesn't have that restriction. He puts a lot of money into Helsing, which is a pure defense company. Plural, I don't know what their LP base looks like, but I suspect they haven't got government money in there. so they have this freedom. And the problem is, is that these funds are 10 years long. So in a way, these decisions were made three or four years ago to kind of tie the hands of these funds. And so we haven't seen, you know, I don't know if you're raising a new fund from the EIF now, can you actually get this struck out?

18:46I mean, we saw the head of the EIF the other day saying, I'm not, we're still not going to be investing in weapons and arms and ammunition. So this is a major difference because we have such a big government presence. And let's not forget also, if you have a fund, that's a 200 million fund and the EIF puts in 50 million into that fund, their restriction taints the whole fund, right? So you actually end up tying the hands of more than just the capital that they deploy. You end up potentially tying the hands of two to three X the amount of capital they deploy. So I don't want to be a negative Nancy or whatever on this, but this is one of the reasons why you actually find it difficult if you're a pure defense company to raise money from a lot of venture funds now and that's also why you'll see fund companies like takiva quantum systems and the next ones there'll be a big amping in dual use and that's fine that's a bigger dual use makes it a bigger market opportunity etc etc but that's what's going on behind the scenes i wonder where there'll be a semi a semi turning of the head just to uh let some thing could let some things flow through but mads one one other thing i wanted to ask you was what was the blow back with daniel eric well spotify is a music company and you know what is the music master doing investing in weapons is the complaint some people have had because right i mean you know for many people they don't ideologically different is that yeah it's just the ideology and he said he thinks it's the right thing and of course the truth of the matter is we need to be able to defend ourselves otherwise we can't enjoy our music i mean he was one of the first investors I mean, Helsing is only a four-year-old company, and he was one of the first investors.

20:24Absolutely. And that's what he had flack for. Obviously, it's a new world today. I'd say, Lomax, just on the point you made, you're absolutely right about the EIF. BBB doesn't have the same restrictions. Yes, no sex, no gambling, but no problems with defense. Oh, interesting. Okay. Well, what I would say is, well, that's great to hear that, you know, maybe that's a Brexit. No, it's not Brexit dividend because the British Business Bank has always been independent. I would just say, look, I think we live in our little world of early stage, you know, venture and innovation and technology. And we can see the pressing issues within defense and technology.

20:58But I think at the wider level, it's not inherently obvious to be investing in weapons. And I can see why Danielette gets flack from some people in society. And yeah, I don't necessarily agree with those people. But if you're going to invest in things like weapons, you're going to get flack. But, you know, if you put yourself out there and do something, someone's always going to try and take you down, which I think is part of the course. well he is he is standing by his own values which he's done a number of times i mean i remember the the joe rogan blow up and there've been a number of daniel eck surrounding kind of challenges about his politics or ideology but i think you know if that's what you you stand for then it could for him he's standing for what he believes in and uh but i think broadly look i mean what are we what are we saying here we're saying much bigger budgets for for defense we now have a reference You always got to have a reference company in an industry.

21:46We now have a very, very strongly emerging reference company in Helsing, which you can look and point to. And when I raise money from my LPs, et cetera, et cetera, like the fact they've heard of Helsing is generally helpful when you're trying to talk through an investment category. So it's great to have a reference. And I think we'll see, you know, what we've already seen on the ground, you know, day to day founders working on interesting problems. And it's not just weapons. You know, all of this stuff is there's a whole bunch of upgrading that needs to needs to happen after basically 50 years of not investing at all.

22:11we are seeing more more defense dual use in our deal flow that's absolutely for sure again we're going to stay with defense very defense heavy this week so the european space agency is looking for a billion euros to build a satellite network with military capabilities this is just the opening budget is going for approval in november what's the story behind the story here and what are the broader implications for europe i think um i think it's tied to the same theme basically you know in terms of the EU upgrading systems and grabbing hold of sovereignty and control over as many critical capabilities and infrastructures that it can, right?

22:52And we talked about this across energy, across AI, and what you're seeing in defense. And this is adjacent to that, which is earth observation. The EU has had its own earth observation system, which is called copernicus but generally been very very lightweight in the in historically and so that's been i think they have copernicus has 15 satellites something like that whereas the u.s has both the military grade satellites for earth observation have been generally delegated to the individual nation states within within europe so there's been like less of a kind of of a militaristic push at the european level and that has meant that historically for like earth observation data the europe has relied heavily on both u.s military u.s civilian and u.s private so you often read and if you often when you look at articles about ukraine or something you see an image and in the bottom right hand corner you see maxar technologies or planet labs right these are u.s private companies right that have put up tons of satellites and are setting them to you know obviously the press but also actually to european governments it turns out right so the european space agency has has suddenly realized now okay earth observation is critical we are now you know you know the space agency is now asking for one to two billion which will actually end up becoming five to six to seven billion you know over the life of this project to effectively double or treble the number of satellites that can be used for earth observation particularly with a military focus so it's again part of taking back sovereignty why is this relevant while it continues the same theme but i think interestingly there will be opportunities here for both you know hardware and software companies that can you know tender for some of these projects you know so as the as the european space agency puts out requests for you know people to build the satellites or people to build systems for the satellites or people to build to build imaging for the satellites there will be opportunities and crucially this time given that you know the europe is trying to build more sovereignty and control it will mean that probably european companies have a greater chance than you know their american cousins who are probably better funded and more advanced etc but actually the europeans won't want to integrate them into this kind of critical infrastructure so i think you know there's a you know company called isai out of out of finland which you know both manufactures and operates satellites i think has raised over 500 million they could be a classic beneficiary of this but they'll actually be seed stage and series A stage companies that would also benefit.

25:23So I think this plays into the same theme, but certainly interesting. And it's also just reminds you, it's like, you know, European governments in the EU have just been relying on like US private commercial companies for this critical data. It's like, come on guys, you've been asleep at the wheel. It's an abject policy failure that we've seen at the UK and the EU level. Well, I would just put it in the context of IRIS, which is Europe's Starlink competitor. Now, of course, the Earth observation network is different. This is, as Lomax is saying, this is ASUS new intelligence network. So this is more about the eyes than the ears.

25:59There are some similarities here, and it's all about plugging Europe's gaps in infrastructure and communication. In some ways, the technologies are complementary. The new constellation here could consume the IRIS bandwidth, and IRIS in turn would benefit from some of these security-heartening aspects of the EO project. And there's clearly a defense angle, as Lomax is saying. Now, put this in the context of Starlink. Please don't, please don't, please don't

26:35Starlink, independent analysts are saying it's cost$16 to$18 billion so far Elon Musk's own guidance was it would be$20 to$30 before he felt it was sort of fully deployed over the life cycle And that it would take$5 to$10 billion to reach break even The truth is, we've had rumblings about when access to the US systems could be switched off and clearly strategic autonomy in comms and surveillance is absolutely essential. And so if we don't have an ironclad agreement with the Americans, then Europe must have our own systems. That's the way it has to be. But if we compare our systems, look, it's fewer satellites, it's lower coverage, it's potentially higher latency.

27:15It's a very long road to commercialization, if ever. And so one could wish maybe for a more commercial approach to projects like Iris than the one that's been taken, But it is interesting to see that we are at least starting to take the strategic autonomy seriously. And I do hope the budget will be approved for the investment. And, you know, one thing that's interesting also as a tangent here is that, you know, that NASA's funding is proposed to be cut by the White House by 25 percent. It will be the smallest NASA budget since 1961. one. So funnily enough, what's going on while the European Union is increasing budgets for the European Space Agency, the US is doing the opposite with NASA.

28:00And the same is true in defence. We just talked about European defence budgets going up. The US is cutting its defence budget. I mean, it's still the US defence budget is still nearly one trillion. It's still nearly double what the European is, right? But it's still like kind of going in opposite sort of opposite directions. I mean, I think maybe in the US, they're thinking that the private sector will pick up more of this is probably what that's probably a very slightly more libertarian white houseian or trumpian philosophy or maybe thinking that europe will pick up some of our own costs maybe yeah yeah yeah yeah that's definitely isn't much of the saving or much of the budget cut in nasa isn't it much of the r &d to spend aren't the trumpians cutting any kind of scientific r &d isn't that that always feels like it's the biggest the biggest sledgehammer they want to take to the budget.

28:49They want to cut everything, fat, administrative burden, all of it. So yes. Even so, the big, beautiful bazooka bill is adding, what, two, three trillion dollars to the fiscal deficit. But what's also interesting is that actually, because there is still a heavy collaboration between the European Space Agency and NASA, but actually now the NASA budget's being cut, some of these joint projects they're working on are also getting cut, right? So I think the Lunar Gateway, which is a space station designed to orbit the moon, is going to be cut. It's interesting times, but at least I guess, you know, the European purse string holders are doing the right thing with regard to some of these critical areas.

29:33Well, let's broaden out because we can't kind of not talk about China in the reshuffling of the global world order. And obviously, there's a major trade war that's been going on for a decade or so between US and China. How will this affect Europe and how will this affect us? Mads, where would you take this? It's closely linked to this discussion around strategic autonomy, because while the US has been rotating away from China for nearly a decade, EU imports have held up. About 25 % of EU imports come from China, and it's now down to 15 % for the US. And there are really three things, three forces that explain the gap.