Hussein Kanji is one of the founding partners at Hoxton Ventures, a new 40m VC fund raised in December 2013 to focus on early stage investments in the growing European tech scene. At a night hosted by Monkfeet he shared his views on venture capital in Europe.
What do Hoxton Ventures look for in startups?
- New markets - These are companies that aren’t just launching in a new market, but creating completely new markets. By doing this they are much more likely to be able to grasp a large market share. An example is their recent investment in Deliveroo, who are creating a market by offering delivery logistics for premium restaurants who don’t otherwise deliver.
- Product/Market fit - Hoxton Ventures positions themselves as a seed to series A venture firm, writing an average cheque of about $2m. They look for 30-50% month on month growth in order to show product/market fit.
- New founders - Whilst many European venture capitalists will look for seasoned entrepreneurs, Hoxton prefer the new founders. Steve Jobs and Mark Zuckerberg are two obvious examples of new founders who went on to build huge companies.
How should you approach VCs for investment?
- Get referrals - Get other people to tell your story. Having other people vouch for your product is much more powerful than you doing so yourself. Use your network to find people in influential positions and get them to talk about your product. You want to create a feeling that the VC would be missing out if they didn’t at least talk to you.
- Reduce risks - Build a product. Build a team. Get some metrics. All these things make the investment less risky in the eyes of a VC.
- Research risk tolerance at the partner level - When looking for investment you should target specific partners within a firm, not the firm as a whole. Some partners will have a greater tolerance for risk or a preference for a specific type of investment. You should research both when looking for funding.
Startup environment in the UK vs. the US
- Funding - The US have greater investment opportunities. If Uber existed in the UK would they have been able to raise the same amount of funding? No. Simply put, there is more venture capital available in the US and they are more likely to invest it near home.
- Talent - Engineering talent is actually very strong in Europe. In fact, an equal level of talent is probably available at a better price in Europe due to big companies inflating the average wages in the US. However, as your team grows there becomes a need for senior level positions and managers. This is where the US dominates. The big companies such as Google, Apple and Facebook are able to train and mentor candidates for senior level positions and they exist in the US. To bring this talent to Europe will come at a premium.
- Acquisitions - The big companies who have the ability to acquire startups exist mainly in the US and are more likely to buy near home.
Venture capital economics Venture capital is not the right choice for all businesses. Venture capitalists usually need to make a return of at least 4x for their limited partners. For a $40m fund such as Hoxton ventures, this means a return of $160m. With a average ownership of about 20% of their portfolio, this means a market cap of $800m. For this reason, venture capitalists need to find big winners. This means companies who can scale quickly and grow fast in order to dominate a market. If you are not operating under these conditions then taking venture capital is not the right choice.