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Happy Sunday,

Welcome to the new people on the list. Today’s email is about the French, conviction and bubble bets, and many other stories. Looking forward to your comments, especially if they’re in disagreement - love great arguments!

Thanks for reading, enjoy!

Dragos

Market talk

Deal of the week 

That would be Mistral striking a distribution partnership with Microsoft, on the Azure platform alongside OpenAI.

• Microsoft will re-sell via Azure a commercial version of Mistral’s open source product, similar to OpenAI.

• it’s a good deal for Microsoft - not only keeping friends close (it owns OpenAI) and the enemies closer (now Mistral is a direct OpenAI competitor), but also pre-empting any governmental speculation of building a dominant market GenAI position. Fwiw, Msft did a similar deal with Facebook last year so they are the biggest distributor in the market, right?

• the French arrangement also includes Msft taking a small equity stake in Mistral. More interestingly, it also involves a R&D collaboration to build applications for governments across Europe and use AI models in the public sector. That’s likely a bone thrown to the regulators - see further below.

• it’s even a greater sales deal for the French - good product without sound business execution means nothing. Tech European founders having American investors on the board handling their business is paying off handsomely, who would have thought three young French engineers with zero business experience would pull off what will likely be the biggest success tech story of Europe? Well, some American investors did and made things happen*.

• it’s also a good momentum speculation as OpenAI had weeks of drama ousting and reinstating its CEO last year while Google is too screwed of a company since it’s still not able to put a decent product in the market, a year after AI became mainstream. Time spent in meetings and useless ego battles translated into not shipping code and strategy execution - each misstep has huge opportunity costs as the market is still incipient and moves at amazing speed.

• speaking of Euro success and to no one’s surprise, the deal seemingly f-ed up the mojo of France's strive for digital sovereignty, or Europe’s for that matter.

• ya know - we were supporting Mistral to fight against big tech, not to become one. Jokes aside, the EU needs to get over its American tech jealousy and stop antagonising the market with value destruction moves.

• and to put a cherry on top, American media did a nice profile of Mistral’s CEO, from where we learn that running the model costs less than 20 million a year, allegedly half to what the other guys are paying.

* it’s not always the case with American investors taking over - just look at Bereal. :-)

Are we back in a VC bubble already?

• Over-paying for startups keeps popping out in many investors discussions, particularly for the AI ones - alas everybody is selling AI nowadays, hence expert pricing opinions anywhere you turn your head. And if that’s any indication, last week’s expensive seed deals piece generated a lot of interest - reminder, you can subscribe to access it from here.

• I don’t think we’re in an AI startup bubble in Europe, at least judging from the data I am seeing. Definitely no, if we compare to the ZIRP days - besides, most of last year’s opportunistic AI enthusiasm cooled off already. As opposed to investors dealing in the States (where the economy is growing), Europeans are more disciplined (we’re in recession) and rather cautious since by default they price the risk of a startup not working out, not its upside if the stars align. Bankers, not VCs. :-)

• But are expensive AI deals done in Europe? Yes, no doubt. Are there high stake bets that don’t make up for their premium? Likely. Always was, always will be the case in the VC world.

• However. On one one hand, it is the market speaking - there’s an emergence of good startups with healthy fundamentals commending a premium in a predominantly me-too European market. On the other, there’s deep-pocketed investors who cannot afford to miss the best of this cycle. Tier 1 players hooping at the high end of the market.

• We’re at the start of a new value creation paradigm - a generational cycle, with transformative tech that will see exits in 8-10 years down the line at values way higher than the standard unicorn metric, if only we’re to compare to the value size unlocking we see AI is producing in so many verticals.

• In this context, if you’re in the big boys game, the cost of missed opportunities is higher than the cost of doing mistakes. You simply assume the false positives as we’re not talking about crumbles, but about whole pies that could feed an LP town. Fact is that in spite of the bad macro, we have a few European startups riding this tech paradigm and already creating consistent value, positioned for worldwide market dominance. Good quality, mission-driven founders, building on solid fundamentals, and not really engaged in get rich quick schemes manufactured by ZIRP investors (hello Hopin). I believe we haven’t seen so many of those founders in Europe at once, ever.

• I think this explains these days’ expensive bets. Again, is there a FOMO coefficient in the premiums we see in the market? Undoubtedly. But I am not seeing irrational exuberance, just a number of interesting assets chased by top spenders thusly driving the prices up.

• And long time readers know it’s not the first time I am saying this - not willing to pay a premium for something because you find it expensive is either because you cannot afford it or because you don’t get its upside. It doesn’t mean it’s not worth it, making for an inflated market - it’s rather a different segment you won’t compete in.

• Here’s some food for thought - looking back 8 months ago, has Mistral been an overvalued bet? Of course it was.

• Would a typical European investor pay for a 114 million pre-launch round on a late market entrant done by unexperienced engineers from France of all places, competing against big gorilla companies and well-funded startups altogether? Stop laughing - you’d even have a hard time to find five willing to listen to you for raising 10M pre.

• That’s a hard conviction play, outside the comfort zone for any fund anyways, big or small, even if it could have gotten in to begin with - reminder, Mistral’s VC dance started with Lightspeed leading at 10 million and escalated 10X after other top tier VCs wanted in too, but couldn’t.

• Even so, 114 million pre-everything makes for the most expensive European pre-seed round that in hindsight was a low entry point, if only we’re to consider that OpenAI was valued at 90 billion a couple of months ago. That’s how conviction works - and I know many reasonable investors thinking at that time Mistral was an insane, bubble-like bet they wouldn’t have made. Some games just require higher stakes and they’re not for everybody, it’s as simple as that.

Cheat sheets

• notable angel deals - Q4, Q3

• notable series A - H2, Q2, Q1

• AI startups - link

• payment orchestration SAAS - link

• active investors in Europe:

  • Americans - link

  • pre-seed and seed institutional - link

  • series A - link

Intel highlights from this week 

• deals → 🇳🇴 ​3LC AI​,,,, 🇩🇰 ​Subsets, ​ 🇩🇪 ​Inkitt​, + many super interesting ones

• get them on the email alongside access to comprehensive proprietary data, long tail moves and strategic intel → subscribe.

• use code SPORTLOV at checkout and get €100 off for purchasing a one year plan (expires on Monday, hurry up).

You will get the best early stage intel in Europe money can buy.

Also notable 

💲 Techstars financials as of 2023:

• 54 active accelerator programs and 682 graduated portfolio startups

• cash in bank: $48.7 million

• revenue: $73.1 million

• expenses: $87.8 million

  • $34.3 million program expenses,

  • $53.5 million operating expenses.

• that’d be 600k per program per year and 50k per startup (that’s program-related not the investment money which is a different cup of tea)

• add to that the 50 million fixed costs translated into an extra 100k per program or 78k per startup.

• so in order to have a local program up and running, they’d need to find sponsorship covering about 1 million a year, probably less as I imagine they have in place global revenue-generating deals with Amazon, Google and the likes for reselling their products under “free credits” form.

• that’s money spent for running a working space and for doing a few events a year - mentors don’t get paid. Am I missing anything else?

🇬🇧 HSBC’s Revolut clone, Zing, did 36,000 downloads in the UK between January 3 and February 27.

• that’s compared to Wise's 203,000 UK downloads and Revolut's 1.087 million UK downloads, in the same period.

🇸🇪 Polestar secured a $950 million loan from a dozen banks.

• critical funds needed to keep the company afloat - expensive EV in a market that’s going down.

• the Swedes are owned by the Chinese - directly via Geely and via Volvo, which is also owned by Geely.

🇮🇪 Stripe manufactured a $65 billion employee stock-sale deal, as the IPO market doesn’t look to good this year.

• Insider Sequoia is said to have been involved in purchasing more shares.

🇸🇪 Kinnevik sold its entire 20% equity stake​​​​ in Tele 2 for ​$1.26 billion​​.

• Tele 2 is one one of the major telecom providers in Sweden, founded by Kinnevik's founder, Jan Stenbeck, in Sweden in 1993.

• it produced sales of $2.7 billion in 2023.

• buyers are French - namely telecom mogul Xavier Niel via NJJ and Freya Investissement. They already run similar ops in quite a few other European countries.

🇪🇺 34 companies and associations, including Spotify, Epic Games and 37 Signals signed a letter addressed to the EU saying that Apple has made a mockery of the new DMA Act.

• probably were told to do so, part of the EU procedure to be able to officially react, a process that should take 6 months.

🇪🇺 A group of 32 European publishers, including Axel Springer and Schibsted, filed a $2.3 billion lawsuit against Google alleging they had lost money by the company’s advertising practices.

• quite sure those publishers are not among the ones Google is already paying for the right of scraping their content in the name of news distribution.

• Canadians are doing the same.

🇬🇧 OnlyFans is a UK tech success story doing $1 billion a year, and its largest market is the US. Two quotes:

• It doesn’t matter to us what the content is that our users are monetising, as long as it’s within our terms of service.

• Q: Why aren’t you on the app stores? Are you ever going to be on the app stores?

  A: I believe there’s a 30 per cent “tax” on being on the app stores. We’d rather keep the revenue.

🤪 Elon has lost the plot - he sued OpenAI and Sam Altman over ‘betrayal’ of non-profit AI mission.

• that’s of course BS - not only it’s self-serving since Musk is doing its GenAI tool on top of Twitter, but also, like always in these cases, it’s about money.

• the complaint argues that investors should not be able to invest in OpenAI, get a tax write-off, and then be made whole on gains, even if capped, on a new for-profit structure that has internalized the technological intellectual property of the former non-profit.

  • Musk donated over $44 million to the nonprofit between 2016 to September 2020. For the first several years, Musk was the largest contributor to OpenAI.

  • Open AI was valued at $90 billion last month in a secondary deal.

🖖🏻 Wendy’s planning Uber-style surge pricing where burger prices fluctuate based on demand.

• it’s a strategic move that was bound to happen in a business paying big fixed costs in order to extract most of the value during the evenings.

• most restaurants are already doing some sort of a surge pricing tactics, with lunch specials and happy hours.

• also worth noting that food distributors such as Glovo, Deliveroo and the likes also have different menu prices than what you can find in the restaurants.

• if this will take off, will supermarkets/retailers be doing the same?

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Mo’ Sundaying 

• Liquidity market is dead, let’s manufacture something: private IPOs. Is this truly liquidity though?

  • [it’s not]

• Why investing in creators makes sense... marketing 101 applied to the VC business.

• Risk and reward for asset classes.

• Pophouse bought Cyndi Lauper’s music catalog in order to produce VR concerts, like it does with Abba in London and with KISS in the States.

  • The Swedes found a smart niche, that’s like the Taylor Swift’s antithesis.

• US-based Qualcomm overturned a €997 million fine enforced by the EU and wanted 12 million back as legal costs.

  • Said costs included expenses of two covid tests and renting a printing machine for €750.

  • The judges gave them €750k instead.

• How the state of Monaco is just a back door to western Europe for financial crooks.

  • Smaller than New York’s Central Park, Monaco holds an outsize influence in the popular imagination thanks to its casino, its grand prix, its lack of income tax and, most significant, its glamorous American princess, the late film icon Grace Kelly.

  • Yet it remains a relic from a different age, when kings and queens held an iron grip on the continent.

• At Milan Fashion Week, a Swedish designer encouraged the audience to throw trash at her models as they strutted down the runway.

• Europe’s ski resorts are closed during what could be the hottest February ever.

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