Hussein Kanji managed to back not one, but three unicorns in his first VC fund.
One of them — Babylon Health — went bankrupt but the other two, Deliveroo and Darktrace, delivered healthy returns for his firm Hoxton Ventures as we discuss on the latest episode of the Sifted podcast.
Hoxton, which is investing out of its third fund of $215m, has also backed startups like travel booking platform TourRadar, tutor marketplace Preply and AI drug discovery company Peptone.
It’s keeping out of the most frenzied early-stage deals of the moment, though, Kanji tells us. This is because valuations are way too high and often raising too much money is no good for anyone.
On the podcast, we also spoke about the most ludicrous investment hypes of recent times, the best time in a startup’s life to move to the US and why Hoxton still hasn’t hired a female partner.
To get a flavour of the conversation, read the lightly edited highlights below — or listen to the full conversation (including one case of a missing founder) here.
What’s it looking like at early-stage?
Seed investing never slowed down — there's so many new funds in the market and so many big funds doing seed that things have been pretty hectic.
One of the big US investors was telling me that seed valuations at the top part of the market are more expensive in Europe than they are in the US. I think it’s supply and demand; there are so few startups and there's so much capital chasing after them that the prices here have just been going up.
We hear stories of seed round valuations at $60m or $100m pre — stuff you would see in 2021, but you would less likely see in 2023 or 2024.
I think that the two big spaces where we see a frenzy is AI. That's largely the DeepMind community or the Meta community (because the latter runs almost all of its AI stuff out of Paris), or its founders who are coming from tried and tested networks — the Revolut mafia, the GoCardless mafia, the Tessian mafia. A bunch of these companies that were kind of yesterday’s companies, that have now scaled up to be real outcomes, or smaller outcomes, who had really great talent and are now spinning off to start companies of their own. There's a huge amount of traction for those people. The CTO of Monzo left to start a new company and there was like a battle royale for the term sheets to be put in front of him.
In those cases, it becomes a battle between the big funds — Index, Accel, Sequoia and Lightspeed against each other. We tend to opt out of those because the prices get very high and the cheques get really big. And I think there's a bit of a winner's curse unless the company goes to distance, because if they're starting at an $100m valuation, they're gonna have to get to a $1bn to $2bn outcome to really make money. And that's hard to do.
We don't see them — but we've heard of weekend term sheets, term sheets sketched out on paper, people flying in from New York for a Friday meeting to take them out to dinner and closing on a Saturday. All the stuff that you read about in the books or you kind of imagine — that stuff still happens for these kinds of companies.
When is the right time for a company to focus on the US?
The minute that you can afford to do it — because I think every day that you waste is opportunity cost.
There's a bunch of people who will say you build your product, and then you get your local customers through your extended network, and that's probably right. But the minute you get one or two reference points, you should be replicating that in the US because — unfortunately — the Americans don’t care about the rest of the world. You go land Tesco or Sainsbury’s — these big accounts here, which are really hard to get — and you show up to the US and, I’m really sorry, but no one knows what Tesco is. You’re starting from square one all over again. I think you should be out there, from the earliest days, winning the same reference customers in the US, which then kind of builds upon itself and lets you turn it into a machine.
Companies here still don't go westward as aggressively as they probably should
There's a contrarian theory that says you should do it as late as possible — that you should go get your home market, build up to a real revenue business, get to scale, and then go worry about the US when you're in a position of strength. But I feel like every time you do that, you give way to the American company. And there's almost always an American version, whether it's a copycat or the original, it doesn't make any difference. There's an American version of the same thing in a new market, and then the movie ends the same way.
I went through all of the startups [in Europe] over the last 20 years and looked at how many companies crossed $500m plus in revenue. I think if they can get to $500m plus in revenue they're on the trajectory to become multibillion-dollar companies, especially if they're still growing and haven't plateaued. And my list is really small. It’s less than 30. And I would say three quarters of them are very focused on the American market if you look at the revenue base and look at where they actually sell product.
I think companies here still don't go westward as aggressively as they probably should. And they leave money on the table as a result.
What’s the most stupid thing you’ve seen investors lose their mind over?
The scooter companies were really odd for me — they were low margin, operationally intensive businesses… and they only worked in the summer! It just made no sense whatsoever.
You raised your last fund in 2021, which would suggest you need to fundraise again soon. How are things looking for when you need to get out there?
We’ve been pretty fortunate — our DPI (distributed to paid-in capital) is actually really high for a fund. Most of our paper wealth has turned into cash because of our IPOs. We have more to come, but a substantial amount has gone back to our investors. So we should have an okay time raising.
I know a lot of people were scared in 2023 and delayed their fundraising until 2024. If you think of all these big institutions, they’re spending money on a budgetary cycle that’s kind of annualised. And so, they don’t want to be in the 2023 bucket, they wanted to be in the 2024 bucket. a lot of people left their funds open for one extra quarter to try to grab the 2024 money. That’s one of the reasons why we’re a little bit hesitant to think about fundraising so quickly.
What has been your strategy — you had all those IPOs from the first fund… but how else have you thought about returning money to LPs; how did you play that game in the boom times, and did you play it well?
We made some mistakes. We sold one of our companies to Epic Games, which has this unusual distinction of being a very well known brand that's private, and was worth $20bn or $30bn at peak and has a very active secondaries market. And like many folks, we got a little bit greedy, and said, ‘It's worth this much today, it's probably going to be worth the same amount or more tomorrow. So we're just going to hold.’
Our COO is really good at being super risk averse, so he dragged us kicking and screaming into the sale process. So we sold a lot of our Epic stock in the secondaries market — but not all of it. I wish we had sold all of it. At peak, it was about 1500 to 1600 a share. And we sold everywhere from 1100 to 1400. The current price is about 450. I think being good about selling stuff early, or when markets are at peak, makes sense. You leave some money on the table, but it kind of makes sense.
We distributed all of our Deliveroo stock six months after the IPO. The IPO was at 390 — it wasn't a very successful IPO unfortunately, it dropped down to 320 and then kept going down. About six months later it rebounded back up to about £3 a share. We sold it out at £3 a share and gave it back to our investors; we didn't sell, we distributed when they elected to sell.
We held our Darktrace — and I'm still a big Darktrace bull. I hold it in my personal account because, again, we distributed stocks so that comes back to me as stock. I think it's a fundamentally undervalued company. I am 100% wrong on this from a short-term market perspective. I think I'll be right long term, but short term the company went public at 250, got to stability around four, then ran all the way up to about nine to 10. When we came out of lock-up it was about six. We probably could’ve sold or distributed at six, but I was like, ‘It’s undervalued at six.’ It’s today somewhere between £3.50 and £4.
I think to do this well you have to be a little bit prescriptive
I think to do this well you have to be a little bit prescriptive. And some of the good firms have done this, where they've just put a formula: when you have an IPO, as soon as you can, you sell a third of it; six months or a year after that, you sell another third; six months or a year after that you sell another third. You don't take a view on the long-term — because when it works, it works in a really good way. And there are lots of these stories of Sequoia holding Nvidia stock ever since it went public way back in the mid 90s — and they’ve done really well. But you can screw it up just as much.
I wish we were more prescriptive. We lost value. As a result, we have a really good fund — but we could’ve been a super exceptional fund if we’d been a little bit more disciplined about selling.
So how good are your returns from Deliveroo and Darktrace?
With Deliveroo, we put in about $2m total to work in the company and we got about $60m back. The fund was about $28m, so it was a good return.
With Darktrace, we put in more, because we bought a lot of stock in Darktrace leading up to the IPO. We probably had about $40m or $50m in Darktrace, and we made a similar type of multiple on Darktrace but on a bigger number.
At peak our holding in Darktrace was about $400m — a blow-out type number.
What about Babylon?
Babylon’s a sad story. When the company went public via SPAC, we were off the board. We were told by one of the big investors that unless you had a certain amount of capital in the company, you kind of didn't deserve to be on the board with the big boys. And we were not the big pocketbook investor around the table.
We would probably have argued against a SPAC for a whole bunch of reasons: it was late in the SPAC cycle; we were pretty anti-SPAC to begin with. And it went public via SPAC and a lot of the investors in the SPAC redeemed — so the company didn't have enough cash on the balance sheet to be able to do what it needed to do. And then the challenge with the SPAC is you start at £10 a share and even a small amount of daily volume, if it's selling, causes the price to go down. The market just went against it. It delivered on all its revenue — it had absurdly high revenue expectations. In the year before IPO, it did $180m of revenue, and in the year of the IPO, it was $320m in revenue, and they were saying they were going to do $900m of revenue — and they ended up doing $1.1bn. Those are big numbers.
The criticism that everyone had was they were getting all these customers — they were basically taking over accounts, like a batch of customers from people — and the question was, could they turn those accounts into something profitable? Would they actually make any money? In Q1, which is the quarter that they went bust, they were at a billion and a half run rate, which is a pretty high number. And the numbers were actually profitable in their basket of customers. They weren't profitable as a company, but they were profitable on their customers.
They didn't lose because of their revenue or their business model, they lost because they ran out of cash
They didn't lose because of their revenue or their business model, they lost because they ran out of cash. They just didn't have the cash flow to sustain themselves back from the early days of the SPAC. We suggested that they might want to privatise — this was a good company to have been sold. But I don't think anyone wanted to sell it. And by the time you actually do want to sell it, it's probably too late.
We did not sell our shares after lockup. It was still a solvent company, so we could have sold — but it was such a small number in the grand scheme of things that we were like, 'We might as well just hold on and see how this movie plays out'. The day it announced its liquidation or bankruptcy you could still trade out of it, so we sold everything that we had and made a little bit of money, but not a lot of money.
How much did you put into Babylon?
About $1.5m to $2m.
You’ve got a team of four partners now, excluding founding partner Rob Kniaz, who is leaving. And they’re all men. Why has it proven so hard to find a female partner?
It's really hard; there are not that many.
We can’t take the task — at least not yet — of training someone from the ground up. So we need someone who comes out of the Bay Area ecosystem, has the Rolodex, has the knowledge of building these companies up because we're active board members, and you can't learn the board job on the fly. And then this is the hard part — has to have been an investor somewhere else.
It will cost $20m to $30m to train someone in venture — they will lose that amount of money before they're productive. It's kind of scary. We're a small fund, and we're much bigger than we used to be in 2014 — but a $20m to $30m tax is a big tax. I would much rather Accel picks up the tab — and I'm not hiring Sonali [de Rycker] anytime soon. And I'm not hiring Luciana at Sequoia anytime soon.
There are not that many women who have come up through the ranks, who've learned the business, who we can actively poach. That said, there are a couple — and I'm trying really hard to court them to come across the pond. They’re in the US. Many of the women that we see at the firms here are younger and up-and-coming. We're probably still another two years away from being able to hire one of them because you need to have a strong enough partnership in place. If I'm on 22 boards, I can't sit and mentor someone. That's another year or two away before I have the bandwidth to be able to grow someone.
It will cost $20m to $30m to train someone in venture
So I need someone who can hit the ground running. But I'm making slow steady progress, which is why I don't think it's like three months away when we make the hire, it's probably like a year away. But I think I’m going to get someone from across the pond to come and join us here.
There are a bunch of folks who are British or European out in the Bay Area, who are doing phenomenally well. So it's basically getting them to return — and then come and join us rather than join Index or Accel or Sequoia. They can pay. We can’t pay as much.
For more of Hussein Kanji’s insights into early-stage startups in Europe, including how not to treat your COO, listen to the full episode here.
