Alex McCracken, Head of Venture Capital Relationships, EMEA at J.P.Morgan: European AI startups are raising bigger rounds than ever

0:00Alex McCracken:Hello and welcome back to the Scaling Europe show. I'm Seb Jolson. Today I'm joined by Alex McCracken. Alex is the head of venture relations at EMEA at JPMorgan. Alex, thank you for joining me today. Hi Seb. It's great to be here. Thank you very much. It's an absolute pleasure to have you. I know that you've just released an amazing report on the state of European venture. To kick off, can you kind of give a high level overview if possible? What are the main messages? so i think the main message is really our venture is undergoing a radical shift from what we've experienced for the last 20 years and it's very exciting to see we're seeing some mega rounds going in into artificial intelligence and broadly the market is breaking out i would say into a few key headline themes number one we're seeing mega rounds of a billion plus into seed stage AI models.

0:59So that's taking a big chunk of capital into a handful of companies, very similar to the US. On the other hand, we're seeing the rise of large rounds, hundreds of millions going into a few key sectors. So defense and security. So we're seeing satellite companies and drone companies and AI for military use. We're also seeing hundreds of millions going into the quantum computing sector. I think as people are cognizant that maybe these things really can work, probably will work at scale in five years or so. So well within a sort of venture timeframe. Then of course, we've got hundreds of millions going into AI apps, some of which are reaching hundreds of millions of ARR in months or less than a year.

1:54And then we've got, of course, AI infrastructure, AI native applications, middleware. So if you have an AI story, it's probably good. You need to show revenue and you need to have a moat. But the capital really is flowing there. Now, for other sectors, such as life science and health, Again, there's AI applications to those verticals, so they're getting a lot of capital. We're seeing the rise of deep tech investing. So things that have molecules or semiconductors, the hard things, these are receiving tens or hundreds of millions of venture capital. So really, really interesting times and a lot of capital flowing into the sector, which is good.

2:41Alex McCracken:And let's talk about, let's pull out one of those threads. I guess the rise of the mega rounds, especially in Europe, is a real change, right? And that's changed quite drastically. We're now seeing these billion-dollar seed rounds. We saw Ineffable Intelligence. We saw AmiLabs in France. Why do you think this is happening? Well, I think two reasons. Number one, we've seen the success of companies in the U.S. that were doing this three, four, five years ago and reached incredible revenues very quickly. so Europe following on from that is pouring the money into those known areas perhaps to be slightly sovereign European versions which is what we need in this interesting geopolitical climate.

3:29The second thing is there's a lot of US capital here now on the ground a lot of large u.s firms have set up offices in europe and they're writing large silicon valley style checks in hundreds of millions quite early so two great dynamic shifts there

3:51Alex McCracken:and do you think there's any drawbacks of this like are we seeing more capital overall and so there's just more money for the big rounds or does the the pooling of all this capital to big seed rounds does that have a an adverse impact on maybe smaller rounds smaller fundraisers i don't think it uh has too negative an impact clearly if a billion dollars goes into one company that's uh you know 999 million that doesn't go somewhere else or or to many startups but the money is chasing quality talent and so when you have engineers coming out of meta or google and others that have real skills and that's where the capital needs to flow bet on the jockey not the horse and so we're seeing some really experienced jockeys out there and the capital will find them.

4:50Now, that does mean a flight to quality in capital. So we are seeing some of these seed stage AI companies with great founders, with great experience, commanding very, very high valuations. Now, that brings its own risks. If they don't grow into those valuations, clearly they may not raise again or it could be a flat round. but by and large we're seeing the right capital find the right founders with the right skills but they do need to show their experience their technical knowledge the fact they can get to revenue early so that does mean slightly fewer rounds overall there is a flight to quality and

5:34Alex McCracken:in that respect and let's talk about the industries because you mentioned deep tech deep tech itself is quite broad you've also mentioned some sort of industries that sit within there within deep tech more broadly what are the industries where we're seeing the most capital flow to i think ai infrastructure is is seeing a lot so if you think of anything where you're making data centers more efficient or you're managing workflows within an agentic environment in an enterprise, this is seeing probably at least a quarter to a third of the capital. Now we are also seeing some semiconductor companies get capital.

6:24We are, as I said, seeing quantum computing hardware companies get capital so it's not all just about an AI native app anymore it is some of the underlying layers of infrastructure that enables those apps to run

6:41Alex McCracken:amazing and what about other industries let's say defense space we're seeing it looks like we're seeing more and more money flow into those industries which is really exciting how's you were performing on those industries? Very well, I'd say. Some countries where their governments or military have been prepared to put in large orders and commitments, allow a space or defence company with maybe some millions or tens of millions of revenue suddenly to get an order book of several hundred million, which allows them then to attract the capital to fulfill those orders so i think again you know we followed the u.s in some respects the success of spacex and its likely blockbuster ipo this summer actually gives a lot of confidence to someone saying i'll be the european version so we're seeing a lot of european space launch i guess replicas to some extent we're seeing the success of satellite companies doing things slightly differently to the US, but again, great customers in terms of European governments and corporates.

8:00So I think having our own domestic European bred companies that then get the commitments from corporates and governments behind them is something we've just rarely seen before in Europe. And it's great to see it now.

8:16Alex McCracken:And do you think we're going to continue on this trend? Do you think we're going to see more money flowing into defence, flowing into space? Unfortunately, yes, on defence. I think there's a lot of money swinging more into the defence side of defence, as in detection or counter drones rather than attack. So I think that's a good use of capital. who doesn't want to feel safer if you're at an air court or traveling or in a stadium. I think in space, that is clearly the new frontier. We're seeing capital flowing to companies manufacturing new molecules in space in low gravity that they wouldn't be able to do on Earth.

9:04and the fact that they can get there in a cost-effective way, get into some sort of space station, make something, it's really driving a whole lot of new advanced manufacturing materials, which is so exciting to see. Who knows what the applications will be in some respects, but it bodes quite well for some pretty critical areas like health, like materials, like our own minerals and things like that, that we can get from space or manufacturing space and bring down to earth cheaply.

9:44Alex McCracken:Amazing. And one of the things I want to talk about is the people that are investing in these companies, right? Especially, you know, I think it's become a lot, it's become very topical in defense and space because especially these 1 billion seed rounds that are going into AI, we're seeing that they're often led by huge US investors, right? I think Ineffable was led by Sequoia. And so question marks are always raised. I think Helsing is meant to be rumored to be raising around, I can't remember who, but it's led by a big US investor. And so it feels like we're seeing more and more big US investors investing in Europe.

10:21So my first question is, is that true?

10:24Alex McCracken:Are we seeing that in the data and then my second question is what is the impact on the whole ecosystem of having more u.s capital in europe i think it is broadly true yes so those companies you mentioned have indeed got u.s investors and they're what's called crossover investors they may have started as venture funds then they added growth funds then they added late stage arms and they're becoming almost multi-asset managers in the way that we have multi-asset managers anyway in Europe. I don't think the source of capital is the issue. I actually think it's a good thing because they have ambition.

11:05They know how big a company can get. They want to fund companies of global significance that frankly has been dominated too long by the US out of the valley. Now they're seeing the opportunity for Europe to build its own versions and scale that globally. Now, if the company retains a certain number of people or development, R &D, key offices in Europe, but then put sales offices in the US and other places around the world, I mean, that's a good thing, because it just means another company of global significance. So I don't think it's an issue. I think Europe does need to build these companies here.

11:51They are building them here. The other thing we're seeing now is not just US venture capital. We're seeing corporates coming in. We're seeing sovereign wealth coming in. We are seeing global asset managers coming in alongside maybe the VC leads around and prices around, but the others follow. and then they have further pots of capital to keep investing. And that's what one needs to build a globally significant business.

12:21Alex McCracken:So overall, great for founders, great for the ecosystem. Do you think it's going to have any impact on European investors? Will it make the market more competitive? Will it make them a bit nervous? They're going to have to start moving quicker. What do you think? Yes, to all of the above. anecdotally from from our venture investing friends they clearly are witnessing the the rise of these mega rounds and having to get in early now the good news is they're on the ground they've been here for decades in many cases and they get access to these talented founders super early at pre-seed. So a lot of the European domestics have started coming in even earlier than they used to in order to preempt, I guess, these later larger rounds at very high valuations.

13:16So that's a new trend. That's heartening to see. I think other VCs have come, you know, maybe founded in the last two, three years. They're more AI native themselves. They use AI to spot trends, to ascertain which founders really have the background, the deep technical expertise, maybe even the resilience to show that they've got the capabilities to be a good founder and also spot early signals to get in there.

13:47Alex McCracken:So I think we're really seeing an interesting time in venture where it's going from maybe the old word of mouth um very very few people that kind of knew each other yes now there's way more people in any one firm um there are many more firms to co-invest with you've got to get in early and hustle i think the ai culture of pretty much always on has to be there because you can't be as slow as perhaps you know i'm old and i saw some pretty slow behavior when i was a vc and even as a founder um you can't get away with that anymore because if if you're sleeping and not coding and not shipping and not delivering somebody else around the world is uh doing that and probably going to eat your lunch yeah yeah well it's good i think an increase in speed is almost certainly going to be a good thing um what about the way that this money is being spent you know i think we're seeing rounds close faster we're seeing bigger rounds but it feels like it's quite different to 2021 2022 when we had this sort of growth at all costs mindset has the way that founders are thinking about not just raising capital but deploying it changed and have investor expectations changed given all the lessons learned from that period of time i think it does depend on your business model now clearly if you are an ai native app it is still gross at all costs and you better be getting to 100 million arr in a year or you're gonna you know really people will question your growth ability compared to others that have already reach that that target and showing what's possible now if you're a deep tech company that is you know building hardware has deep intellectual property and several iterations are needed before something's shickable at production scale that's clearly very different and the point of raising large rounds is to give you sufficient time to fix those things and get to scale production in years rather than maybe 10 plus years as used to be the case now it's get get those contracts deploy get tried and tested in the field if you're in a defense capacity or in a manufacturing plant if you're some sort of hardware making it more efficient so even there the time scales for achieving a milestone, getting to production, getting to 10 million in revenue, getting to 100 have all compressed because if you're good, you'll already have shown promise.

16:44If you're unique, that's a more bettable thing. So is it different to 2021? Yes, because I think the investors have learned from that period where perhaps a lot of cash was sprayed around at high valuations into things that actually ended up being not long-term defensible once COVID was over. Now more money's going to molecules and things that matter with intellectual property that hopefully is more resilient. Now, the investors are obviously very, very diligently looking at whether they think the metrics are sustainable and even if an AI related business tends to have lower gross margins to start with because they have compute costs to reckon with well actually will those compute costs come down per unit over time and improve gross margin now if you're seeing early signs of that great that could be a more investable business if they're seeing your compute costs go up and up and up every time a new customer signs up then that is not sustainable so the metrics they track I think have changed the principle of tracking sustainability cohort analysis show us a path to increasing revenue and reducing costs over time through use of ai even if you're a hardware business is still there and are people thinking about

18:23Alex McCracken:different ways of financing their business you know i i guess some of the deep tech stuff we're definitely seeing debt raises i think nscale raised 800 million this year this week which makes total sense when you're building data centers are there other ways that founders are thinking about financing their business um yeah what are you seeing yes absolutely so a lot of the deep tech companies have hardware hardware needs purchases of supplies then there's a delay while you assemble that before you get a customer signed up and then revenue and then cash drops so clearly there's a working capital gap and so we're providing a lot of working capital finance as are others um we're also seeing some interesting lending structures it used to be that you could look at a sas business and say well you've got three-year contracts on average um we could almost factor that and an advance you know 60 70 percent of those long-term contracts so the SaaS business would get cash up front to invest in growth and fund CAC.

19:31Well, we're seeing similar in other businesses. So hardware as a service. So for example, satellites, quite often, yes, they get a contract to ship a satellite up in space, but actually it's the ongoing data contract that could be a three to five year offtake by a large customer for that data. Now, the business could pull forward that revenue and we're certainly lending against those sort of revenue streams a bit like in data centers you have offtake agreements already signed up before you even build a data center we're seeing that in drone companies and this is the new world of of deep tech really different financing structures um some equity to start then some debt then some working capital and credit lines blended with mezzanine kind of equity instruments.

20:31I mean, all of these put a very different financing structure on offer to companies. And I think anybody with a good CFO should know about these, but companies should consider a wider range of options for financing their business for sure.

20:49Alex McCracken:Amazing. Well, look, it's a fantastic report. I highly recommend anybody kind of gets into the data. And thank you so much for joining me. Thanks, Seb.