Shing Lo:
Hello and welcome to The LathamTech Podcast, where we survey the latest trends emerging from the world of tech and explore the impacts on your company, both the opportunities and the risks. I'm Shing Lo, a partner in Latham's Emerging Companies and Growth practice in London. And joining me today is my fellow partner, Mike Turner, who works on venture capital, growth equity, and M&A transactions for clients across tech, media and telecommunications. Hello, Mike.
Mike Turner:
Great to be with you, Shing.
Shing Lo:
Let's start with the first question. Outside of the US, where do you think London sits in the global tech ecosystem?
Mike Turner:
I think you know what I'm going to say to that, Shing, which is I think London is absolutely, the number one global tech center, outside the US. In fact, I’ll go further than that, I’d say it's probably outside Silicon Valley. The data, consistently over the last ten years or so supports that. And I think that's a very good reason for London having obtained that place in the market and attained that place in the market. London always has been, and I hope always will be, the leading financial center in the world. And that is very relevant for reasons we'll come on to talk about, I think even in the context of emerging companies and the funding cycle.
Secondly, if you go back to 2008, when the world fell apart financially, the UK government in time at the time was actually very smart and quick to alight on the tech sector and the emerging companies sectors as being something they really wanted to support and promote as they were rebuilding, in our case, the UK economy. And though those two things I think have really led to London having that position as number one. Don't want to sound arrogant about that. I think it is absolutely fair to say, and you and I both know this, that there are many other cities around Europe which do a terrific job now in the tech ecosystem. They've really developed some very strong tech economies of their own. And the one that I call out, is probably France and Paris, which have really done well. And Macron has been a huge supporter of the tech economy. Somewhat amusingly, the London tech week coincided with the VivaTech week in Paris. So you had tech icons like Jensen Huang speaking in London on Tuesday and then Paris on the Wednesday. Both were terrific events. I think they really validated each other.
Shing Lo:
That's great. When you're speaking to a founder of an emerging company here in Europe and they're looking to raise money, what would your advice be about? Where should they go to raise money? Should they go to the US? Should they look at Europe?
Mike Turner:
I think my answer to that would be quite nuanced. I think that a company needs to think about where to raise capital depending on its objectives at the time. I think for an early stage company in Europe, quite clearly, raising capital in Europe makes a lot of sense to start with. But then, I don't know, at Series A, Series B stage they may be targeting expansion into the North America market, in which case raising money from the US would make a huge amount of sense to the extent that that capital could help the company in many ways with that expansion plan. And I think that applies to many other parts of the world now as well. So I think it's a far more nuanced question. There are far more opportunities for companies to think about where they might want to raise capital, because there are a lot of sources of capital now well beyond the US and Europe as well.
Shing Lo:
Yeah, I agree. I mean, even in Europe, we see US funds setting offices here in London. So I, you know, founders, I actually have the benefit of US investors here in a market. So let's talk about trends. Where do you think has been the beneficiary of heightened investment activity at the moment?
Mike Turner:
Well, you can expect me to say AI first, second and third, I'm sure, because that is obviously where a huge amount, the most visible capital is being deployed to the moment. And it would be remiss of me not to point out that the UK really has a very strong deep tech, and AI heritage. Let's not forget that DeepMind was a London company. Still is a London company in many respects. And that, you know, Google's own AI plans very much revolve around DeepMind. And then you have players like Mistral in Paris, which is one of the leading AI, Gen AI companies in the world now. So I think AI, of course, fintech for sure. I mean, London is just the standout place in the world for fintech. I was listening to, the founder of Flex, which is a US fintech, speaking at London Tech Week, and he said he is just, always amazed when he comes to London at how proficient and leading we are as a fintech economy. Beyond that, I think, you know, enterprise software is a gift that keeps giving, and quite clearly there's a lot of really good enterprise software companies in the UK. The one place that I'm pleased to see quite a lot of capital being deployed now is in the world of video games and esports, which have become the, most single, most important, part of the digital economy. So that's pleasing to see. What else are you seeing?
Shing Lo:
I'm seeing quite a lot of activity in the defense tech sector. We've been working on a number of transactions, not just in the UK, but also in other parts of Europe, whereby investors are investing in all kinds of defense technology, where it touches on deep tech, where it also touches on hardware. So it's quite varied.
Mike Turner:
Yes. That I think, that's a that's a really good one to call out. And then beyond defense tech, we're probably also seeing some — I know you and I are seeing a lot — in the consumer space in the world of beauty tech for example. So there are always going to be some interesting new areas developing as each year goes by.
Shing Lo:
Well, I think it's always fun working in this sector — we come across all types of different businesses. But why don't we move into fund raising trends? So what are you seeing when it comes to primary and secondary? Are you seeing more secondary these days because of the M&A exit market being pushed out?
Mike Turner:
Definitely. So I think, one of the new dynamics, relatively new dynamics in the market is that a lot of the earlier stage, particularly institutional investment funds, have found themselves tied into their investments for a much longer period of time than they would like. So finding a secondary exit for at least part of their investment has become increasingly important to them. We're also seeing buyers. We're seeing, you know, a good appetite for secondary acquisitions often because those can be bought at a discount to the primary value that is being raised at which the company is raising capital. Often those earlier stage investors are very happy to sell out at a discount because I can still share them a very good return on their investment. So I think it's a dynamic which tends to work very well, but the secondary market is very buzzy at the moment.
Shing Lo:
Yeah, I think you and I have been involved in quite a number of growth stage companies financings. And when it comes to growth stage, it's always about cleaning up the cap table, isn't it? So a large portion of the financing funds will go into secondary to take out, early invest investors, early employees for example, especially when a company has issued plenty of equity and has, like, a hundred employees, on your cap table.
Mike Turner:
It is that and I think the other thing you just touched on when you mentioned employees is that actually finding ways to give some liquidity to the employees and to keep them happy and to allow the companies to take a little bit longer to find its, its own liquidity is a really important point as well. And we see some very, you know, very sizable employer liquidity programs being introduced in Europe.
Shing Lo:
Why don't we talk about the kind of players we're seeing in the market? I think one of the things that I'm finding with London emerging as the hub whereby plenty of sovereign wealth funds are in the market, we've worked with quite a number of them. what's been your experience?
Mike Turner:
Well good for you for calling that out, because I think that's been one of the biggest disruptive influences — positive, positive, disruptive influences in our market for the last couple of years. The Middle Eastern sovereign wealth funds in particular, as they're looking to regenerate their own economies with tech investments, we have seen them being particularly prolific in the UK, but around Europe generally as well. Why I’d say particularly prolific in the UK is that a lot of those funds have established their offices in the UK, in fact their global offices are headquartered in London. And that goes back to the comment I made earlier about London and the importance of London still being the leading global financial center. So I think, I would call out those the Middle Eastern SWFs in particular, and as being the greatest influence on, on my life professionally over the last couple of years in particular. What else are you seeing?
Shing Lo:
We're seeing quite a number of strategic players in the market, you know CVCs, and a lot of these strategics come from the US, in fact. And they’re very interested in the AI, deep tech companies here in Europe.
Mike Turner:
The CVCs, the corporate venture capitalists are very, very important. You're absolutely right. And I think seeing strategic capital in companies now is quite commonplace actually from series B on. Probably I shouldn't say too many of them is series A, but series B as companies are really beginning to find traction we’re tending to see them. Yeah, I agree.
Shing Lo:
And I think the PE growth funds are still opportunistic. I think every once in a while we do see them coming out, on the fundraising rounds of companies. Presumably you do the same.
Mike Turner:
Yeah. I think that that high end growth capital has obviously gone through a little bit of an up and down over the course of the last two or three years. But we're now seeing the, the larger PE minority equity investment funds coming back into play. But seeing, interestingly, for the first time for a good two years, I would say the particularly the US crossover fund is really coming back into the market. And they could have some of you crossover to cross over into to. So hopefully that is an encouraging sign that the IPO markets are coming back.
Shing Lo:
So this leads me into the next question: with the diversity of investors in the market, how would you advise a founder who's looking to raise money from a sovereign wealth fund versus a venture capital or a conventional VC funds? I think they're culturally quite different.
Mike Turner:
Yeah, and culturally quite different from a large corporate, for example. I think it's a really good question, and it's a really important piece of advice to the founders, to think very hard about the differences that are required to their approach in negotiating with these investors. You're going to see a lot of cultural differences depending on the parts of the world, like a Southeast Asian sovereign wealth fund is very different in its behavior to a Middle Eastern sovereign wealth fund, which is just very reflective of the cultures which, from which they come. I think the critical thing is for founders to understand that there's no book, there's no playbook which applies to everybody. You can't look at a whole group of investors and say, okay, you guys have got 28 days to do this deal because a sovereign wealth fund, maybe well want 6 or 8 weeks because they just take a little bit longer with their diligence. They're a little bit more hierarchical in their approach. It doesn't make them a bad investor. It doesn't make them a great investor. It just makes them an investor. And I think it's really important that founders can understand the difference, not only that investors can bring to the table, but in how they will behave during the course of the transaction. One thing I would point out is that also, founders should be thinking about how patient the capital is that they raise because of course, strategic or even sovereign wealth fund capital is a lot more patient and institutional venture capital.
Shing Lo:
Thanks, Mike. So on to the next question that I have is about exits, because I think having different types of investors on your cap table may lead you to a different outcome on an exit, potentially. Am I right or wrong?
Mike Turner:
Yeah, look, I think the first myth that needs to be debunked, if you like, is: what an exit actually is, because institutional investors in private equity will talk about an IPO as being an exit. For a founder it's not an exit. For a founder an IPO is the next stage in the company's growth, and the founders are likely to be committed to running the business for many years to come and at an indefinite period of time. An M&A is an exit because the founders are selling their shares that realizing their investment, they may well be tied into the business for a year or 2 or 3 post-acquisition as part of the into integration with the purchase. But it's a very different thing. So I think, first of all, I would say talking to founders and those founders talking to their investors and really just trying to manage expectations around what type of process is best for the company, liquidity process is best for the company, and I use that expression far more obviously that I would an exit. Does that make sense?
Shing Lo:
Yeah it does. I think most founders would ideally love to an IPO exit, but not all businesses are suited for an IPO exit. Most of them actually get bought out on an M&A transaction.
Mike Turner:
I heard a very interesting podcast just this morning, actually with one of the very leading private equity sponsors that growth fund, and the guy who runs that growth fund in Europe saying, you know, it's actually a very small percentage of their exits are IPOs. He said “Everyone thinks we drive all our portfolio companies to IPO.” I can't remember the precise number was 75% or 85%, by way of strategic exits only 15% or 25%, by way of IPO, which I think makes the point.
Shing Lo:
Yeah, I think you're right. That's very interesting statistics actually. Well, so that takes us to the end of the session. Thank you so much for your time, Mike. It's been great having you here.
Mike Turner:
Thank you, Shing. Always great to chat.