E616 | This Week in European Tech with Dan, Lomax & Andrew

0:00Welcome to Upside, where we dig into the real stories that live behind the headlines affecting European venture. Today, Lomax, Andrew and myself are going to be talking about, we're going to change up the format ever so slightly, have a little quick news section. I'll throw some things in the hat and then we can see what we want to focus on. Then for some deep dives, we're going to be looking at Germany's lithium fine. It is quite a haul. So we're going to have a look at that. London drops out of the IPO top 20 by some margin. Should governments bail out? Should governments support startups and businesses?

0:36JLR in mind in the UK, but taking a look behind the scenes there. Reinventing venture capital, one of my major bugbears. I want to talk about this, but let's see if there is anything to talk about in reinventing VC models. And then we have deals of the week.

1:01This show is not investment advice. and the hosts of this episode may be invested in the funds and companies featured. So, gentlemen, before we kick off, Lomax, Andrew, how are you? Lomax, what's happening with you? I'm great, thank you. I'm very good. We're experiencing the most outrageous weather in Portugal. I hate you. It's like summer, so it is beautiful. Love it, and we're October now. Outrageous surf session at lunch yesterday in between calls. Because you're a VC working really hard. I am working hard, but I also like to take an hour out of my day to clear my head. I think that's allowed.

1:36Stebbings and his 996. I totally agree with the need to work hard to build big companies and also build successful venture firms. But you've got to be able to look after yourself as well. Yeah, totally. And getting in the flow in the water, I bet, is a real pallet. Well, I don't want to make a joke about a board meeting, but I was out there with my partner. Too easy. Do you talk work or do you just get on with it? We do, actually. If we're halfway through a meeting and the surf is good, we will put our wetsuits on and we will continue the meeting in the ocean. What a lovely way to live. When you're running a small organization like ours, where the important decisions are made just between the two of us, you can get away with doing things like this.

2:17It's a privilege, to be honest. Yeah, no, what a gift. Andrew, what's happening with you? Well, that's just all too cool for school, isn't it? I've got nothing to compete. I'm not surfing, I'm assuming. I've been back in London this week, you know, wheeling, dealing, doing deals, seeing some of our portfolio companies. All good. Everyone's trying to be optimistic, despite the government doing its best to crush us all. Seeing the upside. Good. Well, part of the UK government is going to be part of our first quick news sesh. So for this bit, gents, keep it really short, sharp, snappy. Let's see what we want to talk about.

2:53So what was on my mind this week was looking at the American government shutdown. Is there going to be any effect on markets? The Labour Party conference. I know Lomax, we were talking about this. I also saw this week that the UK is trying to keep the$5 billion that it recovered from the Chinese nationals who'd committed that Bitcoin fraud. So maybe we can get another$5 billion into the coffers. That would be nice. I saw also that the UK government has asked Apple again. Again, this is the second time to get a backdoor to data. I think that's just a bloody disaster, but maybe there's something to discuss there.

3:28OpenAI looking now is a half a trillion dollar company. I bet Elon is pissed at that. Now he's now space. No, what is it? Yeah, SpaceX. SpaceX was 400 million dollars, wasn't it? Sam Altman has now beaten Elon to be the most valuable company in the world. and something that also very poignant for us entrepreneurs first no longer entrepreneur first ef has now moved out of germany and france and are focusing on the states which i had a bit of a visceral reaction to so lomax i don't know if i loved it in there did you loved it so yes because well as i said to you before dan at outsize this is this is a key part of our investment thesis anyway more on it when we get onto it okay and also sora 2 i bet everybody has seen the sam altman videos being created with sora 2 the open ai video generation software which is unreal i mean every time i watch all of the latest updates on on the latest uh video generation platform this is just absolutely crazy the amount the i i'm slightly fearful now for ai generated video and what it can actually do and how it can influence the media and news and creators.

4:43But anyway, so... Well, you get flushed down the loo by your own product, it seems. It's just... I saw the one of Sam Altman stealing GPUs from the store and being on the CCTV and being stopped by the security guard. It was obviously all AI generated. It was just... It's like, but I need this for a new Sora release. It's like, this is just so cool. Anyway, Lomax, what would you pick on out of that stack, if anything? Well, we could do the Labour conference quickly and get that out of the way. I mean, big picture, I think by all accounts, Starmer gave one of his, I mean, he's had a terrible year, right?

5:14So he's the most unpopular prime minister in history, 13 % approval rating and Labour are only now at 20 % in the polls versus reform, which are 35%. And this is only 15 months after they won, you know, a really, really big, nearly 200 seat majority in parliament, right? So they came in the middle of 2024 with a huge mandate and they basically snatched, you know, what do we say? Snatched victory from the jaws of defeat or snatched defeat from the jaws of victory in this case. So it's been a difficult 15 months. We know that. And I've talked about that a lot here. I think Starmer gave what was by all accounts quite a strong speech, but lots of kind of...

5:49Was it though? Was it? I would say narrative better, but weak on policy. Again, like actually not enough meat. do you think i think this i mean that you could also frame this at founders and business leaders forget politics for a second yeah it feels like the country needs a strong bold leader when you've got calling for trump and putin and and g doing his show of power so it feels like and i i remember and i've said this before but i remember thinking great we've got this really sensible thoughtful smart kind human in office that's just what we need and i couldn't have been more wrong we needed It's somebody who's strong and, you know, a big, great orator and a powerful leader.

6:30So how much of it do you think is? Some of it's personality driven. No, for sure. There was an interesting article in the FT, I think it was a couple of weeks ago, where the journalists made the point that, taking the US, for example, is all the Democrat leaders over the past, I don't know, four or five incumbents had all been trained as lawyers. Right. Really? Yeah. And that starts to really show. Is Clinton a lawyer? By training. I mean, Starmer's speech was just, it was awful. I mean, it was sort of polished to the point of robot, cautious, profoundly lacking in urgency or inspiration, I felt.

7:14I mean, he sort of, it was almost like it had been spun to, it's a classical, classic kind of liberal speech with no real, yeah with none of that leadership that we're all looking for i felt i follow him on twitter and um or x or whatever it is and it is that the messaging is extremely old school kind of 80s inspirational poster with no connectivity to the audience i know it's only kind of no connectivity to their policies in many cases i mean it's just it's you know a long time ago saying you know persil washes white the white stopped working right the the the electric and the audience have become wise to to advertising that doesn't stack up you know but it's just naturally now we're far more information aware and uh exactly that's why you're reading it and you're getting you're you're feeling that this is just you know bygone era of advertising i would say to be honest not much for us for us in our world i don't think a lot came out of the um labor conference um we have the budget in november some interesting or non-interesting things or difficult things will come out of that i think the most interesting news this week actually is going to come out tomorrow which is the office of budget responsibility who will be releasing um a report publicly which will downgrade the uk productivity numbers going forwards which will basically cut significantly.

8:47I never believe the OBR stuff. The OBR stuff is always, always wrong. Yeah, but this is important because this will cut the projected growth in the UK economy and the tax take that Rachel Reeves is assuming that she will take in the next four years of this government. As a reminder, her fiscal rule is basically to balance the books on a current spending basis. So we meet all expenses except for investment, but operating expenses out of tax. So we basically balance the books that way. We can still borrow money, but that will be for investment in infrastructure, capex, et cetera. That's her plan.

9:23She has 10 billion of headroom over the next four years. And with this downgrade, that will flip that 10 billion of headroom into a sort of 20 billion deficit. So we uncover yet another black hole, which will kind of then paint a grim scene heading into the November budget, which means you'll probably try and find even more money from business and entrepreneurs, et cetera. So that's the big worry that could affect both sentiment and actually the pockets of the people building in the private sector. So this will, I mean, this then leads into another topic I know you wanted to pick out of the quick news section, which is EF now focusing on the States and leaving Europe.

10:02I mean, they're not leaving, leaving, but there is now such a big push from entrepreneur first which was uk very uk centric then very european centric they've closed everything but maybe i think bangalore and the german hacker house i think they've now now the germany piece has gone as well i would describe this as a as a consolidation i mean i'm an albany f and you know they've done such a an amazing job um alice and matt you know building this into what it is i think it's a recognition that they're still going to be able to pull with their brand, the best of Europe who want to join into either a UK or ultimately the US cohort.

10:39So all entrepreneurs now, they spend some time in the US, they have that opportunity. It's something we've talked about a lot on this podcast, which is the urgency in the US is, you know, there's no comparison and the willingness to buy of US customers versus the continuous procrastination of European customers often from a startup point of view. And so I think sheep dipping founders is really smart. For a long time, we pushed founders to go and spend time there. We introduced them locally. I think over half of our portfolio companies have ended up top-coating in the US, either because of customers or because of the need for later stage investment there.

11:16So it's not going to change in the short term. And I think it's only a good thing. Ultimately, for Europe, it's a good thing. No, well, I mean, but they're all Delaware C corps. They're being flipped straight away. and I know that I'm an emotional creature and I cannot answer this question emotionally. It's just no point. It's just a pointless thing. It just feels just like a loss. I feel a little bit like there's a loss in the family. That's what it feels like to me, which I know is a pointless statement and follow the money and follow the customers and it's absolutely a smart thing to do. And I get it.

11:50And obviously Lomax, this is a strong part of your strategy. I just cut the emotion out of it, Dan. And I'd be like, look, to be honest, in a way, this is validation. In a way, it's validation of the following thing, which is that European founders are getting better and better. It's a validation of that. OK, because if that was a problem, EF would either be, you know, downsizing completely. I mean, don't forget, Matt has left. Matt is doing other things like this. You know, the business, you know, Alice is doubling down here. Matt's back, isn't he? Matt's back again. Oh, is he back again? Matt's back.

12:17Well, they're doubling down on the quality of European founders. But one thing I think that they are, I think, evidencing by this, or one of my takeaways from this is that this notion that you can raise pre-seed and seed in Europe, and if you want to try and tap into the bigger kind of early growth and growth money in the US, we know that in terms of rounds of between$20 and$100 million, there are four times the number of those rounds in the US than there are in Europe. if you have completely european dna or uk dna in your company it's actually very hard to tap those u.s capital markets right i'm a big believer actually this is what we also believe outsized and andrew believes that it's seven percent you need to weave more u.s dna into the companies from early on in order to go and tap those big capital markets and also like customer markets too and also hiring you know hiring talent so i don't think it's a bad thing i think they're playing the game as it is on the field and i think you know off the back of this and actually if you look at the conversion rate of companies that leave europe to the us and then become unicorns it is much higher than you know companies that get funded here and then become become unicorns so i think there's a kind of hopefully we will see even more successful companies come out of this i mean ef is clearly a great early stage talent magnet and they're gonna they're and accelerate those people.

13:40There's also just a practical factor to this, which is EF's model is to bring together the smartest people and to pair them up and to build those businesses. So there is value in clustering. There's value in not having those centers distributed. If you stick everyone in the UK or the US into that cohort, you can argue that you're going to get a far better match rate and stir the pot all in one place. It's about clustering talent and capital. So focus is often not bad. I will park my emotion, my inappropriate emotions elsewhere and wish them well. Right. Well, anything else in the quick news bucket?

14:19I mean, I don't think there's much to dig into. US government shutdown. I don't think much to see there from a kind of like, you know, it's just a reminder that it's less about numbers, more about symbolism, really. Well, markets don't tend to move horrifically. I mean, I saw the S &P today. Nothing, nothing has moved. is business as usual. So I think the expectation is that it's going to be a fairly quick turnaround and that the Republicans will probably get their way and the Democrats will probably bend over. So I don't know. I don't know if there's anything that's going to then leapfrog over the pond and affect us, but we will see.

14:55No, the only interesting statistic that I read was that for every week that the shutdown continues, the US GDP loses$15 billion. So there's some numbers. So there is there is an OK, it might not be a market effect, but there is there is an effect. GDP effect. Yeah. Yeah. Interesting. And of the last I think of the last eight shutdowns in the last. Whatever, I think four were under under Trump. So obviously he's a contentious character. So, well, it's a reminder that Trump can't always get his way as well. You know, there is some like democratic safe. Well, he's threatening to just fire everyone.

15:29He's basically saying every day that we're at, we're at, we're closed. We're just going to fire another swathe of, which I'm assuming will be mostly democratic representatives. All right. Well, let's see what happens on that. Let's come back to Europe. And we found out this week that Germany or North Germany has a massive lithium deposit. So I was looking behind the numbers here. So 43 million tons of lithium has been found in northern Germany. Obviously critical for battery technology, but I'm sure I don't need to say that. also wondering where this fit in context with how much lithium there is and how much lithium is required to build batteries and da da da da and in 2023 the the world mines 22 million tons roughly globally australia chile and china are the largest producers i always thought it was china actually australia is the largest producer by a sizable margin i think nearly 40 percent of lithium in 23 was australian then it's chile and then it's china in that order now if extractable germany alone could cover around 50 years of eu consumption with this haul at 2030 or suggested 2030 levels of use so this is a massive massive haul in context but can they get it out the ground what about the environmental regulatory social constraints if they can get to it will this make europe self-sufficient how is it all going to fit together lomax what tell us more and then we'll dig into some of the details no and well i know just to set the scene and context here is that we are now in a in an era where everyone is driving for sovereignty over everything you know defense compute and also now obviously critical you know raw materials where europe is you know for infamously kind of lacking i think portugal where i'm sitting is the biggest producer of lithium in Europe and that produces less than...

17:19Spain and Portugal have both got reserves as well, yeah. Producing less than 1 % of the world's supply, right? So it is Australia, China and Chile that may produce this here. So I think this is interesting and I think this is in the ground. This is worth nearly 600 billion in ground value, right, this lithium. And so it's great to find it. As always, when you look into the detail, things are more complicated. The extraction method here is direct lithium extraction. from brines so it's not traditional open pit mining so for our environmental footprint i think that's probably good but even then there will be you know water table concerns and as always in europe this is a density populated area so you know the our friends the nimby's are going to be causing problems when it comes to permitting the other old friends that we often speak about is energy prices so this is going to be expensive you know europe the uk have some of the you know highest highest costs of industrial energy in the world and that's not changing anytime soon so you know the cost of this project are going to be very very high the permitting costs are going to be high and both take a long time so i'd love to be an optimist optimist about it but it really feels like this may just be something that just sits in the ground and never comes up you know it's not australia where you can get this stuff spun up in six months because it's in the middle of nowhere also the technology here unlike open pit mining is is still nascent so there's still actually a bit of de-risking to do on the um this direct lithium extraction method um which is not a slam dunk so it's not it's not proven at industrial scale but maybe to try and be an optimist here maybe if europe is going to invest let's assume this all gets too difficult is maybe a place that europe could invest is in is in refining you know refining lithium right so So we could probably secure long-term supply from Australia and Chile, obviously not from China.

19:15It feels like that will be part of the new world order shuffling. We'll get more friendly fire, raw materials and rare earths and whatever is required. And just to remind you, to bring it back to the Labour conference, Ed Miliband outright banned fracking forever in the UK. I know we've been in a kind of de facto moratorium on fracking since 2019. But, you know, because of basically high population density, nimbyism, environmental concerns, fracking. But it's also really expensive fracking, isn't it? Hang on a second, Dan. What's driven, you know, the U.S. shale oil boom has been fundamental in the economy of the U.S.

20:01of the last 20 years, right? And also driving sovereignty over a critical natural resource. Yeah, but the US has always produced more oil than it needs. I mean, it's always been in a mega surplus for decades. So I don't fully understand the mechanics of, is it maybe it's just on the refinery side? Maybe they then need to ship that dirty oil elsewhere to then be produced, to then be shipped back to the States. But they're swimming in the stuff. They're swimming in the black stuff. well i mean they need it you know the world is still driven really by oil right so i anyway my point is in europe it's very hard to do any of this stuff it's probably a waste of time but actually moving into something like refining it maybe then is um you know securing critical supply chains from more friendly uh geographies and and refining it is probably what the europeans should focus their efforts on the the refining is going to be the bottleneck not the geology i think so uh unless you know europe builds its own battery giga factories and and the refining capacity then they're coming you you can you can dig the lithium out the ground but it'll still end up powering cars made elsewhere so it's a great first step and to wean ourselves off dependency um all good but a lot of the rest of the stack needs to be in place as well i mean obviously there are there are so many new battery factories coming online so and i i always look at the byd I mean, they own their entire supply chain from mining to software, the full stack.

21:32And I do believe that's where Europe is trying to get to, to be more self-sufficient. And I'm also very keen eyed on sodium technologies in battery, where you won't need as much cobalt lithium and other more traditional battery technologies. And it feels like that is close. so there even might well be elements that are much more abundant across Europe that will affect battery technologies but anyway it's a good thing it's been found on in our backyard and there are potential opportunities to do good things which I think is is not the usual story that we get let's move on to the London IPO scene we are not going to spend too long here because it is a pretty dreary story however it's worse it's worse than i thought actually yeah this week we found out that the uk exchange is ranked 23rd globally for ipos according to bloomberg so it's behind mexico and singapore now the volume of ipos and oman great and oman great and uh sierra leone and kenya and and what was that tiny island that had penguins on it that trump put south or may in principe i don't I know.

22:43Yeah. Okay. Christ. Anyway. So, yeah. So, so just for context, here's the London numbers, but then you've got to compare that to someone like the States. It's just, it's a bit nuts. So the volume of IPOs in London has dropped 69 % from$248 million to 42. But if you just look at H125, US IPOs raised, excluding SPACs, this is 26 billion. So we're just not even in the same ballpark. So what do we need to talk about here? How the hell do we get out of this? Or do we just do something completely different and we don't even worry about ipo some other form of some something i don't even know where to start but lomax maybe set more of the scene this is now the end of a sort of 30 year decline that started probably in the 90s right with a chronic lack of lack of investment in inequities actually people focused on on bonds in pension pension funds which pension fund trustees who control roughly three trillion pounds worth of assets you know being incentivized both, I suppose, from the regulatory angle to invest in less risky assets.

23:49So I think that's one of the main drivers behind this. I think also a lack of it, this is relevant for us, is a lack of investment in technology in the UK has led to this because you look at FTSE 100, 1 % of that is technology. you look at you know s &p 500 about 30 to 35 percent is technology so if you're you know the biggest growth area in equities in the last 20 25 years is tech yeah and the uk is just completely we had we had we still have aim the aim is kind of a laughing stock and so which was the sort of smaller little brother little sister of the the footsie to try and or the london stock exchange aim to try and have lighter regulation to make it quicker and easier and more nimble for young technology companies to list.

24:40But that has been a failed experiment. So we have lack of capital. We have lack of innovation, you know, lack of entrepreneurs listing their companies in Europe. And then we have excessive regulation. I think, you know, the UK, we have some of the highest disclosure rules in the world the prospectus rules are arcane and we still have 0.5 stamp duty on on share transfers right which many countries don't have pisces pisces was just designed for like a light touch enabling founders to get some money out some kind of some kind of liquidity too little too little too late is what i would say there is discussion this week that whole discussion about stamp duty has come back up again that stamp duty should be waived um for in the first couple of years.

25:25I think they're going to do that. And so that looks like a small thing that goes through, but there are lots of other structural issues which are problematic. I think the other thing that's happened is just like, it actually is like, not globalization, but it's competition. For a long time, the UK and the US were the only games in town. Now you can list in many, many countries. So I think it's just the way that other countries, and it's very sad for the UK because financial services industry was originally 10, 11 % of GDP. Like it's a big part of the economy. So I think for the UK is a big structural problem.

25:57In a way, for us, backing young companies and working with founders, you could argue it's an irrelevance. It's like if you're going to build a big company, you just go and just take it to market in the US. I mean, that's totally fine. Nothing's stopping you doing that. Well, that's how we live, isn't it? I mean, they sell, raise, build, exit. They tend to do that elsewhere. I'm just always trying to find the angles where what is where are the levers to pull to enable more listings in the UK or across Europe? Because we see stuff going on in Paris or Amsterdam or Berlin, not huge volumes, but it feels like there might be some levers to pull to get some more activity, make it more attractive in some way.

26:35I mean, as always, you need more capital because if you have more capital, you have a greater ability to generate competition on your book building when you're raising money, right? Which means you're going to get a higher price per share, right? You have more liquidity, which also drives a daily turnover of shares, the ability to sell out of shares. But they would have to be mandated, wouldn't it? They would have to be the one thing that I think Reeves has said she wouldn't do, which is mandating pension funds to invest in UK. No, you have to incentivize them, something like that. On the one hand, as I said, for us, we could maybe just view this as an irrelevance and be like, well, it doesn't matter because we're just going to go and list in the US anyway.

27:14And that is probably the answer today. But I don't – how to fix this is a more systemic structural concern. Yeah, okay, so you cut red tape. You incentivize more investment in equities. What you would do as you would do with the government is you would actively court big tech IPOs to happen in London. It's hard, but you literally actively caught these people to do it. But why would a founder do it? What would the incentive be? There you go. It comes down to incentives. You subsidize some cloud compute for them in the UK or something. Do you know what I mean? There's got to be ways. There's got to be levers.

27:48There has to be. The good news, Dan, is that you were talking about how the Labour government has sort of adopted a kind of 1980s style of messaging and marketing their political messages. and they're talking about doing a Tell Sid style campaign to encourage people to put money into the stock market in the UK. Those who don't know, it's 1986. It was a British advertising campaign by the government during the privatisation of British gas. I remember it. This catchy slogan of, if you see Sid, tell him. Urging ordinary people, in quotes, to buy stocks and shares. So, you know, they're not only got the style of the 80s messaging, but they're going for substance as well by copying a playbook from way back when.

28:37I hope that doesn't happen. Because they were doing that through high street banks, weren't they? That was the plan. I mean, God, if they just fix the fundamentals and stop, you know. They're always looking for these magic fixes, right? It's just suck up and fix the fundamentals. But no, tell Sid Advertising Campaign. this is this is actually a you know this is a bipartisan issue like the you know whether the um conservatives are just too much to blame here it's not we all know the list of changes that needs to be made nobody will make them i don't really understand it'll be it'll be on nige and nige loves it it's mille isn't it the um the argentinian he's a big mille fan is that how you say his name so we'll see well i'm sure we'll see some bold moves from farage when he's in office in a few years time while we're on uk governments and uk government activity in business bailing out JLR.

29:23So Jaguar Landra, which is incidentally is owned by Tata. They bought them from Ford in 2008 for I think it was$2.4 billion or around that figure. So there is, it's not a bailout per se. It's a loan guarantee of up to£1.5 billion. That was the lens or the thing that caught my eye this week. But I didn't really, I didn't totally want to talk about that. I was more intrigued by Germany shifting gears quite. I mean, it's a massive pivot. If you look at how fiscally conservative Germany is around how they manage their economy, they never borrow too much. They always the massive export manufacturing market.

30:07And as we all know, and I've spoken about a lot, there's a lot of problems. and since COVID, even more problems, they've been exaggerated where, you know, Chinese manufacturers like BYD are stealing the march on the German automotive industry. Trump's tariffs haven't helped. So Germany, who have always been very private company focused and letting private markets do what private markets do best, have flipped the script and are now effectively becoming the investor. 500 billion euros, earmarked mainly infrastructure. I think the last time i looked 330 billion euros was focused on infra but this is a massive shift so looking at jlr and the uk government and then looking what germany is doing i'm thinking well maybe the uk should do the same and i know they are i know there's some american money which we've spoken about 150 billion coming in but getting the uk to think more like the germans is this a good idea should we should we should it feels it feels like we should go big and bold and almost trust like without screwing the bond markets just get get some real kind of activity going on the investment side some big bold numbers but low max is that nuts no i i i think by the way there's a there's a certain lithium mine that probably would like some subsidies so there we go we can start That's an expensive way probably to get through that, some of that 500 billion.

31:38Look, I'm all for government investment. I think if you wanted to tie these two things together, you've got what's happening in Germany. And it's also happening in the UK as well, by the way. It's not as if like Rachel Reeves is not investing. Well, she's actually carved capital investment out of her fiscal rules, which gives her carte blanche subject to the bond markets to actually invest, right? But it's still quite low rent, isn't it? it's still we're talking in we're talking in the i mean germany had more of course like germany had more uh like more headroom to play with effectively because of the the breaks they've had on on on their fiscal spending i would say look if you're trying to tie these you know given we started with the jlrp so like i'm all for government uh stimulation you know like catalyzing the private sector right and i'm all for that let's start there let's start there should the where things go wrong.

32:32It depends how, though. It's all about how, isn't it? Because basically, Tata gets to sit there, a huge conglomerate, and they say, well, this is all getting a bit awkward, and we might think about shutting the factory. And the government looks at it and goes, fuck me, 40 ,000 jobs are going to go. And Tata has the government over the bowels and say, well, we'll carry on investing if you backstop our loan. And so suddenly, essentially, the UK public become guarantors personally for Tata's risk and its profits. And where's our upside? And so it's all very well the government's becoming more under the cloak of industrial strategy involving themselves.