This Week in European Tech with Dan, Mads & Lomax

0:00Hello and welcome to Upside, where we dig into the real news that lives behind the headlines affecting European venture. Today, another full house. We have Mads, Lomax, Andrew and myself. And we're talking about Bending Spoons. They've got a glorious roll-up strategy. We are going into a bit of the B word. There've been a number of stories this week about Brexit. We're turning the European innovation tanker. We've got OpenAI's code red looking behind the scenes there. Amazon is getting into chips. Meta's antitrust case and more AI bubble risk warnings. Are they meaningful or not?

0:43to start with boys and girls bending spoons now this is one of my favorite ever strategies in the world so they just for context bending spoons milan-based software company that behaves like a software holding company doing private equity style roll-ups they are buying recognizable brands at a reset valuation. So those that are troubled or underperforming brands, they've bought Evernote, Hopin, do you remember Hopin? Great Cove, Meetup. I think they're in negotiations, negotiations still with AOL and Eventbrite, I'm pretty sure closed this month at 500 million in cash. Now I've always loved this.

1:18We've talked about bending spoons before, but Lomax, give us some other notes. Give us your take on the bending spoon strategy. Well, I think they're turning themselves into a sort of Berkshire Hathaway roll-up strategy of unloved legacy digital products, as you said. So they've acquired Eventbrite, Vimeo, Brightcove, a bunch of other companies. All MarTech, right? All AdTech, MarTech, ComTech. They're broadly in the same category, which I think makes sense if they are looking to rationalize, consolidate and apply, you know, product and technical discipline. I think it's very, very highly valued now.

1:58It's 11 billion in valuation. They've clearly funded this with a lot of debt. They've actually raised relatively little equity, the four to 500 million of equity up to up to 3 billion in debt. And actually being European where interest rates are lower, they're probably benefiting from slightly lower interest rates. And they're probably a little bit exposed there should that go up. I think it's a great strategy it reminds me slightly of listening to bill gurley earlier in the year when he was on invest like the best talking about the number of sort of zombified unicorns that we had out of the 2021 investment era and literally not a lot of these acquired companies are coming from that era they're actually coming from pre that era but it's a similar kind of philosophy which is going around and acquiring at very attractive valuations some unloved assets and polishing them up and consolidating them.

2:47The risk with what they're doing is, I think always, as with any roll-up strategy, it makes a lot of sense on a Excel spreadsheet. Very hard to implement in practice. There's going to be a lot of tech debt in these companies. And as always, when you roll up the sleeves and get under the surface, there could well be a lot more work than they think. But again, if that's all figured out on the entry, then that's sort of part of the risk they take and it's factored into the price. But I love the fact that this kind of buccaneering mindset is being executed by Europeans and our friends in Italy. So good for them.

3:24I think it's a great market opportunity for them. And I look forward to seeing which way it goes. Mads, what would you add? It's a super interesting strategy. It just combines some untraditional elements, kind of stuff you wouldn't have expected, right? So we've talked about this being a PE play, but it's actually, it's not really a PE play because they're not buying to turn around and then ship off. It is, as Lomax said, it's buy and hold. And what they're doing effectively is it's a US-Europe arbitrage. They've said, what is the least likely place to build a high growth, kind of high value tech company in Europe?

3:57Well, Italy is probably right up there. So why don't we go to Italy? Basically what they do is they acquire all these US companies. They fire all the people in the US that are expensive. They hire the best of the best, the top Italian tech graduates, right? And they pay them relatively high salaries so they can get the best of the best in Italy. They put in place this kind of what they call kind of this Anglo-Saxon get shit done culture in a country where nobody expected that. And we've all have this notion of Italy that's just kind of nice espressos and, you know, a beautiful fashion and all that stuff.

4:28But it's absolutely about getting stuff done. Hyper efficiency. So trim out the fat, lower the cost base, and you can just run all these companies as cash cows. It's got an extremely high employee satisfaction rating i think it's 4.7 on on glassdoor coming up with this strategy who would have thought but but they did and they figured it out and i just think it's great i thought i genuinely thought after zerp we'd see more of this but we haven't and i'm always keen what have they done with hopping what did they do with evernote i mean i i get like aol if they end up doing the deal obviously a big brand there's maybe some value there but i'm really intrigued as to how they turn these brands around and how they use these smart people i'm really intrigued by where the value is andrew have you got any thoughts on this before we move on well i mean bending spoons has been around for about 100 years isn't it so you can you know you believe uri geller then it's done with the mind and uh magicians used to do it with sleight of hand so uh yeah are they are they really revolutionizing dying tech companies or are they just hoping that you know the public markets are too stupid to see you know billions billions of dollars sort of hiding in plain sight i don't know in running this strategy for like the last maybe four years they were going for a good decade just as a martech outfit so they've only from memory correct me if i'm wrong they've only actually been running this kind of roll-up piece for maybe three four five years something like that it's not been that long yeah look most products are successful because of successful distribution so if these guys know how to do that better than you know before before they acquired the company then they'll they'll do well yeah and they've got a couple of their own products obviously they've been running their own stuff for a number of years we are going to look at the the b word so lots of news articles this week around b for brexit lammy wants to rejoin the customs union starmer is now tipped as a brexit savior whatever that means and looking at the the US-based National Bureau of Economic Research.

6:25They concluded that Brexit has reduced UK GDP by between 6 % and 8%. Investment is worse off from between 12 % and 18%. Employment, 3 % to 4 % and productivity also 3 % to 4%. So this is a massive own goal, as we know. Are the stories this week meaningful is question number one. And question number two is if we can do something to join the customs union or some other reconnective tissue with Europe, how will that affect our ecosystem? Obviously, we know the basics, but is there anything else that we can dig into? Mads, can you kick this one off? Yeah, I mean, just picking up on the Stama being a Brexit saviour, I think it was David Frost in The Telegraph who said something along the lines of everything the Prime Minister touches turns to lead.

7:11And so he's got this anti-Midas touch. And so I think it was David Frost who felt that Brexit could be saved because if Stama swings into the remain column, then Brexit will be untouchable. Yeah. So I think that was sort of where that came from. And I think just taking a step back here, there is a zombie we need to slay. It's sometimes said that the UK has done well on trade since Brexit and we've made new trade deals and done wonderful things. And oh, by the way, that you can't know the counterfactual of what would have happened if we hadn't left. And that's just simply not true. We need to slay that zombie once and for all because it turns out that we can see exactly how well the UK has been doing on trade or not comparing to other G7 nations.

7:54And we measure this through something called the trade intensity. And trade intensity is the trade measured as a percentage of GDP. So it's an apples to apples comparison across all these major economies. And every major economy has faced COVID and energy crisis and supply chain issues. But since 2019, only the UK has diverged negatively from the rest of the pack. So if you compare the UK to other G7 countries, we are down on a trade intensity level and everybody else is up. And so people sometimes say, well, what about services? Isn't the UK doing well in services? And yes, we are doing well in services.

8:34The challenge is it doesn't compensate for the loss of goods trade. And it's not just goods trade to the EU. It is also goods trade to the rest of the world. And the drop in goods is so much that even the strength and services can't outpace it. So the bottom line is that we are unfortunately measurably and unequivocally poorer than we would have been without Brexit. And the worrying thing is we're really only five to six years into this 15-year adjustment. So in many ways, you could say it's time for us to get our skates on and see what we can do to try to untangle some of this folly. Couldn't have come at a worse time, I guess, as well.

9:11There's obviously all the other challenges that we've seen compounding Brexit. Maybe it would have been hidden a little bit more had the world also not turned to poop. I think you are going to see this one come back. Clearly, they put into the manifesto that both the customs union and the single market that they were red lines. That's what Labour did. I do think you're going to see a reversal on that before the next election. I don't think they'll have a choice. They are going to find, they're going to need to find something to distinguish themselves from other parties and try and recapture some of the hemorrhaging they have of voters to both the Greens and the Lib Dems.

9:43There's no clear strategy and it's just trying to muddle through and they won't win. And actually, to be honest, given what happened in the budget, who really actually believes or trusts any of their red lines or any of their yays or nays, because they clearly seem to ignore them within 12 months. And we now know that you know the majority of the country do regret brexit and a customs union may be a kind of middle ground that is needed in order to kickstart growth again but will europe have us back in any guys well look i mean i think it's it's it's with the biggest trading partner like it's obviously our biggest trading partner and it's a huge trading partner for the eu so if the economics make sense yes they will the cash is flowing you know they've done it with turkey i don't see why they wouldn't do it with us and and as mad says the majority of trade is goods so you do need to fix that and and so this may well be one of the you know one of the solutions i mean politically it will be difficult because you know in just for context you know a trades union does include some harmonization of standards even though we wanted to get away from you know free movement of workers free movement of people and eu law if you're going to do a customs union there will be some harmonization of standards, which, you know, we know what that means again.

10:59You know, straight bananas. That's the problem. Which will be a relatively ugly Pandora's box to open. I saw the article about the IKEA labels and I'd never paid any attention to an IKEA label before. That is a fascinating article in the FT that I would really recommend reading. Yes. Yeah. And then, and then, and how they put it on the FT website and how they've got this kind of lovely scrolling roll through where it brings, it's very un-FT like. The labels are basically bigger than the toy elephant is what we concluded. Yeah, so they've got a toy elephant. And then they were showing all of the different unharmonized rules, regulations and requests from all the member countries as to how they want their...

11:39The French that have a label about four times the size of anything else that is required for recycling standards or something. I don't know if any of you read the Volkswagen story this week and looking at VW and Porsche, how much worse they are than European competitors. And as a part of that, I was looking at how badly the Porsche Taycan, the electronic car that Porsche, the four-door, that has absolutely tanked. And they've absolutely screwed the pooch with all of the sales, the electronics, the battery technology. Everything has been quite difficult for Porsche. So that obviously has added to their misery.

12:17So I think there's a lot to be fixed over Volkswagen. Anything else? So on the European turnaround, Mads, you're my voice of reason and positivity on this one. What else do we need to talk about on Europe? But it's a challenging story. And obviously, it's wrapped up with Brexit because there are so many things that aren't right in Europe today. And so, you know, one answer could be to say, well, we don't like the things that are not right. So we're going to leave and slam the door, which is what we did. The other much harder thing to do is to stay, fight and try and make things right, which we didn't do.

12:50We've now left that to others. I think the truth is our economy is still inextricably linked with the rest of Europe. I mean, there will not be a successful UK without a successful Europe. So they must get this right. And hopefully we can all work together to try and make it happen. One thing is there's been a structural shift in the last decade, which has surprised us. It probably shouldn't have, but it has. kind of the question was asked to a number of Chinese economists, what will you import from the rest of the world? And a purchasing power parity is absolutely a pair of the United States.

13:21And, you know, what are you going to use all this economic power to import? Because we need some trade balance. And the answer is not really anything, some commodities and maybe some luxury goods, some handbags, but not really anything beyond that, because the Chinese model is to import, learn, replicate, improve, perfect, and then push back into the world. And so when you You have an economy like Germany's that is, was a global manufacturing powerhouse. So the best of the best of precision engineering and automotives and other things to all of the world, including China, which is a massive, massive importer of German goods.

13:55And where they've now come to a point where actually we can start to make a lot of these things ourselves. Kind of, you know, automotive really being the canary in the coal mine, but just an example of what's happening across industry. you have a structural shift that probably will never shift back, or at least won't shift back in the short term. So that demand... China's strategy is autarky, right? They're looking to absolutely be completely self-reliant. That's the end point for them, isn't it? That's an interesting... It's certainly mercantilism, right? It's certainly mercantilism. It is, you know, try and export as much as we can.

14:28I don't think it's that they don't want to be reliant on German cars. I don't think they mind that as much. I remember the Mercedes sales figures, they flatlined at the beginning of this year. They were super important. Absolutely flatlined. I mean, from thousands of units to nothing. But whereas I think they have a view of trying to, you know, have sovereignty around semiconductors, which they see as very important. I'm not sure that the automotive piece was driven by the same desire for self-reliance. I think it was much more about this is how we do business. We, you know, we don't like your margin is my opportunity and I can do it better than you and I'm just going to compete.

15:07When Volkswagen was privatized in the 1960s, kind of the deal with the unions was, look, we will privatize the company. But in exchange, we're practically going to give politicians and workers veto on any reform of the company. So 10 out of 20 board seats are worker representations. This means it's extremely difficult to close plants, to reform things when you need to. And so that has just made it really, really hard to remain cost competitive. Now, the EU actually tried to kill the law that prevents Volkswagen from being reformed, and Germany fought it and kept it. And so now you can't really touch that law.

15:46And until the politicians and the unions decide that now it is time to open up for kind of a liberalized the way the automotive sector is run, you're stuck. Matt, I mean, they're losing 30 ,000 workers by the end of the decade. How did that get through? Yeah, but it's probably not enough then. I don't know how many they have. I think it's like 400 ,000 workers in Germany. Yeah, it's a fraction, right? They probably needed four times that, right? Because demand has fallen off a cliff and you're too expensive. Bad cars though. My last brand new car was a Volkswagen. It's a bad car. I know there's probably nothing compared to when you compare something like from Volkswagen to a BYD or something.

16:24They're getting so much for your Chinese dollar, but they're not good cars. I think it's been a conflation of multiple facets here that have absolutely driven this into the floor. There are so many issues, though. I think someone at the top of this conversation said there's so many levers that need pulling or equivalent in Europe to fix the problems. I think these are all just symptoms of the same problem, which is it's a cultural one. You know, Europe is so obsessed with downside scenario protection and legislating. It tries to control everything. It has a psychological obsession with centralized control, partly because much of Europe was built historically on the French model.

17:04And that just seeps into everything. So when you see, you know, it doesn't matter if it's the AI report or whether it's whatever it is, when we compare what the US does and its approach to what Europe does, and the UK ends up in some sort of, you know, weird mongrel middle, not committing to either cultural direction. it's not surprising that we're just not moving fast enough and not enough is changing. Sorry, I've been sometimes said that it has to get worse before it gets better. I mean, I think maybe the hope here is... It's forced to force change. You're absolutely right. Yeah, that it'll get worse so quickly.

17:36There's kind of this ripple effect through the European supply chain. This is what people forget, right? You know, automotive, it's not just about a manufacturing plant in Germany. It's also about a supply chain that ripples throughout Europe. Whether it's ball bearings or semiconductors, There are so many industries that are dependent on our export success and where the German locomotive, when it's great, pulls everybody. Well, when it doesn't pull, we all stall. Mads, have we had the seismic shock that we need to create change? Because all we're talking about is history, but looking forwards, is this enough of a punch in the face to make change?

18:11I don't think so. I mean, just look at the UK, right? It is clear that the model we have right now is unaffordable across Europe. And we're still not making the change. We're still not making the changes. Germany has not had any growth. They've had negative growth on a GDP per capita basis for six years. The UK is just eking out a little bit of growth. We've got a more flexible labor market, thank God. But the public finances are absolutely shut to pieces, and we can't free up enough resource to invest. And meanwhile, the tax burden is going up and up and up. So there's no political will to make the necessary reforms.

18:47You know, China was unencumbered by a lot of the baggage that we had. And then it obviously had the benefit of central planning. I'm not suggesting that we should all move to central planning, but we're kind of stuck in this like messy middle with the legacy and baggage of old industry. and the world is now moving at such a quick pace that we don't have the political strength and confidence to push through what needs to be pushed through because people are a little bit torn. So dare I say, do we need our Trump? Do we need our agitator? Do we need our extreme version of shock? Which is when the EU model kind of breaks down because the EU model tends to be lowest common denominator, which is that, you know, you need to, the consensus model where you need all 27 member states to buy into all the big things.

19:40And then you end up with labels on elephant toys that are four foot longer than the toy itself. And everyone focusing all their time and effort on that and when actually the whole industry's already changed. You know, I think the other news that came out this week in the Wall Street Journal was around carbon emissions, saying actually, so that maybe talk about something that Europe has done well, is that Europe has reduced carbon emissions roughly 30 % since 2005. But wasn't the flip of that Lomax that's come at such a cost and obviously energy... Come at a huge cost, basically saying very high energy costs, electricity costs, which in turn then leads to industrial decline.

20:16We reduce our carbon emissions by offshoring our manufacturing to the rest of the world. Which are far dirtier when they produce stuff than we would if we did it in our own country. That's such a period victory. I mean, this is the dumbest thing to celebrate. Yeah, it's ridiculous. And it's back to virtue signaling, right? It's back to rather than thinking about actually the consequence, thinking about outcomes, measurement, you're back to isolating one data point that sounds really good in a soundbite, but actually doesn't reveal what's really going on. So there was this Clayton Christensen, he had this idea of kind of the innovator's dilemma, right?

20:50It's sort of you become really, really good at something and then are you going to want to keep innovating to maybe make, you know, drive your own obsolescence? I mean, it's kind of Google search and Google AI and will the AI chatbots replace search and kill the golden goose or the cash cow for Google. I think you could sort of have a winner's curse. To some extent, you know, Europe was an economic winner. It's the Second World War. There was, you know, for decades, incredible growth. We built these beautiful welfare societies. And I think to some extent, it just lulled us into a false sense of, well, we are maybe not quite as rich as the Americans, but almost.

21:23And isn't things going pretty good? And then suddenly you look back and there's just been 15 years of absolute stagnation, especially in Western Europe, when compared to other parts of the world. I mean, I would challenge whether we've had a great success growth-wise. We were buoyed by the Marshall Plan and we were buoyed by the world getting back on its feet, which inevitably drove demand. But when you look at what America's done and the achievements America's made economically, I'm not sure that it stacks up. GDP per capita in the UK was higher than the US in 2008. Okay, but was that a blip?

22:01You just bamboozled me with statistics? No, I mean, I'm just saying up into a point there was convergence and actually then there was a point where the UK overtook the US on a GDP per capita basis. But yes, since then, it's been going in reverse. As we know, a lot of great US innovation has come out of the fence bending. I mean, the whole semiconductor, the reason Silicon Valley is where it is, is because kind of Rathian and other companies were, you know, needing semiconductors for missiles, right? You had the internet coming out of kind of defense investments. You've had so much defense investment that led to great innovation that then became commercial businesses.

22:39So I don't think all the defense spending was necessarily negative for the U.S. You can maybe almost argue the opposite, that the fact we didn't invest more has led to missed opportunities on our part. I believe we will turn around. I believe Europe will turn around just through necessity and driven through all the other aspects that we've spoken about before. But how do we pair it back to our ecosystem? The way you grow your ecosystem and the reason why the tech ecosystem, as we know, is so important is because it's the future of everything. And the way you grow that is to retain the companies as being nation state companies.

23:13So that the revenues, so that the headquarters, so that the IP, so everything resides within the nation state. And until we fix that problem, all the best technologies and companies will most likely end up in the US. Everything we talk about on this podcast for the last 100 episodes, which is late stage, you have to fix the capital markets. And you go, and secondarily, you have to fix the cultural blocker on spending a lot of money on things that possibly don't make obvious sense on a spreadsheet today. do you think that the the lack of trust that people now have in the states is going to make any difference in our worlds for people doing anything differently only if the products don't deliver the promise so if you're if you if you have a product which is 10x better or saves you two to 10x the revenue you know ai and the enterprise or whatever it is um then people are going to want to buy those products and use those services no matter what the space economy and the amount of wealth that can be mined from one asteroid or the opportunities outside of the grips of Earth's gravity.

24:27You're always bullish on space, aren't you? You start to paint a pretty grim picture at the moment on our ability to get there and manage it and control it. Yeah, I think we've had a very macro discussion just now. I think how you tie it back to what we do. So what we do, I think, fixes a lot of the stuff we've talked about over the long term. How do you get to that point is, well, you increase spending in R &D as a percentage of GDP. You encourage your best talent. No, not in Europe at the moment. You encourage your best talent to go into technology. You encourage your immigration systems to attract the best talent in the world.

25:06I saw a repeat this week about more entrepreneurs and founders coming through. You cut red tape, the government backstops important technologies by becoming the buyer of first resort, which is starting to happen more and more. That feels like it's happening. Yeah. And you cut red tape. No, there's mutterings of it. I haven't seen it happening. And sorry, the final thing is, as Andrew said, you fix capital markets. The problem, fixing capital markets is actually, you know, it's easier said than done because it's not like the government has a magic. The government does not have that much agency over fixing capital markets, almost by definition.

25:39We talked about before how there are three large pools of capital that the government can influence. There's its own balance sheet, sovereign wealth, but we know that actually the balance sheets of the European governments are not particularly strong at the moment, if you think about it in that sense. You have the pension fund capital, and you have the insurance companies. Now, we know that in Europe, the insurance companies and the pension funds are historically hugely under allocated to privates. And within that, venture sits as a small component of that. And we know in the US, they kind of follow the infamous or famous Yale endowment model where you're allocating 30, 35 % into privates.

26:21UK pension funds are what, Mads? Allocated what? Two to 3 % max into privates. And within that, venture is only a very small component. So what you could do as a government is encourage through incentivization. Either you mandate, you force the pension trustees to put money in, or you encourage them to do so by probably giving even more tax breaks to these people. That's one way to potentially fix. But I think capital markets only gets fixed by performance. I think you need to create attractive asset classes. And the problem that Europe faces today is that capital, by definition, is borderless and can go anywhere.

27:00And it's a competitive world when you can invest in China, when you can invest in Southeast Asia, when obviously you can invest in the US and NASDAQ and S &P 500. And Europe has suffered. So I think that is a harder fix. And until we fix that, we do have problems. Because if you want to create sovereign champions in critical industries, you need companies to go and raise easily from Euro 50 million to Euro 500 million. that that that those kind of big pools of money where europe has struggled to to do the financing of so i i don't know you guys have a thought i'm gonna jump in two quick things and one uh your pension data 0.02 across europe goes into vc 100 times that go in the us it's two percent of the us probably more in the us absurd absurd difference yeah it depends which numbers you look at but it's two point something second point the only way this is going to change any speed is to vote in somebody who really believes what we believe about tech and gets it so that means we better go and befriend nigel farage uh and we better go and befriend whoever's going to be the next european commissioner and make sure they are you know drunk monkeys on the tech tech bandwagon and will readily action a list of a smoker's board of requirements to make sure that we're not left Danny Kruger is the man you want to befriend, by the way.