E643 | Sebastian Peck, KOMPAS VC: Europe’s Industrial Tech Moment: Decarbonisation, AI & the Risk Appetite Gap

0:00Welcome, everyone, to what I hope will be another great EUVC podcast episode. Today, we're connecting with our industrial tech friends, those who built the literal foundations of Europe. We're sitting down with Sebastian Peck, partner at Compass VC, the leading name in Europe when it comes to industrial tech and decarbonizing manufacturing and the build world. With Compass is gearing up for a new big announcement, it's the perfect time to dive into how this often overlooked but mission-critical segment of our ecosystem is shaping up geopolitically, regulatorily, and entrepreneurially. We'll unpack everything from corporate LP dynamics to the increasing need for specialist VCs and the rise of new strategic VC alliances.

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3:05Tear down this wall. It's more than just an ally. This is a union of values. Let's start acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Sebastian, welcome to the pod, my friend. Thank you for having me, Andreas. Looking forward to this. So, Sebastian, let's get some definitions out of the way. How do you define the European industrial tech opportunity? So industrial technology, in the way we define it, really encompasses three dimensions. Decarbonizing industrial activity, which is anything from producing goods to generating energy.

3:54So any form of activity that involves the production of things or of energy. The second element is productivity. So anything around increasing, enhancing productivity, so the throughput in the way we produce things to make that more efficient. And then thirdly, we talk a lot about resilience, which of course is now a big term. We've been doing this for a very long time. And we've always been thinking about it in the context of protecting corporate assets, making sure that companies don't suffer any harm from either malicious activity, think cyber attacks, for example, from geopolitical events, think supply chain disruptions or tariff barriers.

4:40So it's really a complex of use cases and problems that we are tackling that are faced by our industrial complex. You mentioned decarbonization a couple of times, and it's obviously central and has been for a long time. I had a big discussion the other day with a friend of mine on this word, because we were talking about a panel that was going to be called something with energy transition. And then I said, well, is that really where we want to take this conversation? Is it transition still? Because it kind of seems like, yes, but it's all good with transition. And yes, we need every single power source that we have.

5:25But in reality, what we just need is as much power and whether it comes from coal or nat gas or a more green alternative is not that important anymore. At least that's what we keep hearing from our US counterparts now. Where are we in this landscape today? What do you hear from your corporate partners, from your LPs, from your founders, from the regulatory environment? We are living in a politically charged environment. And I think that debate has become quite a difficult one in many, many ways. Fundamentally, if you look at it from a European vantage point, and certainly from the vantage point of Compass, Clean sources of energy need to be built out.

6:11And it's paramount that we really change the mix in the way we generate energy. That's absolutely essential from our point of view. Clearly, when you look at the US and when you look at the political sort of undercurrents there, that isn't the consensus anymore. And that is certainly challenging. Of course, we do in the moment need all the power we can get. you have a massive technological wave that is sweeping over us. You know, artificial intelligence is an extremely power-hungry technology. When you look at some of the projections, it's mind-boggling. And that means we really have to make sure that we build out energy generation, but we do it in a responsible way.

6:55I think burning more fossil fuel is not going to be the solution. I think there are alternatives. Nuclear is having a big comeback. The technology is certainly finding a lot of favor again. At Compass, we haven't really dedicated a lot of time on it or looked very deeply into it. But certainly when you look at what's happening both in the U.S. and in Europe, there is a lot of momentum behind it. So that seems to be one pathway to meet the demand for more power, but do so in a way that isn't increasing CO2 emissions. Can I ask you though, so nuclear is coming up and you're also saying we need to find greener solutions or at least not burning more fossil fuel solutions to the energy need.

7:50And I can see both sides of the argument, right? If you take the US argument, it is, we have global competition and we definitely are playing against players that do not care. And thus, if we choose to pick our more high horse route of going the green way, we will lose. And that's not an option. So for that reason, we got to go this way. In Europe, I kind of hear two arguments. I hear some that say the same and say, well, we got to just full steam ahead every single opportunity to create cheaper and more energy. We got to go that way. And then we have others that say, well, this is a huge opportunity to us because when the U.S.

8:35are not paying attention to the green transition and decarbonization and so on, we have a massive opportunity set because everyone who cares about this will have to come to Europe and will have to work with our company, so to say. And that will put us in front. on where do you land? Where do you see the space and what do you hear in the market? To be honest, I don't think that's a real argument. I mean, if you take the big foe the US is fighting against, I mean, China is really the leader in clean energy and renewables, right? So I think the technology is there. And of course, if you have a sudden surge in demand and you don't have all the capacity, you need to be pragmatic.

9:18I don't dispute this. And there's a big difference between having a long-term strategy and recognizing that we need to decarbonize our energy mix and then working towards that, taking pragmatic steps in between to meet industrial demand, to meet the demand for new technologies. But if you don't have a strategy, if you don't have a goal, you make policy decisions that ultimately take in a very, very different direction. And you see that happening in the US. The US is camping down on wind. You know, it's capping various subsidies for a variety of other technologies from electric vehicles to solar, etc.

9:56So you see in the US there's a conscious choice being made not to pursue net zero as a goal for ideological reasons. And that is very different to saying let's be pragmatic in the short term and work with what we have. but define a very clear north star where we need to get to in order to mitigate the impact of climate change. And so I think as a European and from a European vantage point, I would clearly fall into the camp that says, let's be pragmatic in the short term, work with what we have, but be also very, very clear and targeted where we need to get to. I hope that the European Union sticks to that policy goal.

10:39And that is also what you hear and see from your corporate actors that you work with and customers of your startups and so on. Yeah, what you certainly see is a much more fragmented landscape. I think in the Nordics, for example, you continue to see a very, very strong commitment towards decarbonization. If you talk to some of the largest players in the Nordic region, there's a very, very clear commitment to just stick to those policies and corporate goals. If you're going to the US, there's much more ambivalence and there's much more reframing of corporate goals involved. Some of it is now much more focused on creating a mix to meet the energy demand that basically makes use of all available means.

11:27So not explicitly pursuing renewables, but continuing to sort of add them to the mix. We just have to accept the fact that the world isn't sort of speaking in a unified way about how we tackle these challenges. And you will effectively see a world where you have now three systems. You have the US, which is on a very, very different path to Europe, which again is on a different path to China. I think the European Union had a moment where it recognized, it is in a sense on its own when it comes to pursuing its policy goals. We are now in a very, very interesting phase where decoupling from the US while it was being talked about hasn't really happened.

12:10And we are in this sort of, you know, quite murky middle caught between China on the one side and the US on the other. And I think Europe really needs to define what it stands for and what it wants to be and how it pursues its goals while obviously creating a viable economic foundation, which in this current environment is clearly very, very challenging. Now we spoke a bunch about the energy side of this and the decarbonization part. Let's talk a bit about digital transformation and the productivity gains that you're also heavily investing in when it comes to industrial tech, of course. Tell me about, because obviously one side of AI is what we just spoke about.

12:50The other is how do we use it and how do we deploy it in our industrial base? So AI is clearly a game-changing technology. I mean, nothing new there, right? And we are now in this sort of interesting phase where you see extremely successful companies being built, catering to use cases that get widespread adoption, think lovable, for example, creating websites. So we now see this diffusion of this technology in the sort of consumer and increasingly in the business setting as well. I think there's still a leap that needs to happen for this technology to be truly enterprise ready. We see a lot of companies, a lot of, you know, corporates we work with in our industry network experimenting with the technology, making sort of incremental steps towards business process automation, certainly looking at the opportunities of the technology and, you know, manufacturing settings, for example.

13:45But there are clearly security concerns. There are clearly input-output challenges. Very often, there are still data challenges. If you really want to train the AI on very specific use cases, really collating the data and making it available and ingesting into these systems, that still is a challenge for a lot of companies. So getting AI ready is really the order of the day for any corporate that wants to remain competitive over the next decade. Where do you see them focusing the most on figuring out a good route to adoption and where do you see the blockers being? The blocker, one of the main blockers is really very often data.

14:27And that will remain still a challenge for some time to come. Talking specifically about European company, a lot of companies still find it very, very challenging to really get their arms around their own proprietary data. and consolidating that data in one single place and making it really accessible to those systems. And that requires investment. It requires a level of commitment to really create the foundation, the infrastructure to be able to implement those AI tools. It's not a problem that's new. It's a problem that's also very often been a challenge for the adoption of enterprise software and sort of big data solutions.

15:05And it's sometimes a little bit frustrating that there hasn't been more progress on that front. But if companies get this right, if companies really are able to consolidate, process, cleanse data, make it available for trading purposes, then they sit on enormous, enormous opportunities to really improve the way they operate, to e-card efficiencies, and to become just much, much better companies. And where do you then focus primarily? So this is one of the main blockers. Is that also where one of the main opportunities for startups is? So where do you see the most exciting space right now? Clearly, agentic AI and the ability to orchestrate a multitude of agents and have them deliver tasks, especially more structured or more complex tasks.

15:55That's a very, very exciting area. And we see a lot of innovation there. That's clearly where all the VC money in the moment is headed. But the problem I, or the challenge I described before is more the kind of homework that the customer really has to do to be able to, you know, benefit from that technology in the best possible way. So agentic software is really now the frontier. This is an area where we will look very, very closely at in the next six months to figure out, okay, what are the kind of companies we can back that speak to use cases and speak to applications that fit within the Compass portfolio.

16:35And I got to ask you about robotics because robotics is obviously a big reach. Some say, and it's primarily people from outside of traditional robotics, I would say, they are incredibly excited about what's happening now. And then every time I talk to someone who's invested for years and years in robotics, they tend to say, not that much changed. Yeah, it depends on what your ultimate level of ambition is here, right? If you look at advanced manufacturing companies, their clients are highly, highly automated. If you go to a car factory today, you know, you hardly see any people walking across the floor.

17:14And that's not only the case today. That was the case, you know, for the last couple of decades. So in an industrial setting, robotics is already quite advanced. Now, the way it operates, it's very, very focused. So, you know, you set specific tasks, you assemble a car, for example, and the robots, you know, then deliver very, very specific tasks. They don't make decisions. They don't come up with creative ways to do something differently or to improve themselves, right? So what we are talking about now is really this sort of sense of can robots, in a sense, have agency and start to really have an impact on improving an industrial process.

17:54And at the sort of lowest level, you can think about it, you know, as a sort of information processing challenge. If you have more data and you allow the robot to effectively, you know, analyze the situation and find a pathway to a better solution, then that is certainly very, very interesting in a number of industrial settings. When you go to the other end of the spectrum, a fully autonomous robot who is almost human-like and effectively is replacing a human worker in all aspects and has this general intelligence and is able to make completely autonomous decisions, I think there are still a lot of robotics problems that we need to solve.

18:42anything ranging from dexterity to the way perception works in robots that need to be solved in order to really be able to get to that stage. So I think for a lot of industrial use cases, the next wave of technology is incredibly exciting because it introduces the possibility of continuous improvement. But I think there's still some way of a fully autonomous robot that can replace any human in carrying out work tasks. If you were to be super clear on this, where do you fall on the optimist humanoid robot and that world versus the worldview that now we'll still have primarily in the industrial base robots that are, if not single purpose, then multi-purpose or some version of that?

19:39I think it will be a transition that will take quite some time because you also need to think about CapEx cycles. A manufacturer like, let's say, BMW is not going to replace its robots every couple of years just because there's an incremental improvement in the technology, even if it's a big improvement in the technology. setting up these factories making them tick and and making them work flawlessly still takes tremendous efforts i think the capex cycles are sort of a natural constraint there the other topic is really at the end of the day what you really need i mean just because you can have the most fancy technology doesn't mean you necessarily need it if you are just bending metal for example So there's a question of if you have the Optimus robot who can literally do everything, what are really the use cases where you need that type of machine?

20:35I come back to the car factory. You don't see humans in a sort of modern car factory, but to the degree you used to. And that means you can do a lot of tasks very well with this existing setup. That isn't to say that you don't want continuous innovation. but I'm never really one for the hype, I have to say. I always sort of try and think through the practical implementation challenges that if you like adoption hurdles that exist in complex organizations and how they think about adopting and incorporating these new technologies into workflows. I love a good story, but I'm also always very skeptical about the sort of, you know, time to adoption.

21:19And I think these robots evolve very fast. The technology evolves very fast. But I also don't think that in the next two, three, five years, they will become so ubiquitous that they will replace any existing setup. In that case, I have a little bit more of a pragmatic view. You touch on something that, of course, industrial tech is very known for, which is, of course, that fact that change happens slower than in SaaS and consumer tech. Convincing procurement operations leaders in large enterprises is just a very difficult hurdle to get over. and something that startups often underestimate. So in this context, I'd love to ask you, how do you balance breakthrough innovation with practical challenges of adoption in such an entrenched and risk-averse industry?

22:06We really pride ourselves of having a very, very strong industry network. And then the advantage of that industry network is that we are constantly talking to people. We are constantly trying to understand how ready these corporates are for new technologies, what the type of challenges are they need to master in order to really be able to shift from one paradigm, technology paradigm, to the next. And very often what you find is rather banal things. It comes down to budget considerations, you know, or organizations being very focused onto themselves because they're going through restructuring programs, they are under pressure to deliver results, that these are often things that delay true innovation and really changing things and changing complex organizations, changing the way they work, is not a trivial task.

22:57And one of the challenges we have as investors, as you rightly point out, is to kind of bridge the gap between, of course, the optimism of farmers and also investors and the excitement about new technology and new innovations. and then sort of managing that process when that innovation really hits the real world is faced with these rather mundane problems until it's successfully implemented. And then, of course, the other dimension to all of this is also how different markets also respond to new innovation with regulation. And I think it will be very, very interesting to see how this plays out for artificial intelligence.

23:41If you look at the narrative that's being sported in the moment, especially in Silicon Valley about AI effectively killing pretty much any job anyone has these days, I just can't see that happening from a regulatory, from a political perspective, because it would lead to a complete societal collapse. the engagement, especially of policymakers, with this technology over the next five or so years is going to be absolutely critical. And it will probably be very different in the US and in China and in Europe. And it will be very, very interesting to see how that is going to shape those societies and how those societies function.

24:20Could you unpack that a bit for me? Because that's an interesting perspective. If you take the notion that AI is going to replace, you know, most jobs, and most people will not be able to make a living in a conventional way, you know, go out in the morning, go to their desk, do a job, then clearly you have a societal problem, you know, what are these people going to do? And of course, you know, there will be some who find this, you know, very, very liberating. If you find some sort of social redistribution you know, financial redistribution mechanism, whether it's UBI or something else. That might work for some people, but I don't think it will work for society at large.

25:02Personally, do you think that we are looking into a scenario where this is a significant potential risk? That AI actually becomes a job displacement and destroyer rather than a creator of new types of jobs? Because you, of course, hear the argument constantly that, well, everyone also thought that everything would end in graphic design when we started to have computers. But then all of a sudden we had even more graphic designers who just focused on different work. If you look at history, if you look at the Industrial Revolution, if you look at technological shifts, the conventional outcome was always that in the end, collectively, we were all better off.

25:50But some parts of society suffered, right? I mean, you look at the 1970s and 80s, you look at the steel and coal industry, clearly, you know, there was a lot of job displacement. But overall, societies prospered through globalization. I think it's unclear whether with AI, we will see a similar dynamic where yes there will be some jobs that will get replaced but overall many many new jobs will be created that at this point is is i think completely unclear because we don't we haven't really seen whether the technology the technology in the moment is on a trajectory that trajectory allows us to have a good glimpse of what it could be in the future if that trajectory continues, whether that trajectory continues, you know, remains to be seen.

26:39If it continues, then very clearly, I think most of the things that we do as humans, both white-collar and blue-collar work, could be completely replaceable. If that is the case, then clearly we need to think about societal solutions, what that means, and how that impacts social cohesion, how that impacts, the way our political systems work. And then you said that how this all plays out will likely be different in the US and China versus Europe. And you said it much will depend on how our regulators and policymakers engage with the technology. And I'd love to understand that side of your thinking.

27:20If we take the US, I think the outcomes there will largely depend on ability of corporate actors to influence policy frameworks. So the amount of regulation that comes to bear down, for example, on artificial intelligence is in the US in many ways a function of, you know, the degree of influence corporates can exert over the shaping of that policy. I think that's a well-known fact. In Europe, I think that that process doesn't quite work in the same way. You have a stronger political power base that takes probably a more antagonistic stance when it feels that societal cohesion or the fabric of society is going to be fundamentally disrupted by that technology.

28:12And so I can see many more interventions in Europe to prevent the worst effects of the displacement if it comes of jobs by AI. Whereas I think the U.S. would probably let that mechanism play out, you know, in a way that probably Europe won't. China is anyone's guess, I think. It's an incredibly interesting discussion. And you describe one view, which is that in the US, we'll have more dominant market forces and more dominant corporate capture of the regulatory environment, which will mean that since basically the winnings will accrue to the incumbents and large players, they will want to enable AI technology to spread across.

29:06If you take that dynamic plus the complete lack of a social security sort of framework, that is a very, very combustive mix, I think, when you think about what that means for that society. And yes, I think we all recognize that there's a risk of this scenario. Some think that it's a 1 % risk, others say 20%. Where do you, from this vantage point where we are today, where do you then act? In the US, I think that it does seem very much that the new administration is full on. They are saying it's a risk. We think it's a very small risk. We've never seen it in any technological leap before that we had massive displacement as everyone kind of thought that it would be before the technological disruption happened.