E670 | This Week in European Tech with Dan, Mads & Lomax

0:00Welcome to Upside, where we dig behind the headlines of the news affecting European venture. Today, Mads, Lomax and myself, and we are talking about SpaceX mega rays. But what are you really buying? Europe's euro success, the north-south polarity has flipped. Now the south is rich and successful in the north. Not so much. We're going to dig into that. China's$1 trillion trade surplus. What does that mean for us? Unpacking US defense spend, having a look at that. And more chips, please, in AI Corner.

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1:25This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. But to start, we're going to look at DeepMind and the Department of Science, Innovation and Technology in the UK. Question for you chaps, would you classify DeepMind as a UK business or not? Well, it's owned by Google, so no. I mean, it's a simple answer. It's a UK origin business, the UK founders. That's where I was squinting. I was squinting, looking at it going, UK signing up with DeepMind. No, it's a subsidiary of Alphabet. No. No, fair, fair, fair. So what does it mean that a business is UK?

2:01If a German company makes cars with steel from a plant in Poland, are there German cars? Well, nothing is from anywhere, is it? I mean, I always look at the iPhone as an example. That was globalization, which, you know, is now dying. It's not completely dead yet. Your point is well made. I think you can make, I think the truth is you can make an argument either way. depending on what case you're trying to make. I think if the argument you're making is there's incredible talent. No, and also like look at imagine, you know, some of these public listed companies that we think of as European, like, I don't know, GSK or something.

2:40But if you actually look at the shareholder register, you might have a large majority, almost a majority of like US endowments, pension funds, like money managers. So actually none of the cap tables are really ever truly sovereign. And that, I think, is the beauty of the era we grew up in, which was, as you say, the era of globalization, where we all grew closer and this stuff started to matter a lot less. And we've now been rudely awoken to a new world where all the sovereignty stuff matters a lot more, much to my disappointment. But that is where we are. And that's the reality we have to face and act accordingly.

3:15with. It's very, very important these days, especially if you're investing in critical industries. If you take this back to the startup level, pre-seed, seed, series A, you do actually need to think more carefully now about sovereignty of your cap table. So obviously, if you're building in defense, you need to think about this. But if you're building actually in many like critical industries now, I mean, in the UK, they have this, I can't remember the name of the law, the law in the UK came in about four years ago that needs you to, if you're in one of certain You need listed industries, you need government consent for the investment, large investment to happen or the M &A to happen.

3:50So definitely is a thing for our time, of our time. I just don't know where the lines are. Anyway, I'm going to classify DeepMind as a UK business. If you remove the fact that it's a wholly owned subsidiary of Google, then yeah, it's very, very British. If you remove everything that's fundamentally true, then Dan, you can have your facts as you please. Well, anyway, let's dig into what they've done. So DeepMind, Department of Service Innovation and Technology in the UK, they have got together. They've, as of today, the 11th of December, they have announced a new partnership. Now, it feels to me like it's an extension of budgets that have already been allocated, but DeepMind has been named as the part of the provision.

4:32I don't know if that's true, but that's my sense. I couldn't find much in the press release around the money and the budgets. but it feels like we have the budgets approved, but DeepMind is going to be the partner. And what it means is new research lab in the UK, expanding partnership. So we're going to look at the AI Security Institute and look at what's going on there. Lomax, maybe you can kick off with a bit more of a kind of a scene set for what's going on with DeepMind and DSIT. Well, I think this is interesting, maybe ignoring the government bit for now and public services, AI and public services, more just there's a whole thesis that has been evolving and people have been executing against the AI scientist effectively is a lot of science is done by trial and error.

5:15Well, if that historically was done manually by scientists, it was very slow and by definition constrained by how fast the scientists could run experiments. Now with AI, with both software and robotics, so you have the software which actually in silico can design and run the experiment and then the robotics aspect, which can actually run with whatever materials you're working with. this whole thesis has been i mean look at ai for drug discovery which has had a lot of money gone into it in the last decade with mixed results but i think we're seeing better and better results now this is now happening across materials we see you know cusp ai physics x etc so this is just another example of this which is we can use ai and robotics to run mass experiments at mass scale to unlock new materials.

6:05In this case, I think they're particularly interested in superconductive materials, which can carry electricity with zero resistance, but there are other things they'll be looking at. I think this is hugely exciting. It normally requires a lot of money to do this properly, which is why sort of seed stage startups, I think have been constrained in the past by capital. So it's a good place to do it. It's good that it's happening in the UK. And the final point I'll make on this, why I think it's good that's happening in the UK as a seed investor, is that what often happens is the really smart people who are working on these projects sometimes spin out and create their own companies.

6:39I think GDM is the phrase that is used in our industry. The Google DeepMind X employees who spin out and create their own companies. We've seen that with Latent Labs. It's just one example. So I think that's exciting for me. It's great it happens in the UK because then that talent kind of spits out and creates new companies. But there is a government angle here as well, Mads, which maybe you had a look at. Well, I just, one particular thing I want to pick up on, and we sort of, we're still in this sort of third anniversary of the Jack Gpt release. And one of the things we talked about back then is this incredible potential of, for the first time in history, being able to provide a tutor for every child.

7:17I think it's the most transformative thing we can imagine in education. And you know, we're three years in and we know these things take time. It is, you know, the government is a bit of a supertanker. It can be hard for them to adopt, get things done. We know that many schools still struggle with how much should we use chat GPT and other LLMs in education. Is it just something that students use to answer their homework? Can you really use it to learn as a tutor, as a mentor? What we're seeing now here as part of this in partnership is that there's going to be a focus on creating an education focused version of Gemini grounded in the national curriculum, which is a wonderful idea and hopefully a signal that the UK government and UK education is going to take the use of LLMs even more seriously in education because I just think it is transformative on a level almost unparalleled anywhere else.

8:09They've also got the more wide public services mandate I think to create efficiencies behind the scenes so it'd be interesting to see how this all connects and how this all rolls out. Demise is obviously the closest you get to a super scientist rock star. I mean, he's just incredible. And kind of knowing that he is in there, he's focused on this. And yes, you guys kind of said a bit top of the call. Is this a UK firm? Is this a US firm? The lab is in London. It's led by a Brit who we know really cares about the success of the United Kingdom. And that's great to know. So yeah, I'm definitely a big fan of this.

8:48Yeah, the AI teacher thing, by the way, I think is fascinating. And there are some really cool companies now in C stage, Series A stage, Series B stage that are coming through that are executing against that thesis. So I think it's hugely exciting. Don't forget the Transformer paper, you know, attention is all you need, was not done in DeepMind, right? It was done in another part of Google. Was it not? I didn't know. No, no, no. It was done in like the Google Brain research team in the US, no? And so actually maybe DeepMind team weren't working on Transformers, but in a way they kind of like as the sort of marquee AI research lab of Alphabet, they kind of missed the initial stage of Transformers.

9:24But the point is, is that it's great that there's still a lot of investment behind Google DeepMind. And it's exciting. And as I said, it's great. It's happening in the UK because you actually end up, what I get excited about is founders who cut their teeth there and come out and want to go and build big companies. Yeah, let's do it. Let's bring them on. Having been basically taught and trained with the resources of Google effectively. Talking of big companies, thank you for the segue. SpaceX. So they are doing a massive fundraise IPO. Lomax, set this one up for us because I think most people will know that there's big noise this week about SpaceX raising.

9:57But I guess my core questions are, what are investors really buying? And is space worth$1.5 trillion? So that's what's going on in the back of my head. But set this one up for us, Lomax. Well, I don't think it's confirmed. And basically the news has come out that SpaceX is strongly considering IPO-ing in 2026, so next year. Before, SpaceX has raised famous amounts of money in the private markets. Potentially, like many of these companies, why would you bother IPO-ing if you can keep raising money in the private markets? If you can potentially do secondaries to keep your employees getting liquidity so they see value, why would you bother incurring the costs and or going through the scrutiny?

10:35but they are they clearly feel that this is the right time as mads have said here before sometimes you run out quite frankly of money in the private markets and spacex still has a lot of money to to raise so they're thinking of raising 30 billion next year the valuation mooted is 1.5 trillion now i think the last valuation that spacex raised money at in primary was only about 150 200 200 billion they've done secondaries of five six seven hundred billion but this is clearly a massive step up what are investors getting dan well look i mean the golden goose within spacex is starlink which is a massive like monopolistic business growing fast and printing cash as far as i can tell now obviously spacex is private so not all the numbers you say that that they've only been processable last year or did they break even last year i don't think i don't think they broke even last year, but they've also got the launch business.

11:30So the numbers are generally conflated across and they're doing huge investments in Starship as well. If you look at analysts, like Starlink is projected in 2026 to do$16 billion of revenue and potentially around$10 billion of EBITDA. So it's turning into a real golden goose, that business. They have nearly 10 000 satellites in orbit eight million customers and growing fast and there was before this news always a possibility of them demerging and effectively you know starlink comes out of spacex and then does its own ipo but that that may be put to bed now what are you buying so you have that starlink business which is monopolistic printing money you have the launch business which is also largely now monopolistic right it's less profitable on a cash flow basis but it's still a very, very unique asset that they've built.

12:26And then you have this effectively exponential uncapped upside with SpaceX, which is the Starship program, which is these bigger ships that will do, you know, trips to the moon, to Mars, eventually deep space, which again, it's like, it's so far ahead of everybody else. They'll be the only people who can run this program. I think they get, you know, they're building this big factory now in Texas to create, I think, is it two Starships a week, maybe three a week or something? It's insane. Automated. So you end up with, what are you buying as an investor? You've got the hugely profitable and growing Starlink.

13:03You've got the launch business. And then you've got this uncapped upside with Starship. Now, 1.5 trillion, I don't know. I mean, if the business next year is going to do 20 billion top line, because Starlink is still about three quarters of revenue. I mean, that's a pretty funky revenue on, you know, it's nearly a hundred X revenue, a multiple of revenue, not of EBITDA, right. Or not of earnings. But then for the reasons I just said, it's Elon Musk, it's monopolistic. They have a huge headstart, you know, a bit like in a much smaller way, Revolu in Europe is just like absolutely tearing ahead.

13:40And it's just like winner takes all type position in its market. SpaceX is the same and clearly a much bigger, a faster growing market. Where did X and Grok and Tesla, are they all under the same banner now? Wasn't there a roll-up? No, not a roll-up, wrong kind of phrase, but wasn't there some kind of merge? Didn't Elon throw X into something else? Well, X and Grok, I think, are in the same holding. No, these are all very separate. One thing that was interesting is that I found that, I mean, maybe this is perhaps obvious, So SpaceX employs 13 ,000 people, which actually is not many. Tesla employs 125 ,000 people.

14:20Okay, so it's a big bit. Anyway, I think that's what you buy with SpaceX. Why is this relevant for Europe? Well, it's sort of, you know, you look at this and you think, well, we've missed the boat here. SpaceX has Starlink and launch. In Europe, it's more fragmented. You know, you have on the launch side, you have ISAR, who only did their first launch this year, which wasn't even successful. You have rocket factory Augsburg who need to change their name. And then you have on the satellite constellation side, you have UTELSAT who also need to change their name. It's horrible. But importantly, Europe is more fragmented.

14:56It's behind. It's capital constrained. And this is winner takes all. Yeah, we're going to talk more about Europe in a minute. Mads, where else would you take the SpaceX piece? Well, I've touched on a lot of the good pieces here. Clearly, if you look at the value of the core business, so the launch and the starlink connectivity, you can maybe get that to 300, 400 bill of value on generous multiples. So that's about a third of the price tag generously. And so what is the rest? And you're actually right. Starship is part of it. There's another thing, Lomax, I don't know if you touched on, which is the whole orbital data center thesis.

15:31You know, Elon Musk has built the largest data center of kind of AI factory on Earth, which is his Colossus. But the challenge we have is energy. And so there's this whole notion of, well, in space, you have solar intensity that's six times higher than on Earth. You have free cooling. If you think about the transmission of data, light travels faster in a vacuum than it does in cabling on Earth. And so is there kind of an orbital data center thesis you can buy into? And so this is actually quite interesting. You might say there's a bull case there around it, which is there's a ton of places on Earth where you are struggling to get the right level of compute today.

16:15Maritime, you have a lot of data coming out of oil fields and oil extraction offshore. You have defense, you have remote places where you don't have data centers nearby, but where if you can do AI inference in the sky and beam it up and down, that might be a great value proposition. And so smart money has been piling in. NVIDIA has been backing StarCloud. DOD has been having contracts. China has been launching compute constellations. And so if you think about Musk's position in all of this, well, he's already got the largest compute cluster on Earth over at X. He's got all the technology around batteries from Tesla.

16:50You've got the SpaceX launch economics, and you're well ahead of everybody else. Computing on the edge, you're probably still at least five to seven years away before the edge can catch up in a meaningful way. So there's potentially a window there. The criticism that some people are saying is, look, there's really zero revenue in this today. In terms of the compute, you can actually get to function in space. It's still quite small. The kind of power you need is massive. The amount of solar panels you'd need to create gigawatt, if that's the scale we have, is massive. I mean, you'd need more for one gigawatt orbital space center to them, the mass of the entire International Space Station.

17:34So these are potentially big projects, but it's interesting. And I think that's part of where the market is inferring some value to this composed SpaceX IPO. Which is, I think, by the way, I mean, a matter of time before we started talking about data centers in space. I mean, every time I open LinkedIn these days or Twitter, it's plastered all over. Largely in thanks to a British founder, if we want to take this back to Europe. So Philip at StarCloud, we talked about, Mads just talked about. who are now sending an H-100, no, into orbit, is British. He's doing a great job of beating the drum for this concept.

18:11Congrats to him. He's a Brit that also has mastered, found his voice and mastered narrative and storytelling, because I think he's doing a great job on that. Are you sure he's a Brit? Well, I know, I know. But interestingly, I do remember chatting to him, and he said he's basically building the company in Redmond in Washington, And he said, that's the only place in the world I could build this company. Yeah. Forget Europe. Forget anywhere else. Talent. The only place in the world I could build it. And then if you go back to the outsized venture thesis of backing European founders who often need to go to the US to build big businesses, you know, it's kind of bang on.

18:44Props to him. Props to my friends who invested in him. I think it's a great, it's a cool thing. And it's very, very necessary. Let's talk about your backyard, Lomax. So Portugal has won. Clap. Clap. Cheer. Rah, rah. Portugal has won. Economy of the year and the economist. So it's not all doom and gloom in Europe, although we are going to get a little bit gloomy in a second with some punches in the face from across the pond. But Lomax, tell us what's going on in your backyard. So The Economist every year run a little competition called Economy of the Year, where they screen on five key macroeconomic indicators, which is inflation, deviation from inflation targets, GDP growth, employment and stock market performance.

19:23It's a competition of the 36 wealthiest countries in the world. And last year, Spain won it. And this year, 2025, Portugal came on top. 2.4 % GDP growth, inflation control at 2.3%, stock market up 20%. The stock market, mind you, is only 100 billion in market cap. So it's relatively small. It's great. Look, I mean, they only use these five indicators. So for example, in Portugal, if you look at the average monthly wage net is about 1100 euros, which is like a third of what it is in the UK. So it depends what data you actually use. However, on these metrics, Portugal comes on top. I actually thought Poland might be nearer the top because Poland's actually GDP growth at the moment is nearly 4%, 3.8%.

20:07But I think they do badly on inflation and employment. The UK is woefully near the bottom. The US is in the middle of the pack. And both didn't do so well based on inflation and employment, actually, with the things dragging them down. And growth. I mean, the UK has basically no growth, right? Well, it's nice that the Southern European countries flip the script, right? This was not the case five, ten years ago. Well, I mean, do you remember the pigs? Portugal, Ireland, Greece, and Spain, the pigs in 2011, 2012, when they were, yeah. I mean, it's a big turnaround. The Germans were going to kick the Greeks out of the Euro and all this kind of stuff.

20:47I think things have changed. Yeah, I remember it well. So let's go into Europe. So it has been a mixed week, as it always is. There's been a bit of euro bashing. Trump has been savaging the EU, apart from obviously his autocratic buddies. China's flooding the zone. They've got a trillion dollar trade surplus of goods, which is probably going to grow in 26. So there's going to be a whole more raft of Chinese products coming through at a low cost. EU's answer of made in Europe, this kind of mandated made in Europe directive, or I don't know if it's going to be law directive. Well, there's been a massive backlash and I think it's going to be voted on the 16th of December.

21:25It's going to go back, which was effectively a motion to encourage slash force European companies to buy European. I remember when I was a kid made in Britain and the Buy British campaigns in the 70s and 80s. But the challenge you had was that the British products weren't very good and everyone could see Japanese cars, German manufacturing products from all over the world. So it didn't really work that well. But I kind of like the idea of a bi-European or a bi-British, if it comes to pass. So we've got China, we've got Europe being punched in the face, and we've got the US, obviously Trump turning his back on us.

22:03Mads, where would you start with this? I think let's start right where you are. The US are talking about this new national security and safety strategy, where they're saying Western Europe is just no longer a top priority for the US. They favor sort of the Central and Eastern European countries where they feel there's more kindred sentiment and migration and bureaucracy, etc. You know, the Trump administration is very keen to do a deal with, kind of to end the war in Ukraine and get, as they say, Russia back into the fold and do lots of trade. I think lots of people in and around the White House are eyeing opportunity for lots of new deals and more business to be done there.

22:38and kind of these pesky Western Europeans are standing in the way talking about, you know, outmoded things like freedom and democracy and, you know, not attacking your neighbors and all that stuff. And obviously, the Trump administration is not having any truck with it. At the same time, you've got China flooding the zone. We've seen for the first time a trade surplus of more than $1 trillion. And that's just in 11 months of the year. We've just never seen that before. and the US tariffs, they seem to not really be working because although exports on a direct basis might be down, they're up via other channels.

23:14And so overall, Chinese exports are just going from strength to strength and China keeps increasing the global export share. And it turns out when you spend decades trying to perfect the things you do and becoming the world's best at something, well, guess what? Lots of people want to buy your stuff. China's GDP on a nominal FX basis is still smaller than the United States, But on a purchasing power basis, it is actually larger. It's the largest economy in the world. And that means that if you look at the output, if you look at the things the country makes, the Chinese economy makes more than any other economy in the world.

23:51And so that's, of course, remarkable. It's also remarkable that there is such a big gap. On purchasing power parity, China's GDP is 35 trillion. But on the nominal FX basis, it's only 18 to 19 trillion. So that's a 35 % gap to the US. And the fact is that because you have such a big swing between the two, well, really people are saying this is because the Chinese currency is undervalued. And so the question is what would happen if that swung into place? Well, firstly, China would then have on paper the largest economy in the world, but it would also make their exports less competitive and make it easier for others to compete.

24:30So there's definitely contention there. And why can China do what they do? Well, it's because they're not, again, having this thing that's called democracy, right? They're not lumbered with that. We have been producing great things in Europe, but the challenge is the surplus we are creating kind of by the democratic institutions. We are now, people, voters have co-opted those democratic institutions to funnel so much of the surplus into the welfare state, into welfare, into things that are nice but don't necessarily fuel future growth. And that means that every year we just sink a little bit more into debt without our economy getting better, whereas the Chinese are not struggling with those pressures.

25:16They don't have democracy. And so all the resources are funneled into, you know, making the country more productive, keeping the currency down and exporting things and just winning more and more market share. So we're really caught in between the United States that no longer seem to care much about us and a China that is actually out to get us on a competitive basis and are producing great things. And we have to think about what does that mean when we think about how to position ourselves for the future. Some of the big trade surplus also stem from a lack of Chinese domestic demand for international goods?

25:51Well, of course, that's right. I mean, the two things go hand in hand. When you have a country without pensions, without a welfare state, people, they tend to save more because they are concerned that there might not, you know, if there is a rainy day, there might not be a safe connect to catch them. And all those savings are then funneled back into the economy or into exports, right? Instead of the Chinese domestic economy consuming the goods, well, they're exported abroad and sold to others. So you're absolutely right. And the only way to really fix this is you have to fix Chinese domestic consumption and get that up so they start buying more stuff.