E527 | This Week in European Tech with Dan, Mads & Lomax

27:01You know, remember Jasper? Jasper, one of the big original kind of application-led companies in, you know, SEO content automated generation was quick out the gates, maybe even a bit too quick out the gates. Timing is everything, right? I think ended up laying off timing is everything and laying off a lot of people. But look, I think, you know, if Europe is lost on the model race, it hasn't lost, you know, the application race is up for grabs. And, you know, there are amazingly talented people here in my backyard in Lisbon and clearly in Stockholm, as we've seen. And we 100 % know that in London and Berlin and Paris.

27:39And again, talking again recently with you guys, like as Mads says, where greatness comes from great people, you know, getting together in person and magic happens. And I think that can happen very, very quickly. I mean, look at the speed of this. You know, these companies going from the new benchmark is what, you know, at least 0 to 10 million of ARR in 12 months now. So the growth rates are off the charts. And I think Europe's got a good a position. And, you know, unlike the model companies, this requires less money. And we know, we all know that Europe has less money than the US. So at least if we have less money, this is actually a game that we can play.

28:18Well, let's talk about how this is going to affect our investment strategies, how we work with founders, what we encourage them to do, not do. So question for the room, maybe Lomax, you can kick this one off. Is this going to affect how venture is done, what we invest in, how we work with founders? is this going to change your strategy at all i think often in venture and technology or venture there's often a people are a bit too quick to call the models changed the you know the new rip up the old playbook it's all about the new playbook when it comes to venture investing i know dan you like to say that a lot but i but i i still think to push for i'm keen to push for new models to evolve to be one step.

29:08I'm keen, I'm keno keno, not only how we do what we do, but what we do. But and so I'm always going to be poking that bear. Yeah, no, of course, poke away. But I think especially pre-seed and seed investing, I think like at the later stage, you can start to innovate at the financial product level once you get more data, more patterns that you can sort of underwrite to. So, you know, For example, we saw General Catalyst do that revenue-based financing for Grammarly a month ago, for example. So you see new models apply where perhaps non-dilutive to founders. But I think at pre-seed and seed, I think it's still a very, very simple concept of just backing highly ambitious, highly talented, highly focused young, but also middle -aged individuals, to do big, big things.

30:02And I think that's very, very simple. And I think we can sometimes overcomplicate it. Maybe we do it on purpose because we wanna try and make what we do seem more complex than it is. But the thing that even just doing what I just said is actually very hard to do because to find those people and get them to take your money is extremely complex. And obviously to build those companies is extremely hard, much harder than the investing side. So you know what? I think at seed, precedence seed, no, I think the metrics might change, as we just talked about at Series A. You often used to talk about, oh, 1 million ARR is the sort of benchmark for Series A.

30:39I think, you know, maybe it's a lot higher now. Maybe it's 5 million, you know, about 5 million ARR and maybe the growth rate is higher. You know, clearly companies like Lovable, Bolt, Cursor have all set new benchmarks that, you know, unfortunately other founders are having their, you know, heads beaten with by investors. but I think no I think yes we may incorporate more technology into ourselves as early stage investors but I think the fundamental concept of taking small amounts of capital giving it to smart people they use it in a focused way to drive short-term ROI with a with a focus on generating long-term value not going to change how do I drop this mic just lift it up baby there you go there were some other other aspects that we got the uh gp5 we've got the other perplexity models coming out what else is happening there's some other stuff which we haven't spoken about what have we missed mads it's a rumor are that uh rumors are that uh gp5 gp5 will come out end of the month i think you know sam he has had a bit of headwind recently and you know i think actually rock 4 was uh it was a bit of a bit of a punch in the nose potentially so yeah you know he he knows he needs to come out with a with a new state-of-the-art model he needs to he needs to to you know kill all the benchmarks when he does and so and rumor is that it'll be a great model that'll come out in a couple weeks but you know rumors so far did we talk about mistral mistral and apple we didn't talk about that no go what what's the deal linux what's happening with them Well, Mistral is the, I don't know if it's real.

32:19I mean, I'm just going by what's reported in the press that we've talked before about Apple missing the boat in many respects with regards to AI. And it may look to recoup some ground by acquiring the French LLM company Mistral. there are reports of a 15 billion dollar acquisition apple has i think 50 billion of cash and marketable securities on the balance sheet so it's easily within scope for them to do mr i was raised as mad's just said 1.3 million euros i think it is the last value at 6 billion yeah 1.3 billion yeah 1.3 billion and last valuation is roughly 6 billion so the numbers would stack up for everyone involved i mean you know i remember what i used to do i've done a few you know set aqua hires you know where you sell for sell for um for the team you know the old price back in the old days was like two was two million dollars you know for a for a machine learning engineer this was you know this was only six seven years ago um clearly i guess to mr alice more than just talent you know clearly i'm sure there's the the foundational work they've done as well with le chat that's the rumor going around i don't know mads if you have any more um more insights but yeah nothing more to add i mean you know back to the european context right so that would be kind of the last the last uh hope but then you're also saying listen things are moving very fast you know could there be a uh kind of an open source group coming out of could them out of the woodwork somewhere the truth is even some of the chinese open source outfits have had you know quite generous backing, not to the tune of the tens of billions you've seen in the US, but certainly in the hundreds of millions to low billions range.

34:02And so it is unlikely that we see another European contender come up at this stage. So if Mistral calls it quits and sells itself to Apple, that probably means there will be no European model company left. And maybe that's fine. Yeah, well, we'll do what we already have, which is we currently have Apple research labs in munich will now have an apple research lab in paris of course and deep mind deep mind in london right and and uh and messa and paris etc so plenty of researchers here they're just on american payroll internally in apple it would sideswipe a lot of the internal struggles that are making the press a lot so maybe it would help apple on that on that front doesn't help us at all but um i'll welcome the cash through the through the ecosystem so we'll take it i'm sure the french government will be very happy talking about government no no no i well i actually don't know if they would sovereignty baby really as you would say as you would say listen they're gonna spin it macron is gonna spin it to like whatever he's gonna get his two three x uplift that's fine you know billions in billions out live to fight another day i mean i guess it would be what it would be if it was cash it would be the biggest cash exit of all time in europe i guess it would be no i if i was if i was yeah as the government have been so pushing for this no no no no i could almost i could almost see if i was mistral i'd be going to the french government and i'd be leveraging this and saying guys you know give me some more money look what they're doing this politically would be very bad look i mean you know this politically would be very bad and don't forget that i mean i don't know where this probably wouldn't seep through into everyday day politics in France, but there's a strong nationalist sentiment in France.

35:49And maybe this is tying two things that aren't in reality tied together, but giving up kind of talking a game of sovereignty, whether it's defense or technology at the same time as selling your crown jewels is, well, it's what Europeans have been doing for years. So I guess it would be no change, but it would - I think it can be spun. We'll see over the coming weeks. it'll be um it'll be open ai next or it'll be anthropo whoever whoever's next on the list that apple is looking to target but talking about governments i want to talk about some government reforms and updates this is not as unsexy as it sounds uh reeves has been out treading the boards had a busy week calming nerves and making announcements all against this mini backdrop of a mini inflation spike but looking looking at the numbers it's not crazy there is a consumer price index, which is pushed up a little bit to 4.1%, slightly wrong direction, with the biggest drivers of that being fuel and clothing.

36:43But that's the backstory to Reeves' talks. So she's made a couple of speeches this week, notably the Leeds Reform and the Mansion House speech. She's been pushed to streamline EIS and VCT, which is ways of getting early stage innovative capital into the system. But there was no response on that. Her Mansion House speech is all about encouraging, basically encouraging the city to take more risk. And some of the specific elements that she focused on were cutting capital reporting requirements, so removing some of the red tape, overhauling the financial ombudsman service. I'm not sure that has any impact on us.

37:18Launching a new task force to support listings on the LSE. We desperately need some more listings on the LSE. As said, she'll reserve powers to mandate pension funds to invest in a wider range of risky assets. We've heard that many times before. Considering changes to ISAs, sure, get more money into Publix, great. And then obviously helping banks to focus their retail customers on investing more into public markets. I'm not quite sure how that's going to work. So lots of noise, lots of soundbite. It doesn't quite add up to me. It doesn't feel like anything solid or needle moving or meaningful.

37:57Mads, is that fair? I think the intention was good. I'll take that as a no. Yeah, I mean, look, they're kind of easing some of the restrictions around mortgage lending, make it a little bit easier for banks to lend to first-time buyers. I think that's good. I think it should go much further. I think it's still too much nanny state around it. About ring fencing of bank capital, making it easier for banks to move capital between investment banking and retail banking to free up more capital to invest i think good thing raising the threshold for emergency funding for smaller banks again making it easier for them to lend more it's a good thing it's kind of a little bit of bit of tinkering there but i think overall it feels like a bit of a damn script there's some evolutionary tweaks it's not really revolutionary we have mega high inflation 3.6 It's way, way up, nearly 2x the target.

38:51And we have low growth. The projections for 25 are 1.1 to 1.3%, but the start of the year has not been great. So we'll really have to run faster in the second half of the year to catch up. And does it feel like the country is on that trajectory right now? I'm not sure. High tax burden since the Second World War. Low productivity behind the EU. kind of our Brexit friends always said we should unshackle ourselves from the you know the course of the EU right then we have this this this this you know low productivity I mean it's just it just it doesn't really add up and it feels like you'd have to be much more ambitious to really make the country run faster and do more and then you also have the geopolitical gaps right you have the the US trying to do reforms on their side you have China actually doing a lot of things and running fast as we've just seen in tech.

39:40So I don't know, it feels like we should be much, much more ambitious here than what we've seen. Lomax, what would you highlight? So if you can bring it back down to like our ecosystem investing startups, but what would you add? Well, firstly, they need to get a handle on all these names. I mean, Mansion House speech, Mansion House reforms, whatever. She needs to go and give these speeches in different places, so we can keep track. I think this is the third Mansion House speech we've had in 18 months anyway i think big picture they are trying on the one hand to do business friendly things at the same time they are doing the opposite and being a classic labor government and you know they have their hands tied by the left of the party and they are having to they are unable to reduce spending on benefits and disability benefits etc and welfare and have been unable to push through those reforms and then they're trying to do a little bit here that's seemingly business friendly and cut some red tape but it doesn't i don't think move the needle i mean you're now talking about the context i think of for the fifth consecutive month the uk has you know shedded shedded jobs each month month on month right which pretty much tracks exactly with the national insurance increase that kicked in in april this year so you sort of have on the one hand a very anti-business move on the other hand you have this pro business move of cutting red tape it's all very high level at the kind of broader financial services banking industry domain i mean a lot of this came in after the last financial crisis right they probably overreached and over-regulated so it's good they're drawing it back taking it down to startups and financing and funding i think it's head down and keep building and yeah you know maybe maybe some of this if she mandates pension funds to invest in in private um or even you know the stock market and and they so they rotate out of government government bonds which would be a great thing that might mean down the road more more fundraising at the sort of series abc level and eventually in the public markets but that stuff just takes time to trickle through so look i think there is a you know as always in everything there's fundamentals and there's sentiment and the uk seems to have low scores on both at the moment which is not brilliant i'm not really sure how it's um going to improve i don't want to be too pessimistic the only thing i would say is just exactly what I just said.

42:04Head down and keep building. Forget about it. It's fine. You can raise your pre-seed money. There's plenty of seed funding around. There's literally plenty of it. And if you can prove that you have product market fit, you'll find Series A funding. You know, I just think it's, it's not gonna be easy, but it, you know, no one said this was. So heads down and get to work. Heads down and build, baby. Let's do it. Ourselves included. You know, ourselves included. Yeah, I mean, for us, we know we follow the money. I know that there's this kind of ideological emotional push to feed our own. But we'll follow the money and we'll support startups however they need to be supported and do whatever we need to do.

42:37I'm going to change tack. I'm going to talk about the money, not money. It's been crypto week in the USA. It's not quite been crypto week in the USA because it was blocked in the House. It was temporarily blocked by the Democrats and the Republican rebels. Here's what it should have been. Was it this week or last week? Bitcoin peaked at$120 ,000. So Crypto Week, just to dig into a little bit of what it should have been or maybe will be, is the official designation by the US House of Representatives for the week of this week, the 14th to the 18th, during which lawmakers aim to debate and vote on three landmark pieces of cryptocurrency legislation.

43:15There was the Clarity Act, which is this comprehensive framework for regulation. The Genius Act, which is all about stable coins and pegging coins to the US dollar and the anti-CBDC or the Surveillance State Act, which is intended to prohibit the Federal Reserve from doing anything that gives potential government overreach. So the three acts, but it has been stuck because there's a few rebels putting some procedural pauses down. But all of this is with the aim of making the US the center of crypto, owning it, regulating it, layering it into the economy and just making it a fundamental way that business is done.

43:51Now, I have very strong opinions on the topic. You may or may not do two. But before we start, just one observation, Mads, maybe you can pick up on this. As crypto's up, gold is up, and cash seems to be really, really unpopular. What's happening with the non-cash assets in general? Just forget crypto for a second, but what's going on slightly behind the scenes? Yeah, so gold is up 37 % in the past year. Bitcoin is up 80 % in the past year. We've got persistent fiscal challenges in most major economies. The US is running a 6 % annual deficit of GDP, the federal government. Federal debt is now at 120 % of GDP.

44:36And there is not really any signs that there's any desire to manage that. This new BBB is going to have a big, big, beautiful bill of Trump's. We'll have another$2 to$3 trillion to the U.S. debt. Now, the U.K. government, on our side, we couldn't even slow the growth of welfare spending, right? So the proposal was to slow the growth, not to actually cut, but to slow growth by£5 billion. And that's in the context of a£300-pound welfare budget. That couldn't be done. Look, I mean, I think Starmer's probably thinking, what am I going to do? I think he's turned around now and said, look, we're going to propose that 16-year-olds should have voting rights because that's the only hope we have of staying in power.

45:16We just can't get anything done. I think there's a suspicion in markets that the only way for Western governments to resolve this spiraling debt is to inflate it away. And therefore, investors are seeking haven assets as inflation protection. Lomax, should Europe have a crypto week? Should we be embracing, celebrating, crypto-tastic-ing? Well, I mean, I just sort of made a quip about the third Mansion House speech in 24 months. It's all confusing. You know, the sort of poor branding that the British government are doing about, you know, regulatory reforms. At least the US are like giving their, you know, regulatory changes like good soundbite-y names.

45:59I think like, look, no, no, I don't think, you know, it would be great if Europe sort of, I mean, there's not normally much to celebrate when it comes to regulation, quite frankly. I think in the US, this is probably good in that this signifies crypto coming in from the cold or certainly less cold than it was from a regulatory and institutional standpoint. Investors love certainty. So if you can start to give certainty, you know, whether it's a commodity, whether it's a security, and they've obviously gone for the lighter touch regime being a commodity. if you can give clarity and security without uncertainty, without overburdening industries, then that's good.

46:35So I think, you know, clearly we have, I think David Sachs is still in the White House and, you know, the US. Very quiet. Very quiet at the moment. But, you know, this regime is very pro. You know, Democrats may, if they win the next election, row things back a bit. But don't forget, Europe's already done all of this stuff. but europe's like already had big sweeping crypto regulations so in a way you know they just didn't label it crypto week much to celebrate and well also it didn't really move the needle at all when it comes to actual crypto prices but no i you know don't even need a crypto week and um but i think it's probably good to have some um certainty i mean this asset class is now coming in for the certainly stable coins the kind of use case there and it seems to be getting broader and broader broader adoption.

47:23Yeah, I think the more regulation, the better. I think it would just remove the value of the crazy. And as soon as it's fully layered, I think that's it. I think that will be the end of Bitcoin and Ethereum, apart from their usage as an application, which I think anything blockchain-based to me makes sense in certain application situations. But taking money out of money will never end well. Let's talk about... So this is the, we are, my request of you both is that we keep everything extremely positive, activity centric, no moans, no groans, because we are going to have to talk about an uncomfortable truth that Europe is on, Europe is now, European VCs are on track to raise the least amount of capital, fresh capital for a decade.

48:09So we might see H2, so the next six months, you might see some of the baked in inertia, which I do believe there's an aspect of, and some of the megafunds starting to tip the scales the right way. But this isn't looking good. However, we're called upside, so we are going to keep it on the upside. And before we kick in, I'm just going to share some of the facts and some of the details that are going on behind the scenes. So 2025 on target for the least amount of capital raised, it's going to possibly be this year at about$10 billion. dollars peak was 2022 at 38 billion just for some context and then 2015 if we go back the 10 years was around 12 billion and all the years in between bounced in this kind of 15 to 30 this 20 to 30 bucket so that's that's the contextual bucket according to pitch book now it's hard to know how much exact dry powder there is in europe but doing my research it looks to be between 30 and 40 billion available still to deploy.

49:12Around roughly 1 ,000 active VCs, although that's a number that's also really hard to pin down. But these numbers have both dropped quite significantly since the peak in 2022, probably about 30 to 40 % down. And there are still plenty of zombie VC firms out there. Another interesting tip bit is that 80 % of EU deals are now more than$10 million. dollars. So also an interesting aside, 30 to 40 percent of European VC and startup deals have some kind of government backing, either EIF or BBB, British Business Bank. No bad thing. I want to see more of that. Maybe we need to do more of that to encourage more private capital.

49:48However, end point before I shut up, there are fewer investors investing more capital into fewer startups. So there's fewer deals, higher value, fewer investors, and it's all a bit of an unholy mess. So what do we do? I don't know, Mads, do you want to kick this one off? How do we encourage more LP activity on what basis? Yeah, I mean, I'd start with what essentially Lomax said earlier, which is as VCs, you just get on with it. VCs and founders build great companies. Heads down and build, baby. Yeah, heads down and build. But if you're asking the question about what should governments do, I think there's plenty to start with.

50:24So one is we need more risk capital and more money in productive assets. So you're just step one, we can make it easier for VCs to raise funds. We can make it easier for retail investors to invest. Today, retail investors, they can invest in crypto products with a few taps on their phone. I don't have a problem with that, but I do think it's rather odd that you can buy a rather speculative product in crypto, but to buy a diversified VC fund, that's effectively prohibited or at least very, very difficult. The burdens are very onerous, both for the investors and certainly also for managers. Maybe we could rebalance that a little bit.

50:57We should also make it a lot easier for pension funds to invest in private equity. We can merge pensions games. We could reform the definition of prudence. So we balance some of the short-term volatility towards long-term return. Now today, as we talked about in previous shows, it's really hard for pension funds to invest both in private markets, but also even in public equities because they have this prudence rule. So I think if you have a plan that's long dated, you've got people that aren't going to retire for decades, they should have a lot more equity than they do today and a lot less bonds.

51:32And this is purely down to legislation. The governments could change the rules today. I think they should. We could encourage more investment in the UK. We give massive tax breaks for pension savers. I think it's fair to ask that some funds in return are invested back into productive assets for the local economy. So these are just three ideas. I mean, in general, I'd say, you know, cut red tape and where we have tax incentives, make sure they align with the UK economic interest. One of the big unlocks in US venture capital was getting pension funds to invest into US venture funds in the 70s and 80s, which was both a, it was twofold.

52:13It was a both relaxation of the regulations, which enabled pension trustees to actually take exposure to venture funds. And then it was also a sort of growing sophistication amongst pension fund managers about investing in venture funds, as well as performance. And I think there's this sort of trifecta that is needed because we always say, oh, you know, talked about Manchin House earlier, talked about Rachel Reeves mandating pension funds to invest in, you know, whether it's the stock market or in private funds, which would include private equity and venture capital. But I think there's a sort of three things that you need.

52:48If we're talking about a lack of capital, well, okay, fine. But where is the money? So governments have some money. They can invest. They already do. They already put in roughly 50 % of the AUM of European venture. Where else do we have money? In the UK, we have$3 trillion of assets and pension funds. A very, very, very small proportion of that goes into venture. We have$2 trillion to$3 trillion in insurance companies, so the insurance premiums they take and hold. And then in households, you probably have$2 trillion to$2.5 trillion sitting there. So that's a lot of money. That's potentially$10 trillion.

53:14Just in the UK alone, across the EU, it's probably more like$40 trillion,$50 trillion. this is a lot of money could be unlocked. How do you make that happen? Number one, you change the regulations to make it easier. Number two, particularly at the pension fund and the insurance level, you try to increase sophistication. You get more and more people actually doing it, developing the muscle of looking at and investing in funds. And thirdly, you need performance. And that's sort of where we come in. The founders build big companies. We're lucky enough to back those companies. We deliver returns. We are in a slight liquidity crunch in the market at the moment where you know lots and lots of money has gone into our industry and not enough has come out so that's also explaining what's happening is there's a lot of trapped capital in the market and so until that money starts coming out then you know like you and i know when i when i send money back to my lps they're both happy with it but some they also reinvest back into my new funds you know and that happens at a much bigger scale and we just talked about the mistral you know example it's like well if they do sell and ignoring the sovereignty issues aside if that's 15 billion of cash going into the you know the french and you know french ecosystem that is a lot that's a lot of capital i mean that's more than europe is what proposing to raise in the whole year so it's it's a mixture of things but clearly we need to get i think uk and eu pension funds have certainly less than one percent of their aum in venture probably 0.5 something ridiculous it's tiny in the us it's probably more like five to ten percent in venture.

54:43So that's where the money comes from. But you need those three levers to work, the regulation, the sophistication and the performance. Well, let's see if the small little measures that Reeves has been talking about are these various speeches, poke the bear in any way in those three buckets. Right, gents, we are nearly out of time. Very, very quickly. Deal of the week. Lomax, it's yours. It's Newman. What's happening here? So Newman started out life as a men's D2C health company has just raised$57 million,$30 million in equity,$27 million in debt, revenue doubled to$90 million in 2024. So this is a D2C health company that pivoted in, started out in stigmatized men's health problems, such as erectile dysfunction and hair loss, pivoted in late 2023 to GLP once and has been on a tear.

55:37And actually, in a way, D2C health has been a bit of a graveyard in the last five, six years. But look at hims and hers now in the US, which is now 11 billion market cap company, which also did the same pivot. It's an interesting lesson is like, if you've actually built distribution and brand within D2C Health, you can then ride as new products that can be consumerized come along, you can plug into those. So we now have GLP-1s, which have driven the growth in these companies. Well, what will be the next thing? There'll probably be a next generation of those drugs, but there'll be other drugs that can be dispersed in this way um so d2c health is going through a bit of a renaissance at the moment driven uh by these weight loss weight management drugs so good for that sector and i think um with longevity and wellness now and you see function health in the u.s which is um you know raised a lot of money and is also on a bit of a tear commercially you know d2c health is is a bit of an interesting category at the moment having been in the graveyard Thank you.

56:38Like everything. Sounds like solid distribution. Also, you know, big reminder that everything is circular and cyclical. It's great. Lovely. Gentlemen, thank you so much for your time. I'll catch you next week. Bye-bye. Thanks, mate. Bye-bye.

56:56Tear down this wall. It's more than just an alliance. This is a union of values. Let's start acting