E572 | 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, with my condolorious surroundings, I am in Bolzano in Italia, and we have Mads in London, and we have Lomax in Lisbon. So it's a super European international affair today. And we're talking about, well, let's have a look and see what we're talking about. So I'm going to talk about, I want to raise this kind of European alliance thing. Obviously, challenging topic, and I'm picking it up from the American Indian news this week, that a lot of American VCs were going to team up with Indian VCs to invest in India.

0:37I want to talk a little bit about that, see where we go with that. A lot of macro kind of investor big picture. There's gold, there's borrowing costs globally, there's bonds, there's the deal room pension report. We are going to look at that. A lot of lovely stuff in AI corner, which is one few mads doodles. So we're going to look at Google, we've got Tesla, we've got AI won't steal my job, We've got the UK, there's middling AI power. And then last on the list, we cannot not talk about Xi Jinping and the Chinese, what are they called? Someone tell me what they're called, those displays. Summit?

1:13Well, it was this mega display of military awesomeness. There we go, we'll go with parade.

1:31This show is not investment advice, and the hosts of this episode may be invested in the funds and companies featured. I read this week, let's see where we go with this, about this US-Indian VC alliance. They're looking to invest a billion, roughly, into India's deep tech startups. And it made me think, can we, should we, is there a vehicle for Europe? Is there a way, and I know what you're both going to say, but play with me. Is there a way to be more systematic, take the 28th regime to the next level? Is there a way to connect the dots, make Berlin the centre of manufacturing, London the centre of finance and be quite structured around how venture and investing and start-upping works across Europe?

2:17Is there a way to take it to another level? And I'm going to hand over to the floor. Mads, shoot me in the face. Never. But I would say on the US-India piece, I think for me, it looks like US megafunds cycling excess capital into fast growing India, which has been a terrific market to be in the last few years. I'm not sure there's super much we can learn there other than that it is fun to be rich and have lots of excess capital you can spread around. And, you know, our dear American friends are doing that. And then I'd say to some extent, kind of this 28th regime you're talking about, it already existed formally in the sense that London funds invest in the Baltics and funds from Paris invest in Africa and people invest in different places.

3:01I guess you want to do it more structured. I'm actually, I think I'm probably more of the other school. I think I want the market to do what the market does. I want businesses and entrepreneurs to be free. I mean, I think it's more about making sure that we remove restrictions, that we remove barriers to business doing what business does best, which is innovate and grow and do. And I'd say kind of some of the challenges here, what are some of the things that stand in the way, stuff we've talked about before. On a per capita basis, Europe has only a fifth of the venture capital the U.S. has. So about$100 per capita versus$500 on the other side of the Atlantic.

3:34A lot of that is concentrated on the growth stages in the U.S. And that's what gives that whole ladder, right? You start with the seed and then venture and then growth. And because businesses in Europe, you don't have as much growth capital. Well, they end up either migrating to the States or they get bought up by U.S. firms. So we need more money here. So there's a big gap there. And again, we've also talked about what happens post-growth, kind of once you IPO, and the fact that there just isn't enough risk capital to underwrite IPOs in Europe. So companies go and they list them in the U.S. And again, that's a bit of an annoying thing that needs fixing.

4:09We need more money. I don't know if we're going to pack. I think we're going to pick up on pensions today. And clearly, there's much more risk capital that's needed and that can be invested in productively, both on the public side and the private side, and venture as a subset of that. So that's where I would take that. So, Lomax, we've done a number of European events, and obviously we knock around with a whole raft of European VCs. Is there a more structured approach, do you think? Is there something that we can do better differently smarter? No, I think you need to let chaos reign at the early stage, quite frankly.

4:46I don't think in my experience, anything top down really works. I think as Mad says, you need to let the market and market forces take hold and encourage that. Clearly, there need to be guardrails, which the Europeans love doing. But I think you need to let chaos reign. I mean, we already have enough. I mean, Europe, where 60 % of LP capital comes from the European governments or European states. So you've already got a large structured or structural government-led intervention in the sector. If you're sitting there as the private equity industry, they don't have anything like the level of support that the venture capital industry has.

5:31They don't need it. They mug their own homework of course no well now that's a separate point but they've also had credit to them they've built they've okay they've ridden off the um low interest rate um uh boom but they've also delivered the performance that you know the investors wanted and so i i do think when it comes to venture and startups that and i think we might be touching on this a bit later it is for it is all very well us standing here saying give us more money because we know there's capital gap. I mean, we know actually roughly it's sort of early stage seed that actually the Europe is not so far behind the US.

6:08In fact, it may even be the same. The gap is the series B onwards. It's sort of four times the number of 20 million plus rounds in the US than there is in Europe. So we know we have capital constraints at mid to late stage private and also at public as Mads touched upon. But performance needs to be there as well. We as VCs, it's incumbent on us to build financial products and performance behind that, that actually gets pension fund trustees to get off the fence and actually take something to investment committee and commit to this asset class. So it sort of works both ways. But going back to your question, I think too much structure is a bad thing, particularly in venture capital.

6:50If you're looking at, we are at the sort of messy, cutting edge, early frontier of the financial services industry. and so you need to encourage, provide some guardrails as I says, but I think you need to let people do what they want to do. And you talked about events, for example, we go to events together. A lot of that is all private sector initiatives. I don't think if someone in Brussels says, let's create a tech conference somewhere. I think if someone in Finland is like, why don't we create this conference in November? Even though the weather's rubbish, I'm sure we can do something. and then they go to the government and they say, please, can you give us some money?

7:31I think that's great. But ultimately it comes from entrepreneurs and Web Summit in Lisbon, which say what you want about it. That's an entrepreneurial set of individuals from Ireland who basically built that and got the support from the local government. But I think it comes from the private sector, the individual, the entrepreneur, and it goes back down to the individuals, the people who want to get up at five in the morning and actually build something and have a vision and the ability to execute against it. Okay. All right. Fair enough. I will park my requests for another couple of months. I might bring this round when I've got some more meat on the bones.

8:07Don't also forget that any of these top-down kind of things, they also get administered so poorly. I just don't trust, you know. I would never suggest for a top-down thing. Just to be clear, I would never ever, because I remember David Cameron turning up the Silicon Roundabout. I was there when he turned up and it was the death knell of silicon random i know what it's like when government touches however there's a way to touch and there's a way not to touch i'd also sorry i mean if you're talking about collaboration between you know private market participants like you and i collaborate we just talked about where we're sitting today yeah sure we should collaborate but normally that's driven by profit motivation of profit yeah i mean we're all you know i don't run a non-profit but i do do you know we do are we do have the benefit of of working in an industry where the currency actually is favors and this sort of pay it forward mentality.

8:57So I think long may that continue. Well, yeah, more collaboration. Let me come back to the table when there's something more concrete about more collaboration, because that's really where we're going to end up with what I have in my head, which I've articulated incredibly badly. Look at what this man, you know, Stebbings is doing with Project Europe. You know, the numbers are small, but again, it's a collaborative effort across Europe, those kinds of things, but it's driven by him. I mean, he's not doing it out of the goodness of his own heart. And that's great. People will benefit from that. We're talking about other investors.

9:27Let's talk about the macro for investors. There have been a number of things which do eventually pair back to investing startups, our ecosystem, even though they sound a million miles away, like gold being at record highs, UK borrowing costs hitting near 27-year highs. There's massive bond sell-off. There have been a lot of these kind of big macro picture things that will affect how recycling happens, how much money comes into venture, how the whole ecosystem works. There was also a deal room pension report, which I loved the title of. The title of it was From Savings to Sovereignty, which kind of, for me, captured everything that's wrong with investing in Europe.

10:12let's get stuff out of the savings pot let's get stuff out of the pensions pot and into private markets and into innovation and where we live so a couple of bullet points before I open to the room so from this report the value created by European VC backed companies has more than tripled in 15 years now this was something that surprised me the most I looked at that 15 year chart and I'll put the link to the to the full report in the in the comments but in the last 15 years, we've gone from virtually nothing in enterprise value or whatever you want to call it, startup value to nearly 3.5 trillion, which is massive.

10:47We are still playing a 30-year catch-up game, but we are growing nearly five times faster than the US, which is great. Growth capital, I think, as you mentioned, Limex is still the challenge. But Europe has the biggest pipeline ever of high-growth startups coming through the ranks, which I think is extremely promising. The gun is loaded. And also on the pension piece, this is another thing that surprised me. This year, well, actually, these are 24 figures. So last year, we saw 850 million into European VC, the most domestically ever. So almost going back to 2019 figures. So this is great. So I'm going to open up to the room.

11:22I don't know where you want to lean. Mads, I'm going to ask you first, how do you, and also how do you draw this kind of big macro investor stuff down into European venture startups and founders. You're touching on a lot of different things there. I mean, just to touch briefly on the kind of you talked about interest rates. And I think kind of the thing we've seen kind of this gold is very high, there's inflation, and the gold is at a record high, because no major country is showing any fiscal restraint whatsoever. The US is running kind of 6 % deficits, you know, as if we were in kind of the depths of a wartime scenario, whereas clearly we're not.

11:59And so gold was always the classic anti-inflationary hedge. And so gold is up, Bitcoin is up, kind of all these things people associate with trying to protect themselves against inflation. So people don't trust fiat and so people are switching into these other things. And that's just where we are. We could wish that we was a little bit more disciplined around the public finances. In terms of the European equity gap, I mean, I think for investors, I think you're asking where is the opportunity? For investors, there's a huge opportunity because we have such a massive equity gap across all the stages in Europe.

12:32So we can deploy much more capital at everything from seed through growth to even to post IPO. The talent is here. You're talking about all these great companies that are coming through. We've built some amazing businesses already. It's Spotify, it Revolut, Lovable coming through, right? So they're all showing what's possible. And so I'd say for investors, just a massive opportunity. So let's lean in. It's our time. For the founders, you have to keep your business funded. Without that, there's nothing. And so you might have to go to the US to raise capital. That's what I did. I raised most of my money in the States when I was a founder.

13:07But you can still build in Europe. There are people that say that it's impossible to build companies in Europe. I said, that's hawk wash. You absolutely can build companies here. And I think some of the companies I mentioned before show that that's possible. Revolut, what an incredible business. In this report, if others have time, anyone listening has time to read it, they list all of this, this three-point function in enterprise value. They list all of the European companies that have come through over the last 10, 15 years. And it's a very impressive list. So I just wanted to double down on what you were saying.

13:38This is, you can, and it is, the proof is there on the page. Yeah, this is a great business. This just isn't enough, right? We need more. If we want to matter globally, and this is one of the other things I think we've touched on is the sovereignty piece that we discussed last time, is if we want to matter globally, if we want to be able to have the force to chart our own course in the world and not just be caught between other giants, then we've got to build more great businesses because they're the foundation, they're the bedrock, they create wealth for everybody. And then I think one of the things you had in your macro overview was this question of the UK's fiscal position.

14:15and actually the UK gets divided a lot and I think the last 12 months have not been great. I think the government has made a lot of unforced errors but it is worth remembering that the UK's net debt is still below 100 % of GDP and that's actually one of the lowest in G7. The France is I think at 113, the US is at 123 and Italy and Japan even further along. So it could be a lot worse. I mean, it's not that the UK is a fiscal saint but compared to others, maybe not as bad. But we do need welfare reform. We do need to free up resources so we can invest in more tech to modernize public services. And again, that's potentially an opportunity if you're an entrepreneur.

14:55I do think there will be more investment in technology for public services over the coming years. And if you're a founder, maybe you can build some great tech that can help make education, healthcare, and other things much more efficient. What a great thing if somebody can do that. Yeah, and we are going to touch on the Isambard supercomputer in a minute, which is being used for a lot of the things that you've just mentioned. But Lomax, what would you pick up on? Where would you challenge? What would you, what do you think? No, I think there's this conflation of the, in venture and early stage company building and the funding thereof, how much macro matters is something that I think we're still learning, quite frankly.

15:36You know, I think if I reflect on the zero interest rate phenomenon, you know, ZERP era, I think in a way that the venture community had almost forgotten how much macro matters and actually was very focused on the micro. I sometimes wonder now, and then what happened with COVID and then with the interest rates and inflation, is I felt that now we might have overcorrected and we're almost sort of overreading what happens at the macro level. and actually building big companies from scratch still really just requires incredible people to work incredibly hard on a big problem and attract amazing talent and execute flawlessly.

16:29And actually, a lot of that is not affected by the macro. Yes, they need to be able to raise money, but actually, if you build a business that is attractive to early stage investors, you will raise money like you know a lot of these you know if you build something that's attractive you have no you have no trouble raising money i mean we've seen that and so actually sometimes like yeah we can talk about the debt to gd why i mean why are we talking about debt to gdp ratio in a in a podcast about startups i mean that's not to denigrate what you said mads i think it's it's hugely interesting and it's a great point but it's just like why why should we shouldn't we just like you know heads down the bill baby yeah i mean get in the basement get in the basement and start building now of course look we know that some of this matters like we know that if you want to raise you want to build a unicorn you need to probably raise 250 to 300 million you know at least i i think like reflecting on what's been said about europe is we do have now if we were talking about this 10 years ago we would have been like oh you know we haven't got enough big businesses and big outcomes in europe well now we have a bunch of companies that have reached well in excess of, say, 100 million of revenue in Europe now, right?

17:36So you can say, well, that's tick. I was surprised by the list. The list is big. And I was surprised by that. But in a way, the next KPI, which admittedly, I don't want to set the bar too high, is, well, for the next iteration of the MAG7, let's have a European company in there, at least one. So let's go from 100 million of revenue to 5 billion of revenue. If you're being optimistic about it, you would say, look, European venture and tech and startups is 30 years behind the US, a number of cycles behind. So this is just catching up and this will happen. You can be a bear about it and say, oh, structurally, Europe has got problems with mid to late stage and public funding and it has too many regulations, et cetera, et cetera.

18:18But actually, Europe's come quite a long way. It's come a hell of a long way. Yeah. It's come a hell of a long way. and actually this happens in spite of you know you could we talked about the macro in the uk we'd be like well growth you know growth rates are basically anemic and there's this hugely negative sentiment so you've got this like horrible marriage of negative sentiment and really poor data which you know the macro economists are going to be very depressed about and the headlines you know tell you that every single day but again you know actually if you want to go and if you have a good idea and you want to raise seed money in Europe, it's not a problem at the moment.

18:57I mean, I don't see it as a massive problem at the moment. You know, long-term that continues. There's actually a lot to be optimistic at. And I, you guys see on the ground, better and better founders, building better and better companies, having the ability to hire people who've, you know, been there and done it now. The number of operators who've taken companies from five or top line to 50. That was another point in the report was that recycling piece. From the report specifically, I was very buoyed by having all of that data thrown in and seeing how much pension cash, because we obviously deride it a lot, how much pension cash there is now coming in from European pension funds.

19:31I'll take the other side of that. 850 million is a drop in the ocean. Yeah, it's nothing. It's nothing. Also, there was a typo on the page. Dan, we're about 150 billion short a year. Yeah. But also, Dan, one thing you said at the beginning was sort of this concept of like taking savings money and putting it into venture. I don't want to over sort of index on the words you chose, but just like this framing of like, what it should be is this is a super productive, high yielding asset class, high return. And it's super attractive to somebody who's given the mandate of guarding the pension, the capital or the savings of pensioners.

20:18It needs to be attractive. This is not a charity. This is business. It's got to come from somewhere. The money has to come from somewhere. No, but you can put a gun to the pension trustee's head and do it, but you need to make it attractive. But Lomax, let's not forget, I mean, what is attractive for a pension trustee? I mean, they have specific rules they have to follow. The rules differ by country, by the way. But if you look at the big countries, the way prudence rules are defined are not how do I maximize long-term return, right? If I am looking at pensions, I should be taking a 10, 20, 30-year view.

20:53And I should be embracing risk. I should be embracing volatility. Why? Because that's how I maximize my long-term return. But instead, if you look at how the rules are structured, they're focused on two things. Minimize fees and minimize volatility. Yeah. Okay? We are all financially literate enough to know exactly where that point you're in the rubric. Minimize fees and minimize volatility means straight to bonds. And lo and behold, that's where the trustees go. And that's what's happened. And that's what's happened. It happens. I completely agree with you. Nobody should force anybody to invest in a particular asset class.

21:30But I think there are two things we should do. We should certainly structure the rules so people at least have the notion and the incentives to maximize long-term returns and focus a little bit less on the short-term fee and the short-term volatility. Because yes, if you want a complex product and a high-yielding product like venture capital, you will have to pay more than to buy government bonds. It's a much more complex thing to manage. That's the first thing. The second thing is we should be looking at the way we put tax incentives on these things. The tax intensives we put on pensions are massive.

22:04What's the point in putting all these incentives on so much capital when a lot of it flows to the U.S.? As a pension saver, I get the same tax break by putting money into Max 7 as I do in putting it into European productive assets. That can't be right. Why are we subsidizing funding for Google and Amazon? So I think fix those two things, and I think you'll see a completely different situation. Don't disagree. I will maybe end this segment, Dan, on the sort of next exam question for European tech is if you look at the current cohort of companies that people are very excited about, which all seem to have an L in them, but you know, like Lovable, Legora in legal tech, Eleven Labs, Synthesia, Wave.

23:00The companies that we're all excited about are now doing what? Between 100 and 150 million of revenue. Actually, what happens to them next? Do they get either acquired by like a big US company? Do they sort of IPO in the US? Or do they actually go on? Actually, I don't really care where they IPO, quite frankly. It's probably better for them if they do in the US. But do they go on to build like one and a half, two billion of revenue and big balance sheets and big... big research campuses and new products and do they global footprints do they do that next or and that's a really interesting kind of question as to what happens in the next i don't know three i think you're you're hitting the nail on the head look at what's happening at the frontier labs okay so anthropic has just raised 13 billion dollars it's more than all the companies you've mentioned combined yeah and how can you do that well you can do that because you've got mate sitting in one of the giga funds across the road that know you very well.

24:02And when you go to them and you say, I have a plan, I want to do a 10 bill round, you can actually get that capital together. Now, try for any of the names you mentioned to scrape together even a tenth of that in Europe. Good luck. And that's why we don't see that kind of capital accumulation. The money just isn't there. Well, let's stay with AI. We're not going to talk about Anthropic, but we are going to talk about Google and the breakup that isn't happening. We're also going to talk a little bit about Isambard AI. So the UK's newest and biggest supercomputer, it came online, I think, in July, July, August, I think, costing about 250 million out of that billion allocation from Kirstama.

24:42But there was a question posed in The Economist this week about how does the UK compete as a middling power? It is the 11th fastest supercomputer in the world. And obviously, we only have one. It's also, I don't know if anyone's got any commentary on Tesla's master plan part four, looked like another shift or a pivot away from EVs into AI robotics and sustainable abundance, I think Elon calls it, where he thinks there's going to be 80 % of value created from humanoid robots. Although I don't know where that fits with some of the incredible Chinese robotics that I also saw this week, which looked nuts and cost about$6 ,000.

25:20So I don't know where we're going to end on that. More bold promises, I'm sure. I've also been reading about how AI won't take your job, which feels a bit click-baity. I don't know if anyone wants to pick up on that, but we can happily leave that. But there's lots happening in AI this week. It's not been a slow news week. Mads, where would you kick off? I mean, it's just touching the Google monopoly ruling. We spoke about it in the last part and said, look, Google might be broken up in five minutes. They avoided the nuclear option. Google gets to keep Chrome. There's no breakup right now. And as a result, the stock immediately popped 8%.

25:55The ruling says that Google must share index and anonymized click data with qualified competitors. And there's an important proviso there that it's on commercial terms. So they don't just have to give it away. They can charge for the data and they're not allowed to discriminate. So they can't make a sweetheart deal with with one firm and then discriminate against another. It's quite interesting. It's not going to destroy the company overnight. Competitors, they may say, have web crawling infrastructure, but they still need Google's search ranking algorithm and they need to compute to run all of this stuff.