E636 | This Week In European Tech with Dan, Mads, Lomax and Ben Prade

0:00Welcome to Upside, where every week we dig into the real news that goes on behind the headlines affecting European venture. Today, it's Mads, myself and Ben Prade. Ben is an investor and operator from the firm Bullhound Capital, which is the investment arm of GP Bullhound. They're an advisory business and growth investor based in 13 countries with 120 staff. Ben, I hope I'm doing you proud here. You can always chime in any time you like. Chime in any time you like when I get it wrong. Ben focused on deep tech, AI, quantum and space, as well as dual use. Previous investments is pretty much the who's who of everybody there is in household names, Klarna, Spotify, Revolut Slack and all the cool shenanigans.

0:39Now, on this week's show, we have the VC funding environment. Ben, I think that's one of yours. We're going to lean on you for that one. Nobel Prizes and one in particular, what that means for Europe. What's going on that's creating all the talk of AI bubbles. Terror from China. And the$1.5 trillion chasm between the US and the EU.

1:12This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Gentlemen, how the heck are you? Ben, kick off. What's new with you? How are you? Tell us good stuff. Yeah, all very good. Thank you very much for having me back, guys. I love the podcast. I'm a follower every week. yeah so things are good you know it's that kind of time where we're kind of on the swift downhill into christmas trying to get as much done before the end of the year as possible the middle of october man i know it goes quick these months right dude it's half term it's half term it's half term tomorrow you get two weeks of that when you're back it's halloween and then there's a month to december yeah 2025 is practically over unbelievable it's not cool yeah what the heck um mads what's cooking with you apart from planning for halloween and half term i've got well absolutely and christmas parties and this that and the other no i mean look deals to be done you know we're hopefully closing a deal tomorrow super super exciting something we've been working about and on for months so looking forward to announcing that in due course yeah yeah one of our biggies i'm excited about that anyway enough about us let's talk about in fact Ben, this is yours to kick off.

2:26When we were planning the show, one of your points was an intrigue or a share, I guess, around the fundraising environment. Now, many of our listeners are founders and many are in our VC ecosystem, but this affects everybody. So what's your insight take on the fundraising environment? Yeah. So I guess in my role, I do tend to take on a lot of the fundraising responsibilities for the group. And, you know, it's a roller coaster ride, as always with fundraising. I mean, I think people always kind of underestimate the importance of fundraising in our business. I think we probably all do a lot more fundraising than we care to admit.

3:07Always be fundraising, baby. Always be fundraising. So, yeah, I mean, down the years, lots of interesting learnings, really. I mean, we know that there was a big pullback after the kind of the hype of 21, 22. And I think, you know, what's really shocking still is that there is less and less money coming into VC generally from investors. Still? Less funds. Yeah. Yeah. Less funds being raised, less funds out there. Generally, what you're seeing is there is, I don't want to use flight to quality because that's not fair on emerging managers, but there's maybe a flight to brands people recognize a little bit more.

3:47So at least, you know, 25 % of all new funding goes into the top 10 brands. I think 75 % of all funding goes into the top 30 brands. So really then emerging managers and other kind of more experienced managers are fighting it out for the last 25%. I think probably there was too many funds after that boom in 21, 22. So, you know, a thinning out of the market probably isn't a bad thing. but it's definitely bleak out there. And I think, you know, one of the things I was going to bring up is that, you know, different sources of funding are coming into our market and sometimes they come with different implications.

4:28You know, I think a lot of funds in the US, when they're raising money from institutions, you know, those institutions trust those brands. They like the venture capital risk. They are happy to give managers money and for those managers to go out and do what they do best. but we're seeing a lot more in Europe, you know, that the work that the European Investment Fund has done has been fantastic over the last 10, 15 years to stimulate VC. But, you know, as more and more government money comes into the sector, you have countries that want to have an impact on their own local technology ecosystems.

5:02Sometimes that money comes with strings attached, you know, sometimes it comes with policy goals that maybe don't align with good investments, you know, and So sometimes the European ecosystem kind of suffers a little bit from the goodwill of governments that want to support the ecosystem. But sometimes that is, you know, you run into this issue of the tail wagging the dog. You know, funds need the money. I was at a conference this week, a defense conference, actually. And somebody stood up. Of course it was. It's the hot topic. Somebody stood up and said, well, these days they don't have any risk appetite.

5:42and I think you know the people such as yourselves and us you know the risk appetite is there but a lot of the time if you're going to go and raise a fund you're going to have to raise a fund in a certain way to be able to get that money in and sometimes the money wants certain things so I think it is a bit of a situation that we need to deal with you guys have talked a lot about accessing true private capital in Europe and we won't kind of open that can of worms again about pension funds, just not investing locally and not having the skills and the understanding to invest in tech. But it's critical.

6:20It's critical for us, isn't it? The other thing, of course, is DPI. I know you guys have talked about this as well. DPI is money coming back to investors that have invested in our asset class. That is probably still not as much as people would hope. So there is a lot of money gummed up in the system that needs to come out. But there are chinks of light. We're seeing the Klarna IPO is a great moment for Europe. Many, many funds across Europe and family offices and individuals are invested in Klarna. So once that lockup comes off and the share price is holding up reasonably well, there'll be liquidity coming back through the system.

6:56So that should be good. So it's interesting times. I think that a lot of funds that shouldn't really have been in our sector are being weeded out. So I think the quality will remain. So the future is bright, but there are issues to deal with. Well, we are called upside, Ben. So I love you for finishing on that little upside. Mads, before we move on to the Goldman's purchase, any reflection? Because you're obviously out and about meeting LPs. Any reflections from you on the fundraising environment? There's obviously a lot of capital that's coming into technology broadly right now. And a lot of that is going into AI.

7:37you know we've seen some of the rounds that are being raised by the open ai's and anthropics and x ai's of this world and they are absolutely massive and i suppose to some extent that might be crowding out other things because everybody wants to chase as ben says these marquee names these massive massive brands but we know that there's going to be value created in many many places and so to some extent it's probably a good thing because that means there's you know everybody's chasing these few big names and there's all that capital is going in there there's a little less focus on some of the gems uh out and about so i actually think there are a lot of amazing investment opportunities right now if you take the time to work if you're not worried about rolling up your sleeves and knowing that it's you know it's not about writing just writing a check you're going to have to do some work to support the founders support the entrepreneurs to build good companies yeah yeah and my sense is now we're in fundraising mode as well that the conversations we're having this time around are a lot more open and fluid.

8:39It feels like there are more people in Europe that are willing to have conversations around early stage venture and the innovation, these early pieces. So I think there is, and I'm going to also be a bit upside-esque, and I think there is a little bit more intrigue and appetite around AI and defense and resilience and all these conversations that are going on around Europe, which I find actually quite positive, even though it might be happy ears. We will see. Now, we're going to step... Actually, before we go into the Nobel Prize piece, the other thing that was on your mind, Ben, was this Goldman's purchase.

9:10So Industry Ventures has just been bought or acquired. Now, I was looking behind this. Nearly a trillion bucks, 965 million. Sorry, a billion. But 300 million appears to be contingent on future performance. So I'm not quite sure what's cash, what's not, what's what. But why was this on your mind, Ben? Well, I thought it was interesting because, you know, it's the more traditional finance industry getting more involved in our industry. So, you know, they play an important part in the ecosystem, industry ventures. You know, they are a secondaries fund. So, you know, by definition, they're buying other people's stakes in VC funds.

9:50They're not just secondaries, though, are they? They do their fund of funds. They do some direct. They're known as a secondaries fund. Is that fair? That's right. Yeah, I think so. Yeah. I think it all adds up to creating liquidity for the industry, which is a good thing. I mean, these groups are known for pushing quite chunky discounts. So, you know, when you're looking to find some liquidity, they're not going to be doing you any favours, but that's fine. That's the business model. But what's really interesting for groups like Industry Ventures is that, you know, they have 700 funds on their books.

10:21They are investors effectively in 700 different funds. below those funds there's 10 000 underlying company holdings so as investors of course they're picking up all the data all the quarterly reports from these funds and the progress wants do you think is that is that the angle because there's there's two for me one is them getting into alternatives as an intervention another but do you think it's the data piece where do you think the angle is i think i mean goldman's are super smart right i think it is a data piece as much as anything. But I think what that data really activates for them is the ability to price lots of private market companies really accurately.

10:58And also, as we talked about a little bit earlier, a lot of money is stuck in BC. A lot of maybe high net worths came into that during the boom and are looking for liquidity. Some of these funds are up quite nicely, so are happy to take a small discount. And so for Goldman's as a very active wealth management division, being able to offer this as a product to their clients as we can kind of clean out any illiquid products you've got stuck in your portfolios and allow you some cash to invest with us somewhere else. I think it's a fantastic move. And I think the price is relatively modest. I think it's a great deal for Goldman's and it's a great deal for the guys at Industry Ventures too.

11:39But I think it is a really interesting indication that the big boys are already looking at this asset class and saying, this is something we want to get involved in. Well, let's see if there's any more purchases going on. I was keeping an eye on fees and it looks like obviously all the big banks are rinsing the fees at the moment. Maybe there's more to come from being in this asset class as well. Now we're going to change gear. We're going to go, I mean, super sideways. I don't think we've ever spoken about Nobel Prizes before, but there is method in the madness and we are going to talk about Nobel Prizes.

12:08And no, we're not going to talk about Trump not winning one yet. This week, the prize awarded for economics went to, and I'm going to bastardize their names, I'm sure, Mokir, Aguillon and Howitt. Now, Mokir only took a half of the prize and Aguillon and Howitt split the other half. I don't know how that works. Do they chew the medal in half? I don't know. But their work is all about explaining innovation-driven economic growth. So why are we talking about that here? Because they've unpacked the role of innovation, governments, VC startups and incumbents. And obviously, there is a massive highlight on all of that around the challenges facing Europe.

12:47But I'm going to lean on you, Mads, because you have unpacked this. Why are we talking about economic Nobel Prizes? Yeah, it maybe feels a bit esoteric, but it's actually very relevant to what we do in venture capital. Now, Mokir, let's sort of put him to one side. He identified some of the prerequisite for sustained growth, sort of going back to more of the Industrial Revolution, the Enlightenment, and what was it that made Europe a sort of a fountain of innovation and economic growth at the time, whereas the Aggie and Howards model is much more relevant to modern times, kind of this creative destruction, where they're talking about firms investing in R &D and how that creation destruction means that new technology is displacing old technology, and that leads to continuous growth.

13:32And in many ways, they provide the first rigorous mathematical proof for why growth is driven by these incentives in the economy. It's not sort of something that falls like manna from heaven or something that is, Schumpeter has been talking about creative destruction for a long, long time, right? For decades before these guys came along, but they now bring the mathematical proof and that's why they've won the Nobel Prize. To some extent, you can say this is the theoretical foundation for venture capital, It sort of validates why it works. That's not news to people in the industry we know, but they've now proven that it works.

14:09And it's this mechanism that channels the capital. And that is in many ways why governments all over the world are trying to stimulate R &D and venture capital, because these things are essential for growth. Now, if one was to criticize the model, what are they missing? Well, to some extent, you could say maybe the state's role. Forgive me, maybe this sounds terribly European, but if you look at some of the big innovations, let's take the iPhone, almost all the technology in the iPhone, the foundation was laid with government investment. So whether it be the internet or GPS or touchscreens or even semiconductors, so much of that came out of government money, government R &D, government procurement.

14:51And then the private sector invests after the state de-risks some of these innovations or inventions with patient capital. Now, the Ackley and Howard model is a little bit quiet on that, but I think we can see in reality that those things are really, really important. So I think kind of economic theory is not stopping with this Nobel Prize. there's much, much more to both sort of document and discuss. Another critical gap is kind of in their model, they talk a lot about innovation and innovation driving growth, but a lot of the late industrializing countries, like a South Korea, like a Taiwan, they didn't necessarily innovate initially.

15:29There was a lot of learning and leaning on existing technology and then innovating later on. And the sequence really matters there. And then I would say finally China, because China is a little bit the bull in this Nobel Prize China shop. They've demonstrated that economic growth is about innovation, but not only about innovation. They've managed to grow their economy phenomenally with a combination of infrastructure investment, the bridges, the roads, the house building, which they've done massively, and a lot of innovation at the same time, where you could say some of these classical economical models might say, look, it's all about innovation.

16:07Don't worry about investing in all the other stuff. The Chinese model was very much, well, we'll do both. We'll do both really well. And what they've demonstrated is when you do that, you can come out in some ways on top. If you look at robotics, for example, China today, just 15 years ago, people were thinking about it as a low-cost manufacturing hub. Well, guess what? Where do you automate? You automate when labor is expensive. Well, today, China's got five times as many industrial robots per capita as the UK does. Okay, and it's also a much larger country. If you look at AI, their innovation is incredible.

16:43The top five open source models today are all Chinese. They've got dark factories that are terrifying some Western execs. Maybe we're going to unpack that in a bit. So I think to some extent, whilst we're looking at this Nobel Prize here and these economic models, I think there's a lot of insight there. But I maybe also think there are some things they're missing a little bit in their model. And I think as we think about how Europe can regain leadership and get back on the growth trajectory, it's important not to forget some of those lessons. Well, yeah, we are definitely going to slightly unpack the terror and fear felt by some Western executives that visited some Chinese factories.

17:24but before we go there, Ben, any thoughts on, did you see the Nobel Prize? Did this catch your eye this week? Yeah, I mean, it's really interesting to see economic theory coming up like this. I think it's wonderful. I mean, I did economics at university and it's a subject that doesn't get talked about very much at the moment. You know, the theories are quite qualitative as well. You know, it's quite opinionated and I think it's brilliant to see it up there and for everyone to be really reminded of the basics of how economies work and what it's all about. But I think we live in a time where there's ample opportunity for development.

18:03And I think, you know, AI has created lots of new industries at the moment, but it doesn't seem to be moving mankind on that much so far. You know, obviously, people are kind of reaching for the low hanging fruit when it comes to developing business models. I saw this week or just today that Mistral is developing a group of AI-powered science research, which sounds really exciting to me. I think it's wonderful that groups can start really applying AI in deep scientific research that doesn't necessarily have an automatic financial benefit to it. And I think that's one of the great things about Europe is that we still do research for the benefit of research to move us on as a species.

18:52It's not all about new businesses and listing on stock exchanges. We need the money, Ben. We need the money. Show me the money. Give me the money. Yes. Maybe there is a deep tech, which I'm assuming there's a deep tech angle to the Mistral work. We're going to talk about AI bubbles, but we're not going to talk about AI bubbles. there are so many stories and i guess we will see so this will rinse repeat this ai bubble story will rinse repeat in the news until there is some some form of correctional or crash but what we thought would be interesting would be to look at some of the facts that are fueling the stories and some of the some of the ai assets and facets that are actually creating some of the dialogue so open ai obviously spoke this week or last week about having 800 million users they released Sora, AgentKit and other more enterprise focused toolkits.

19:43And one thing that also hit me between the eyes was this feels like it feels like Sam Altman is building the app that Elon Musk has always wanted to build this everything at this ecosystem. So between him and Johnny Ives pendant or whatever that hardware ends up being, and all of these applications that live with inside inside chat gpt it feels like this is going to be an everything app so here are some of the other facets that kind of caught our eye that i think we're gonna i'm gonna ask you mads to dig into so we've got ai and the investor buyer partner circularity challenge i know we've spoken about this before but have a look at that the real chinese threat using open source the energy that's required to fuel this next ai boom the ai monetization attempts that are going on with Walmart, Wendy's, Target and other more American outfits are now starting to try and monetize AI.

20:36So, so many questions around this. But before we do that, Mads, how else would you tee up the topic of what's going on with AI that's creating all these conversations around bubbles? But you cannot talk about AI without talking about open AI right now. Sam Altman, he is absolutely going for it. And we've seen that over the space of three weeks, he have made a$1 trillion dollar bet. It's, you know, a trillion here, a trillion there, right? Suddenly it becomes real money. You know, as a technologist, you know, as somebody who is excited about what tech can do for us and how it can change the world, you can't help not being excited by the scale and magnitude of this.

21:18So he has announced over three weeks about 30 gigawatts of new compute capacity to be rolled out over the next few years. Partnership with NVIDIA, about 10 gigawatts, right? And a $100 billion investment. AMD, a 6 gigawatt partnership. Broadcom, another 10 gigawatt partnership around custom chips. And then you have the whole Oracle and Stargate piece, which could be 5 to 10 gigawatt there over a five-year period. So we're talking about investments of well over a trillion dollars over the next decade. It's just staggering. And to put that into context, it's about half as much power, just under half as much power to power this compute capacity as all of the UK consumes.

22:01Okay, so to take 30 to 35 million people is the power that we all consume over the course of a year is what he is gunning for, saying I need that capacity to deliver the compute that I need to take on the projects, the challenges that I want to solve. Ben, back to your point about core science, imagine what that scale of AI will be able to help us unlock. And of course, the skeptics are saying, well, is this just about kind of memes and silly videos? I happen to think there's going to be a lot more to it than that. Although hopefully there'll be some humorous stuff mixed in as well. We also need some of that stuff.

22:37But we're talking about 20 to 30 new nuclear reactors worth of electricity. This is staggering. Now, his strategy is to leverage other people's balance sheets because he ain't got the money. And this is maybe what we can unpack a little bit when we look at who the two Goliaths are on the scene here. because it's OpenAI on one side and it's Google on the other side. And they have been sort of in this quasi-price war where both are pricing similarly now for the top-end model, but Google can sustain that. They can sustain something that is massively cash-bleeding for a long time because of the money printer they have in the basement from their search business.

23:17Now, at the same time, the main threat to Google's business is OpenAI monetizing ChatGPT via ads and stealing Google's ad business. And so the question as you line this up is, will Google be able to be predatory enough to push OpenAI enough that they can protect their search business and their search revenue? Or will OpenAI be able to snaffle away ad dollars from Google and really hurt them? And right now, there are two goliathes. It's really hard to say with certainty who's going to win. Because yes, Google's cash flows are formidable, but so is Sam Altman's ability to do alliances, as we've seen, to strike these deals and raise a phenomenal amount of capital.

24:06So it's really, I'm going to get out the popcorn, guys. There's a showdown coming. Yeah, really, for sure. So Ben, and Mads, I'm going to come back to you in a second, because I want to talk a bit more about some of the other aspects of this. But Ben, And without having a bubble, no bubble conversation, if possible, but maybe we should. But what else is on your mind on this topic? Well, I guess everybody's talking a lot about the deals being done between the big players and this circularity. But, you know, I don't think there's anything new about circularity in industries. You know, we've seen vendor financing operating successfully in many industries.

24:42I mean, the whole car industry is built on vendor financing. You know, most people don't own their own cars and ultimately the company that sold you probably does. So I think as long as the financing arrangements are reliable, I think, you know, what always causes blow ups in most financial situations is people taking short term cash and putting it out on a long term basis. So if this vendor financing or if one company is investing into another company, as long as that capital is safe and doesn't need to get drawn out at short notice, then interdependencies like that are fine. I mean, for me, the problem is the revenue expectations.

25:27All the numbers can add up. But one thing you can never control in these markets is the expectations of humans, of investors. And if people's expectations of revenues and what AI will do in the shorter term runs out of line with what is actually going to happen, then that's when the problems start. And then if these businesses are interconnected through various financing loops and equations, then some kind of correction could be even harder than it would normally be. But personally, I think from our point of view, we don't see AI as one thing. AI comes in many different layers. And it's not just about open AI for us.

26:08There are lots of industries being built on top of these companies that are super, super interesting for us as an investor. And the more verticalized AI companies become, AI offerings become and start helping us in our everyday life, both at work and at home, I think those companies can really build lasting models that are very successful. So for us as an investor, you know, we're kind of closer to this space where you've got SaaS companies with data that are becoming AI companies. And that's really interesting for us because if you look at this kind of bubble kind of narrative, yes, AI companies are trading very, very expensive.

26:47But traditional SaaS companies, the multiples they trade at haven't changed that much really over the last two or three years. And there has to be at some point a coming together between the multiples that SaaS companies trade at and AI companies, because ultimately everything will be an AI company in the future. Every company will use AI the same way every company uses internet. So there is an arbitrage there for us as an investor to say, well, which companies are really going to benefit from these changes? And thinking a bit longer term. But yes, in the short term, expectations do drive markets and it could be a bumpy ride.