The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
20VC: Why Large Seed Rounds Increase the Chances of Success | When to Sell in Venture | Why Multi-Stage Firms Do Not Do The Work | Is Europe Totally F****** and Why AI Means London Can Compete with the US with Hussein Kanji
Mon, 20 Jan 2025
Hussein Kanji is the Founder and Managing Partner of Hoxton Ventures, one of Europe’s leading early-stage firms with mega wins in the form of Darktrace and Deliveroo. Hussein cut his teeth in venture at Accel Partners in his early years. In Today’s Episode with Hussein Kanji We Discuss: 1. How to Raise a Fund: What are Hussein’s biggest lessons from his first fund taking 39 months to raise? Why does Hussein believe you should fundraise for a set amount of time and not to achieve a certain amount of capital? Does Hussein believe governments should be investing in venture funds? What are the biggest mistakes Hussein sees emerging managers make when raising? 2. How to 10x a Fund: What is Hussein’s formula for knowing when to sell an investment? How did Hussein miss out on making $400M in Darktrace? What did he learn from it? How much money did Hoxton make from Deliveroo? How did doing 37x on Deliveroo impact how Hussein invests today? 3. How to Build a Team in Venture: Why does Hussein believe the incentive mechanism for young VCs is broken? Why do they just want to get cash out the door and not worry about quality? Why is it hard to hire female partners today? What needs to happen for this to change? What are the single biggest ways that venture partnerships break down? What went wrong between Hussein and his partner, Rob? 4. Is Europe Totally F*******: Why does Hussein believe small seed rounds are a massive problem in the UK? Why does Hussein believe the dire state of the London Stock Exchange is not a problem? Why does Hussein advise companies that the best way to scale is in the US? What advice would Hussein give to Keir Starmer on how to stimulate growth in the UK? Why does AI mean that the UK can now compete with the US?
there is a correlation between how much money goes in to a company and what the probability of success is the average is about like 300 million to get to unicorn status your best path to scale from a financing perspective is america the rounds are bigger do not do a fundraise for a size of the fund do a fundraise for time of the fund give yourself 90 days whatever you get go start investing
This is 20VC with me, Harry Stebbings. Now, today's show is a venture nerd's dream. I love this guest because, well, he's willing to be unpopular, he's very opinionated, and he's a very good picker of both companies and founders. I have a lot of respect for his investment style. And so with that, I'm thrilled to welcome Hussein Kanji.
Found and managing partner of Hoxton Ventures, one of Europe's leading early stage seed firms with mega wins in the form of Darktrace and Deliveroo. Hussein cut his teeth in venture at Accel Partners in his early years. And as I said, this was a really deep and granular discussion on so many of the incredible intricacies of the venture business.
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Get $1,000 off your first year by visiting vanta.com forward slash 20VC. That's V-A-N-T-A dot com forward slash 20VC. You have now arrived at your destination. Hussain, dude, we did this nine years ago. It was a webcam on Skype, which is aging both of us. Thank you so much for joining me today.
Yeah, I think I remember. I was like, I had my laptop on a pillow in my bedroom, staring at me. I was like, who's this Harry kid, like, interviewing me?
I think everyone was thinking, who the fuck is this Harry kid? Why won't he leave us alone? Listen, I want to dive right in. I remember Keisterboy telling me in a show, every fun needs a right to exist. When we think about Hoxton, how do you think about your answer for what our right to exist is?
Yeah, it's a good question. By the way, I think the venture world does not need yet another fund. Like we have a lot of them, right? They're coming down in numbers, but the world, we have a lot of, like a lot of people playing VCs. 11, 13 years ago when we first started, we're 11 years old, but we started fundraising a little bit before then. The world did not have that many VCs in Europe.
Had a lot of them in the US, had a lot of them in China, had a lot of them in India, but nobody was here in Europe. In fact, the seed funds of record year, you won't even remember the names. There were Eden and Pond. They're like a bygone. The people raised money in the dot-com boom, mismanaged their capital all the way through the collapse and kind of left.
And so the world really needed a venture player in Europe. And that was the thesis of Foxton. And then if you look at where we are today, the world now has quite a bit of venture funds in Europe, but there are not that many old-fashioned venture funds left in this industry. I think most of us become momentum investors in this industry.
We write the check largely to get the next markup, not to build the long term, durable, big company of tomorrow. And I don't think there are that many people in Europe who do those kinds of things.
Why do you think that is?
Why have we shifted to this heavy momentum? Well, we went into a market where money was effectively free. And the way you get promoted inside of most firms, remember, we're exceptions to the rule, right? Because we own our own firms. These are our businesses. So we think like business owners, not like employees. If you're the general employee, you optimize for getting to the next career ladder.
And how do you show that you can get to the next career ladder? You do a deal and then General Catalyst or Index or Kleiner or Sequoia or Andreessen, I mean, there are so many of these great firms, mark it up at a significant premium. And then someone else, Tiger, et cetera, marks it up after that. And all of a sudden, it doesn't make a difference.
If you've not made any money, you look like you've picked a hot company.
But I would actually argue even for us and for those that own their firms, if you have to fundraise, it makes life considerably easy. People are like, oh, you know, DPI is all that matters today. It's not true. If you can show a cohort of companies that have great tier one investors following on, it is meaningful to LPs.
Yeah, I would say even for us, we have a challenge when it comes to LPs. And this is not us specific, us in the general, which is the entire industry looks at what the next markup is. Who's following your deal? Who's marking it up? Is the company well capitalized for the future? And really, is it a signal of quality when a Sequoia ends up writing the check?
Like, have you picked a really good company? I think that's true in the general. But the problem is the venture world is not a general type kind of industry, right? The averages and the medians are very deceptive in our industry. That's not where the returns are. So weirdly enough, we're in this weird predicament in the industry where you kind of have to do things that are a little bit off-piste.
You kind of have to build for the big outcome. And you have to be a little bit contrarian. And then very quickly, about a year or two later, the world has to recognize that you're right in order for you to really get credit.
What does it mean to do things that are off-piece today, though? Vertical SaaS, you think in a world of AI and agents, shit, vertical SaaS has never been hotter. We just did a bluntly very boring vertical SaaS company, had 13 term sheets.
The whole industry is massively grown, so there's a lot of money to be made. But if you think about the big, iconic, the household name companies, the Googles, the Facebooks, the Ubers, the Netflixes, they were all mostly brand new category creators. That category didn't exist. There wasn't an Uber before there was an Uber. There were a bunch of search engines, but none of them really succeeded.
And Google kind of became this thing. There was also Friendster before Meta, but it never really succeeded. So these were kind of inventing new categories. And I remember even at Facebook went public when we were fundraising for Fund One. And when it went public, people really were skeptical about how it was going to make money.
The transition to mobile was hugely questionable.
And Facebook hadn't done the transition to mobile yet, right? And how does Facebook really make money? It captures all your attention on the mobile phone, and then as a result has the right to be able to serve you ads. And that's kind of their durable moat. But that wasn't clear even all the way up to the IPO. So these new categories, they're really fuzzy up until they're not.
And then when they're not, you see really big outcomes. And I don't think people in Europe think in that kind of way. I think people in Europe are largely trained in private equity. They think about how do I minimize my downside? I will do the vertical SaaS company because I know I can't lose money on it. The metrics are really good. I can understand them. I can characterize them.
With the pref stat where it is, I only need to clear 12, 15, and there's upside to 750. Great.
Yeah. And how many investors have you come on who think in this kind of language? Like, I will worry about my downside and the upside will take care of itself. But the venture industry is all about the power law, all about the outliers, all about those kinds of outcomes that I was talking about. And Europe doesn't have them.
Do you do outcome scenario planning?
We think about all the range. Like if this company falls into trouble, like we have a strategy in the fund. If the company, the founder gets hit by a bus. We had an incident in one of our companies where the founder got diagnosed with bipolar syndrome late in life. I like how that explains a lot about the founder. But he had taken himself out of commission and was getting Medicaid.
It was like, if something like that happens, a weird externality type of event, what do we do with the company? Every quarter, We have like an immediate shopping list, which is if this company falls into trouble, I'm picking up the phone. I'm calling this person at this buyer in this level of the organization who wants this kind of product, technology, technology team.
I can kind of grease the wheels to get an acquisition done. I hope I never make that call, but I'm like mentally prepared for making that call. All of us are.
So you will prepare a list of three to five names of people who would buy in the case of X happening.
And it's not even just a company. Like, who's the buyer? What's the division? Who's the person? Who's going to be that protagonist?
What if you can't identify them? I will quite often sit with the team and I'm like, here, I totally see who the buyer is. Here, I don't know. It's a bit fuzzy. What if you can't? Is that a red flag?
So we don't do that from an investment perspective, but we do it once we're actually involved in the company. So like the nice thing about being a seed investor is these companies have a little bit of life, 12 to 18 months before they have to worry about kind of this crisis mode. But then at that point we start building in this resilience.
And so when we think about, when we think about fund one, how long did that take to raise?
Fund one was a bear. Fund one was 39 months to get going. Like three, nine, like over three years. You mentally think at 24 months. Did you have an anchor? No. We had a lot of friends. We had two buckets of people. We went to American people, mostly individuals. We were like, we don't really understand this Europe thing. It doesn't make any sense to us.
We don't understand why you want to be in Europe. But we like you. We'll write you a small enough ticket, which turns out to be a decent-sized ticket, but a small enough ticket where if you lose all this money, and we're mentally prepared that you're going to lose all this money, we'll still invite you around for dinner every once in a while. So that was our merit.
And we got to about 8 million on the basis of that. And then we had a lot more to go. We had to get to at least 25 for the first one to make it viable.
Okay. So 39 months, we have eight from that. How did the rest come together?
And then it was like a grind for like the next, like two, two and a half. The early money was easy and it was like two, two and a half years. And then finally we got, we found the family who believed, who then ended up writing a check to us. And then about a couple of years later, they wrote a check to Isomer.
10.
No, sorry, 15, 15 out of 15. And they split it between 10 for Isomer and five for us. I have five from the family, 10 from them.
That's a big check in a small fund.
Yeah, yeah. That basically made our fund. We would not have a fund without them.
Is there anything you'd do differently on that fundraise when you look back now?
Oh, yeah. So I got this advice from Mike Maples, who said, do not do a fundraise for a size of the fund. Do a fundraise for time of the fund. So in other words, give yourself 90 days. Whatever you get, go start investing. You're a smart guy. You can figure out how to do portfolio construction with a smaller amount of money or a bigger amount of money.
Go deploy it, go put points up on the board, go prove that those investments are actually really good, and then go back into the market to go raise more capital. And again, Floodgate had four big LPs, Princeton, Yale, Horsley, and I forget who, and I think Notre Dame was the fourth. And it was a $75 million first-time fund.
So to me, it was like, this is great advice, but it's like kind of luxury advice, right? Because look at your LP base and look at the size of your fund. So I ignored it. But the advice I give every emerging manager is Mike's advice, which is that's what you ought to do. Like give yourself a finite amount of time. Do not do what we did.
39 months to basically do nothing with your life other than beg, which is what you're doing, is a lot of time wasted. Were you terrible at fundraising? Oh, awful. Why? I think we were selling a story that nobody believed in, right? Europe is going to produce really good outcomes. Prove it to me. Well, there's no data. Like you look in the rears, there are no outcomes.
Now, 15 years later, 13 years later, it's obvious that there are comes here. So it's much easier to tell that story. Now people shop for this product, but you're basically selling a product that nobody's designed to buy.
Did you come out of the gate fast? Often when it takes a long time to raise, it's like, woohoo, we have cash now. Did you deploy fast?
No, we were pretty methodical and like all the way through. The only time we probably maybe sped up was like 2021, but I think the whole industry was speeding up at that point. And then we slowed down intentionally in 22. So we do, we used to do about four to six a year.
In terms of first funds, what was the best investment from that fund?
The best investment on paper was, I mean, not paper, like realized was Deliveroo. It was about 34X on the first check. At first and whatever we deployed out of the fund. So how much did you put in? We put in just around a million of that first round. Will came to me when he was still a grad student and doing his MBA. And I tried to talk him out of it.
Most of the founders that we end up writing a check to are very missionary. They're not worried about money or fame or status. What they're trying to do is solve a problem that they think is really broken. That's what they want to bet their career and their life on. And that kind of becomes their project. And Will was a distressed debt guy.
And I was like, you're going to make a lot more money in London working for a hedge fund or working for a bank. Why do you want to get on a bicycle or a scooter and do these delivery drops? You realize it doesn't make you doing the deliveries in the early days as a startup. You're going to be taking food from a restaurant and schlepping it to someone's house. And he was like, it's broken.
He's like, it pisses me off that I can't get food delivered. I tried to talk him out of it when he was a was an MBA student. He came to the summer. He was like, I'm going to do this round. We were in the middle of our closing for fun one, so we couldn't do it. And then he launched. And to be fair, I was somewhat skeptical. I was like, the world doesn't need this problem.
Like, this is a top 1% problem. Like high income earners who have lots of disposable cash want to get food from restaurants. and have a driver kind of come drop it off. I'm not so sure this is a mainstream product. And then there were lots of other delivery companies back then.
And then about four or five months later, it was very clear that he was the most methodical and thoughtful about the operations of the business, which is kind of the core. He built an Android stack that kind of tracked all the drivers like it was like real technology in it. And and he was he was growing five, seven percent week on week. And we came in and we said we'd do that.
We'd write the first check. And then Index came in and gazoomed us. What do you mean they gazoomed you? So the round was supposed to be like a million, million and a half, and it became a three million pound round and three million pounds is like, it's a $5 million back then. That was like big enough for the small seed funds.
So like, uh, like which we were really the only seed fund really interested in this couldn't really write that check. Right. Couldn't match. So they ended up winning the deal and then will fought and, and, and we ended up kind of co co-investing with index.
Okay. And so you have that first million, it returns the fund. Great. When we think about like preserving ownership, how did the preservation of ownership look like in that?
So we followed, but as a $28 million first fund, which is what we were, it's hard to follow your capital. And then we had a weird scenario in that particular company where our pro rata rights got taken away from us. And in the legal documents, they changed the definition of who would get the pro rata, basically singling us out.
There weren't that many other seed investors that owned above that bar and below the number that they set. And they forgot that we bought common stock there.
from angels so we kind of politely didn't comment on the legals and then the next round we said we're going to exercise our prorata and then we were told you can't and i was like yes we can like you know and then they realized the mistake and then they changed it so like we did our prorata in the the seed round was called an a so that it was named by the letter a so we did the b in the c and then we didn't do the d which is when dst came in
How do you think about reserves? Because there is the theory that, hey, a company will never be as cheap as it is today. And so just buy up as much early as possible. And then there's also the theory that actually you see your winners evolve over time and you should double down and concentrate capital effectively. How do you think about which camp to be in?
So we've gone from a $28 million fund to an $89 million fund to a $214 million fund. And we haven't really changed all that much in the way of portfolio construction or what we do, but we are now super aggressive about doubling down. So if we see early traction in any one of our companies, we will figure out a way to put more capital in, in these days for our best companies.
And our best companies are much higher concentrations than our average company. We're getting closer to like 15, 20% ownership pretty consistently.
Over time or on first show?
The first check is the first check, but we put a second check in and sometimes it's by the third check. So it's between the first and the second check that we're really getting these kinds of underships.
And those second checks, you're kind of making the round happen. You're proactively going to them saying, hey, just take three more in a note.
We're finding ways to take. We don't want to screw up the downstream investors who have to then write the check. And we don't want to be cherry picking our best companies, but we find ways to get more capital into these things. And sometimes it's as easy as, look, Whatever you're doing the next time around, we want to do more than our prerogative. And it's a handshake agreement.
In other cases, you know, we'll do a safe on top of our first check. Like we'll find a way to put more capital to work when ownership is still really inexpensive in the grand scheme of things and build up the ownership.
Will you ever do an uncap note? No, not an uncap note. Will you ever do common not prefs? I'm seeing this more and more.
Weirdly, no, because I think in the UK, it's very easy to convert common if you buy common as like secondary into preferred. And then generally speaking, like we're old fashioned, like we think that the preference matters, even in these large outcomes, because there could be volatility downstream. And yet, so I don't think we've ever really bought common.
The other really challenging element, when do you sell and how do you manage that? So like with a delivery, when it IPOs, do you just sell then? How do you think about that?
Yeah, so we've learned this the hard way. So in the case of Dark Trace, which we also took public, Dark Trace went public at £2.50, traded up to four. And by the time lockup was expired, it was around six and we did not sell. And had we sold... Didn't sell anything? I was a super long term and was all the way until the end. And to be fair, I was... How much did you have in that?
We would have been a 10x net fund on Darktrace at its peak.
A 10x net?
Yeah. So like our numbers for Darktrace are way higher than our Deliveroo numbers, but we mistimed it. And then you get pressure when you don't sell at the top. And to be fair, like this is also like in 21 where everyone, you know, the market was just euphoric in general. When did you sell? We sold it about a year later because we were coming up to the end of the life of the fund.
And we sold it around four pounds a share. So we left, or maybe not even four, I think closer to like three, 350. And we distributed in specie. And so I got a bunch of stock from Dark Trace. And then I held all the way until the Tama Bravo acquisition, which is roughly around like six pounds.
But that like four is the fund, right?
Yeah, yeah, yeah. We made a lot of money on dark trays, but we should have probably programmatically sold. And so I think the formula that we now have is at the time of the IPO, as soon as you're out of lockup, a third of it you sell, a third of it you sell six months later, and then a third of it you sell another six to 12 months after that.
Just make it a formula because I think there's too much human error in this. And by the way, long-term, I was right, but the markets and what you think long-term, they don't always map one-to-one. Did you do a third, a third, a third on deliverer? No, no. We sold out a Deliveroo at the IPO. We thought it was like very fairly valued at the time.
And so there we took a view, we took human judgment, right? We were going to sell. It was supposed to go public at £3.90, went public at £3 a share. Sorry, after lockup it was £3 a share and then it came down to about £1 a share. So we look really smart for selling Deliveroo on the eve of the lockup. Were LPs grateful? Yes.
I mean, we have real distributions in the first fund, like it's distributed multiples back of the fund. So like DPI right now is a real topic. But a $28 million fund, even if you multiply it by multiples, doesn't turn out to be that much money for the LPs.
Do you invest differently when you've delivered real DPI? And what I mean by that is, bluntly, you're not downside protection thinking. You are not thinking, oh, shit, I've got to put numbers on the board. You are able to see greatness kind of more easily having proven yourself.
Yeah, so we just had our AGM yesterday, and we have told most of our investors, do not pay attention to TVPI for the time being, because what we have been doing is proactively finding ways to put more money to work inside of our best companies. We know what the best companies are. It's about a third of the portfolio.
In the second fund, that's now shifted to a little bit over 50% of our capital is in the top third of the fund. And in the third fund, it's getting closer to about 60%, 65% of the top 50%. Like the money is going into the best companies. And so when that happens, you're obviously putting money to work at like slightly depressed prices, right?
You're not sending them out to get ridiculous markups because you don't want ridiculous markups on those companies. I mean, if the founder wants it, then we're along for the ride. But if you can find a way to not get the ridiculous markup and put more money to work, you're buying more ownership. And if you're right, three, five years later, that will make a material difference in DPI.
When you review the best companies, are the best companies the hottest companies early on?
No, not necessarily. So I think Darktrace was not a hot company for a good chunk of its existence. In fact, I know that they talked to a bunch of the good and the great, and people were skeptical about them. And as a result, they were buying opportunities for us. The biggest regret we had in our fund one was that the Series C, we brought KKR into the cap table of Darktrace.
We introduced KKR and kind of brokered the introduction. There was a little bit of a miscommunication at one point, and we kind of put some social capital in to kind of smooth things over. It was a $40 million round at 400 million post on a company that was doing about $4 million a month in revenue and scaling. I would argue a pretty fair price.
And the company said, we will give you 10 of that 40. Go raise it as an SPV from your investors. We think you will not get rich enough off of Dark Trace. And you guys are doing so much work behind the scenes helping us that we want you to have more skin in the game. And this is a weird scenario to, by the way, have, right, as a small fund. And so we went around.
And I remember going with super returns, February, cold, early. And I'm like going around to all these family offices. And we couldn't obviously say KKR is leading this, right? Because the term she was there, there's a confidential. It's like a major investor that you would know, household name, is seriously looking at this. We raised zero. It was 400 million posts.
It got privatized at 5.3 billion. So this is all dollars. So 400 to 5.3. It would have been a net 10x net of fees. We left money on the table and it's painful. It is really painful. We have another, I think our best company right now in our second fund, it's an AI drug discovery company. We wrote the first million dollar check. Nobody believed.
This is a time where people did not understand tech bio. It was before the term tech bio was coined. Brand new market creation, right? We were convinced. We put the chief scientist, Merck, on the phone with the company, and we were pretty convinced that these guys were onto something. And worst case, the six person team would get acquired for the technology chops they kind of had.
It would be an acquirer. So there wasn't that much downside in our case. And then all the data started lining up the right way after us. The check after us, less than a year later, was $40 million. from Bessemer and F Prime, we used to own 18% of this company. It's in an $89 million fund. To do pro rata, that's like a $7 to $8 million check. It's a big check to write out of that 89.
You can't really go to LPs at the Series A and be like, I think this is the next big thing because it's like super early, right? And all it's done is raise another round on the basis of some data. And so we ended up coming down in our ownership. We own about 13%, 14% of the business as opposed to 18%.
If that company goes where I think it's going to go, like I think in this company could be like the iconic company of tomorrow, like that 5% is going to be really big. Have you done many SPVs? We have nowadays. So in the run up to the Darktrace IPO, we did a bunch of SPVs with our investors. We put more money to work in Darktrace than the fund size of fund one.
And we think the lowest performing IRR for us was net 66%. This is all realized, by the way, net 66%. And the best performing was net 154%.
So you did over 28 million in SPVs.
I think we did like 40, 35 or 40, something like that. Whoa. What was your blended entry on those? Like you mean what was the price points we came in? I think generally we made somewhere between one and a half to three X net for our investors and a year to two. Hence why I looked at the IRR numbers. The IRR numbers are a lot more indicative because it was like they were very short holds.
Like I said, I've been bullish, right? I mean, I've been very bullish on Darktrace ever since I wrote the very first check because I saw the numbers. And I think this is the delta, right? When you see inside information, like you're close to the company, you know how it's doing and you see the buying opportunities and you see that they're fair prices. These weren't like not overly inflated prices.
How do you think about two things? One is bias. Let's start with bias. You love the founder. The numbers look good, but you just really like the founder. They're messaging you late at night, great ideas. And you're like, you have a connection with them that you don't have with someone new.
So we have a fairly trained growth investor on our team who is not in these companies, who can look at the data just on a pure databases and give a view. So we basically assemble a different team other than the person leading the investment saying, take a look at this, figure it out.
But, you know, going back to that dark trace round that KKR did, $4 million a month, so $48 million annualized, $400 million post, not pre-post. That's a pretty average. $4 million a month, so it's doing basically $50 a year. $50 a year, $400 million post. That's a pretty fair price for a SaaS business. Dude, that's ridiculous. You never see that. I'm like, I'm understated. Yeah, that's like a...
It's a good deal. You don't have to think about the founder sometimes or like the vision. You can just look at it from a numbers perspective. It's like, that's a pretty good company in the making. By the way, the Delta was, they'd gone from about a million a month at that point to about 4 million a month. So it was like, it was like super exponential growth in those early days.
The company, when it got privatized, did 732 million of revenue. But when we invested, it was doing like 10K.
Have you ever had a reserve check where you'd really doubled down extensively and it hasn't worked out?
Yeah, we've learned a couple of things along the way. People don't really need much from your investors when things are going well. They just need money and kind of get out of the way. Whenever there's a hiccup, usually end up picking up the phone and call your investor and we're usually the ones working it. I think this is a big transition right now in the seed world.
Sometimes when those calls are being made, it's not the series A guys or the multi-stage funds that are doing the work. There used to be a time where you wrote the check as the seed firm, then the big boys came in, you exited politely. And the big boys ran the business and they did the board stuff. They did the hiring, firing. If things had to happen, they did the acquisitions.
But these days with the growth of those guys, it's all call options for them, right? They will invest into something and see how it plays out so they can write the 30, $50 million check where it starts to get meaningful. Whereas for us, it's always meaningful. So we end up usually doing all of this heavy lifting.
And as a result, there's a bias that comes into this, which you then think you can fix a lot of stuff. We had a company that hit a stumbling block. We doubled down, rolled up the sleeves, started working. The other investor with us, it was another big venture fund in with us on this company, wrote it off. Weirdly enough, still turned up to the board. So they wouldn't give up their board seat.
So they wouldn't get recapped. So they defended themselves, but they wrote zero additional check. And the company needed about 2 million to turn itself around. And we were able to put a million. And we assumed if we did the first million, Someone else would come in and do the other million and we'd kind of get it there and ended up raising like 1.3 out of the two, ran out of cash.
Business had turned around. Someone else, it went into insolvency. Someone picked it up and has been flying with it since then, right? Because all the heavy lifting got done. I got a call about two months ago and this is weird. I heard that you were such a good board member for this company.
I want to give you stock options and have you back in the company on the board and I'm giving it to you for free. But the lesson for us is that this one feels like it might actually work out. The lesson for us is, like, this hard work stuff, you need to be well capitalized to be able to do. And sometimes it's not our place.
Like, even if we could do the work, we don't have the capital base to be able to do these things.
Has the Series A product worsened over the last three years?
I don't know if it's worsened, but I think we've gone to an era where people are writing checks and then letting things play out. There's a great transcript oral history. I do a lot of reading, right? So there's an oral history that the Computer History Museum does in California.
And they've gone back and interviewed all of the good and the great in our industry, like the founders of our industry, like the early venture capitalists. They did these oral histories, like eight to 12 page PDFs that you can kind of read. And if you read those transcripts, the way venture looked in the 60s and 70s and 80s and 90s looked really different than it does in like 2024.
Back in the day, Dave Marquardt was the only investor. He was at August. He was the only investor in Microsoft. Very few people know this. In the early days of Microsoft, Microsoft was structured as a partnership, not an ink. It was not a company. It was a partnership. And there was weird tension between Bill and Paul. And so they needed a third party to come in and clean it up.
And his firm complained that he was spending a lot of time helping these two kids out. They're all in their 20s at this point. The industry is really young, like it even is today, helping these kids out. He did that work for about a year before he got invited into Microsoft. He ended up owning 10% of Microsoft.
And I got a lecture from my COO when I did this with another one of our companies where we did a next generation AI law firm that runs as a law firm. And obviously, if you're running as a law firm, there's a whole bunch of stuff that you have to do beyond the tech. And I was giving this free advice to the founder. We own 20% of this business. The company's on fire. It's doing really well.
But I spent like a year problem solving, troubleshooting, getting on the whiteboard. Every time you had an issue, come over to the office and we'd like sit down and do it. And my CEO was like, what are you doing? Like, your time is really valuable. We got a whole portfolio that you're supposed to be working on. And you're like, you're like brainstorming with this guy. It's fun.
But like, and sometimes you have to do those kinds of things in order to buy the goodwill to actually be able to write the check. We ended up coming into a deal at nine. The company's on a million pound run rate right now. A month. This work pays itself back. But I think the industry did all of these things in the 80s and 90s. And we've gotten so much bigger now.
We're like, honestly, is it worth the time to do this for like a million, two million, three million, 10 million? Like you're much better off raising a five, six, seven billion dollar fund and putting 50 to work.
Is this good for founders though? They get a $10 to $15 million check from a Series A player who's got a billion to $4 billion, $5 billion even. And yeah, you're a total cool option. We're going to give you $10 million, $15 million, and just get out of the way, see if you are interesting, and we'll come back and give you $50 if you are interesting. Is that good or bad for founders, actually?
So if you'd asked me this question in 21, I would have said it was good. Because if the market's on the way up, if everything is pulling you up, All you need is money from the investors. You don't need all that much more. It's nice if they invite you to things, but you don't really need very much out of them.
If the market stumbles, market stumbled in 22, there's a whole bunch of companies out there. By the way, if you look at the public markets today and you go look at all the SaaS companies between the first decile all the way up to the 10th decile, if you break it up, everything other than the first decile is both growing and profitable. Both, not either or, both.
Which means that if you're a $100 million vertical SaaS company that's profitable, private today and you're at that kind of stage and you're not one or the other. Sorry, you are one or the other, but not both. You have a long way to go before you can go public. And those companies need to be like work needs to go into them.
And you probably need, even if it's just a sounding board, someone to sit down and have that conversation with. And that's probably your venture person. And if you're in a call option business, it's not worth the venture fund's time to do all that stuff. So I think it depends if you're in bull cycles or bear cycles or kind of in between cycles.
And I think we're kind of sort of in between because we're bull on AI and then kind of bearish on a lot of other stuff.
Keith Reboy, who's a friend and been on the show a couple of times, he always says like, the best founders don't need your help. Do you agree? Yes, until there's a hiccup.
And there are hiccups. People forget like even some of the massive outcomes in our industry have had hiccups. Some of them did not. Google did not have any hiccups. Maybe now it has a hiccup with some regulatory challenges, but did not have a hiccup. Facebook had hiccups. That was not easy to raise some of the rounds at Facebook. There's a reason why Microsoft ended up on the cap table.
Companies, they don't have a linear path from zero to success. It looks like that. You stretch out the curve and you miss all the volatility. It's like your glucose monitor. You see ups and downs on your glucose monitor, and then you see the trend line. And the trend line, when you eat, starts going up. But you do see ups and downs. You forget about the ups and downs with history.
But it's in the ups and downs where you actually need someone around to have the call. And maybe not on the ups, but definitely on the downs.
You said about the downside. Another thing that Jason Lemkins taught me is that honestly, giving founders true feedback on why you're passing, don't bother. They will just argue. They'll just think you're a shit. Just don't bother. It's not worth it.
I'm kind of in the same camp. There's no upside from like arguing with people. I mean, argue with your founders who are like in your, they're in your family, right? You're an investor, you're along. But like, there's the outside world.
And by the way, one of my founders says like, your single biggest flaw right now is you just have an overactive, and one of our LPs says the same thing, overactive twitterx.com. Like, why are you even on this thing? Do you give a shit what people think, dude?
I was in the gym the other day and you tweeted that some kitchen utensil company had blocked you. And I was going to respond to you. You know I love you. But I was going to respond to you like, even the kitchen utensil company doesn't work. I was like, that is too good. Yeah, I got blocked.
I got blocked from buying frying pans. What did you do? I bought a frying pan two holidays ago from my wife and it never turned up. And I complained and then eventually turned up. And apparently the response, because I complained, has been to blacklist me. I'm not allowed to ever buy a frying pan from this company again.
But does it affect, like, does it upset you? I think you know the truth, which is that you're not the most popular.
Yeah, I mean, I don't know if we're shooting for the popularity contest. Does it ever have a materially adverse impact on funds?
I mean, I think who wants to work with people who are too controversial or too unpopular? I mean, you want, like, especially when things are going up, right? You want people who are going to be cheerleading as much as possible.
So, fund one, 39 months. How long do fund two take? It's going to be better, right? Because we've got dark tracing delivery.
So, it's going to be great. It's better, but marginally better. It was 28 months. So, we went on the fundraise. We finished up fund one. It was a 2013 fund, somewhere around 17, 18. We went back out into the market to go raise. And you're going from 27 to 89? We were trying to get to 100. We thought 100 was the right number for a seed fund back then.
We now think the closer number is like 150 to 250, but back then it was about 100. And if you're going to play this game well, that's about the size that you need to be. So we went out for 100. We got a commitment from the European Investment Fund. It's a long process with the EIF. And they're like the anchor LP of record in Europe, especially in that era.
And we asked them about Brexit and they said, we don't, there's no such thing. Article 50 hasn't been invoked. We got to the final, we got to terms. We hadn't gotten into legals or doing the jurisdiction work and Article 50 got invoked and everyone who had a check or a commitment from EIF at that point felt it. Seedcamp got one of the first calls.
They tore up the document and all of us lost the EIF commitment because they were no longer able to invest in the UK. And then we had another big insurance company who was like the co-investor, the co-anchor, basically. We lost the insurance company in this process. We basically reset back to zero to go do the fundraise.
Started from scratch again in 18 and then kind of got our way to a closing in 19.
What was the big breakthrough moment there?
40%?
I don't think we'd have a fund without BPC.
But we're always told, and I know this is an incredibly luxurious position to be We're always told, like, don't have anyone over 10% of your fund. You don't want to be too concentrated, blah, blah, blah.
You got to get a fund. And you got to get the, I would argue, you have to get the right size fund. And, you know, nowadays we don't have this.
Is it better to get the right size fund with imbalance of LPs or is it better to get the wrong size fund with the right balance? If you're going to deliver a ton of returns for your investors, get to the right size fund. You mentioned that, obviously, BBB or BPC. Should governments be funding venture?
I think in Europe they've had to. I have a controversial take on this, which is the worry about governments funding, especially at those kinds of concentrations, is you end up with governments having market power. And I am a big believer in capitalism. I'm a big believer in the markets.
I think if you have someone like the EIF, where there's 30% of the aggregate capital of the LP commits, it's too big. What you should really have is what happened with AT&T in the US, where they broke it down into the bells. You had five different bells kind of competing with each other in telecom. You probably need five of EIFs competing with each other in the market.
If the government's going to step in to help, you don't want to concentrate it in one big power, because then you end up with weird terms, like you said, that may not be market. And it's really hard for the market to then function the way it needs to function. So if you're going to do it, do it in a competitive way.
Yes, or it could actually force the hand of pension funds who sit on the side in the UK and do absolutely nothing, which is a disgrace.
So I looked this up. So the pension funds in the UK, so the defined contribution scheme, about 10% of the capital in the pension funds is invested in the top tech names in America, 10%. And about 5% of the pension funds is invested in UK equities. So they're actually pretty long tech as far as pension funds go. They're not in venture. I have a genuine worry. It is really hard to be a VC.
It is really hard to be a founder. It is, I think, also reasonably hard to be an LP. Like if you're coming in from scratch with no knowledge, I don't know if you really know what you're doing. It takes money and time to train a VC. I think it takes money and time to train an LP. Super hard. So, OK, pension funds now decide to allocate capital to venture. Who's going to do it?
Where's the talent base in the UK of experienced LPs who know how venture works, who know what kind of funds to bet on? There are none. Yeah. So there's going to be a problem.
There's going to be a problem. By the way, no one is talking about this. And also, by the way, and I'm kind of arguing myself here, say we add across a couple of pension funds, another billion a year to European venture. That is bad. We already have way too much cash in Europe.
Yeah, this is this is the other problem that I think we've had ever since 21. We have had a number of people enter the industry. We used to have like 10,000 people doing kind of this tech investing venture, etc. It's gone up to like 35,000. It's come back down to the historic norm. But there are a lot of people doing this stuff.
And I don't know if people know how to allocate capital to who's good, who's exceptional, who's average.
We have a lot of data on managers through the shows and everything. And a lot of LPs come to me and they say, hey, here's my book. Tell me how I should write a size it. And they talk to me about their annual budgets. And the annual budget is generally about $300 million to $500 million for U.S. endowments.
$300 million to $500 million annually in venture is almost impossible if you want to do great returns. Because you're going to get $20 million in your top names. And there's probably three to four top names. Okay, so we've got $80 million out. Where are you going to put $220 million?
It's a real question.
Then you have to bet on the right emerging managers or you have to play the index. You can't even do that. You do five emerging managers at 10. Great. Now you've got another 50 out. You've got 170 left on the small side. So then you've got to do 40 into Andreessen.
I thought the Tiger playbook. was actually really fascinating in 21. Let me not sell a product that's designed for returns. This is how I viewed Tiger at the time. I will sell a product for a capital deployment and I'll just buy the index. I'll hoover up not $50 million commits, but $200 million commits who have to deploy into tech and I'll just buy the index. It didn't work, right?
Because I think they were overpaying on the market. But I could understand the appeal to the LP base, which is, look, where am I going to put this money? I've got a group that's going to take not a little bit of money, a lot of money, and be able to play the market for me.
I think the thing that's so challenging with that strategy is you assume that the outcomes are equi-probable, independent of how much cash goes in. And what I mean by that is like, OK, we'll pay up, but it'll still get a 3x. It may not be a 5x.
And that was the mistake. But but I do think like I looked at the data on this there, there is a correlation between how much money goes in to a company and what the probability of success is.
And this is the one this is why I think if you're going to be contrarian and we take pride in being contrarian, you have to make sure your companies get capitalized, because if they don't, they don't have it to meet. The average is about like 300 million to get to unicorn status. And then like there's some companies that do it for like 200 million.
But you have to raise that kind of quantum of capital. And the biggest structural problem that we have in the UK and Europe, the conversion rate between seed and series A, series A to series B, series B to series C is basically these days on par with the US. But the capitalization of our companies from seed to series A, series A to series B is way under what happens in the US.
And there is a statistical correlation between if a seed round raises like 100K, the probability of it becoming an outlier is very, very, very, very small. Kind of makes sense. If that seed round goes up to like 10 million, the odds between 5 million and 10 million, if the seed is 5 versus the seed in 10, basically double.
It doubles between 5 and 10 because I would always in my head assume that actually like say 3 to 5 is the optimal, but 10 actually it becomes detrimental.
Yeah, yeah. But there is a reason for companies to raise the right amount of capital at this stage. And then too much capital, I think, becomes too much of a wash. But the big problem that we have in Europe is we raise, but we raise small rounds. So people will take the risk, but they'll mitigate the risk by writing a small check.
And it's weird because the inverse should be if you believe in this thing. Like if you believe as a seed investor at a million and you have the fund size to be able to do this, you should believe at three. You should believe at four. It doesn't make sense to believe at 30.
But there is a number where you're freeing up the capacity of the founder and of the company in order to try and achieve greatness. And you're shooting for greatness as fast as possible. And I don't think people rock this fully in the European venture ecosystem. Are you price sensitive? Yes, because we care about ownership, but know when it comes to the check.
Like we often have this debate where most of our deals, like I said, are contrarian and there's contrarianness even within the table. So like we don't get it. The rest of the group doesn't get it. We don't see an obvious reason not to do it, but like we don't see it. And some of our best deals are usually like this.
And so instead of then downsizing the commitment, we're like, okay, we don't really get it, but they're raising three and a half. Like if they're going to really try and make a run at this, maybe they should have like four or five. Maybe you should go in there and buy like an extra few points of equity for that money. And I think that's the right way.
Like if you're in this power law world, that's the right way to play the power law. But that requires a fund size that's bigger than the hundred that we initially were thinking a few years ago.
We're going to get to that. But they're contrarian even in the partnership. We're partners. I want to do this deal. You really don't. You think I'm nuts. Can I do this?
So we do it on the basis of is there a red line? Like, is there some flag? I mean, red lines are on. Is there a flag?
that we can throw down that says it doesn't make sense which is i looked at the cohorts i looked at the early cohorts and and you know all of those cohorts are deteriorating so you thought it was really good it's growing exponentially but the data suggests that maybe that's not the case by the way that's a real world scenario i got super excited about a company in portugal and one of my partners looked at it and was like hussein like you missed the trick here and by the way this is why i love working in partnerships like
I think partnerships are way better than solo GPs because you get this error correction mechanism from other smart people. But if the error correction mechanism is they're blocking you for no good reason, and they're just running interference on you, then it's really obnoxious.
Do you not think there's always a reason to say no to a company? There's always a cohort that's off. There's always a conversion rate that's not there. There's always a retention metric that's down. I could throw down a red flag. Correct.
Which is why we look at like on the aggregate, like if all the cohorts, like if you've missed something and someone flags it, we generally have a lot of humility inside the firm to be like, yeah, I didn't catch that piece. Like I get it. I don't know if I really want to do it. But most of our cases go down to the following. I don't think that person is going to be able to hire very well.
It's like, okay, that's like super gray zone, right? How the heck do you disprove like that? There's no null hypothesis to prove. And in those kinds of cases, we give each other the rope.
You said 150 to 250 is where you may be naturally thinking optimal seed fund size is. That's bigger than most people would suggest. I'm, by the way, in your camp. Our new fund is 125 for seed, so ballpark. Why do you think 150 to 250?
So I think if you're going to try and do 20 of these, your check sizes are going to be three, four, five. And then sometimes these jumbo seeds are now up to 10. Like Ed Sim has been able to done a bunch of like work on this, showing like what the path is of these. And they're more and more common, by the way. The jumbo seeds up six to seven times in volume than they were a couple of years ago.
And the seed rounds that are 5 million plus are a fifth of the industry. Do you do those jumbo seeds, the inception rounds? We did one. We did one. And you have to sometimes. I saw this.
It was like a 10 million round, right?
So it was a $30 million round where we took it off the table at 10. We locked it down, set the price. You put in 10? We put in 10. It was an AI company, a foundational model, didn't necessarily need all the money on compute. So 10 in a foundational model, and 10 is a really large number, but 10 in foundational model land is still a small number.
We took it off the table, and then everyone wanted in, and then we selectively let a few funds in. NordStone came in, Lightspeed came in, et cetera, and the round became 30. 10 million is a big, big bet. Not out of a $200 million fund. This is why you have to be a decent sized fund. If you're a $100 million fund, that's 10% of your fund right there.
You know, 5% of the fund is very different than 10% of your fund. And I would argue maybe that number should be like 200 to 300 if you're going to double down proactively. You have another vehicle, so you can double down out of another vehicle.
But if you're not able to have another vehicle and you're going to do it out of the same fund, you probably need to be closer, a little bit higher than your 125.
10%.
10%. Okay. So you say have another 5% for this company over time.
Yeah. But I think in this case, we think AI on the foundational model is somewhat binary. It either works or it doesn't. Because if it works, and you've seen this with a bunch of AI companies. Are you happy you wrote that, Jay? Yes. I don't know if it's going to make us money just yet. It's premature to say that. The company was funded in, we took the term, the term sheet was March.
I think WIRE went in June. We're sitting in December. It'd be foolish for me to say anything about how it's doing. I don't know.
I think we've seen the commoditization of different model providers very quickly over time.
It's not a generic model. It's a model for material science. It's a foundational model that's bespoke. There's a piece of Microsoft research that came out two years ago that proves that this kind of stuff can work. It's basically the AI building the next generation of materials using AI. It's a very different type of foundational model.
So, sorry, going back to it, so we have 20 companies in the portfolio. Pretty good picker at 20, by the way.
Yeah, so the probability at seed of picking something that becomes a unicorn is 3%, done in a few times.
Yeah. 20 is not a huge amount. And so just walk me through that. If you got 150, you're doing 20, say, $5 million checks minus fees. Plus reserves. Plus reserves, sure. Hence 200.
That's a one-to-one rule of thumb. It's not quite what we do, but just double it because that's the easiest mental way to do it. What do you think of all these seed funds that are $75 million? I'm worried.
Like, I think in a bull market where you're writing the first ticket and someone else is then carrying the slack and picking it up, you know, it's easy to be the feeder fund for those folks and write the small checks. I think we have too many of them right now in the industry. I think right now the real opportunity in Europe is there a handful of really good venture funds at the top.
We know who they are, right? Index, Axel, Sequoia, et cetera, like all very active in Europe. What do you think? Sorry, do you think there's actually a handful?
I think there's Index, Axel, and Sequoia.
I think it's slightly more broad than that. I mean, I think Crandom would feel really annoyed if you didn't put them on the list. I think that's true of a bunch of other funds. No, Crandom are a seed fund. I think they're a Series A fund, but okay, fine, nomenclature. There are a handful of funds that are bigger and aiming for big outcomes in Europe. But the market here has grown 30-fold.
Like when we first started, there was about a billion that went into Europe in venture. These days, about 30 billion that goes into Europe in venture. Weirdly enough, people seem to think like markets that get more liquid and more competitive are bad. I think markets that get more liquid and more competitive are good because the market's actually working.
When the market goes up 30 fold, even if there's more competition, I'd much rather play in the bigger market than the smaller market. But I think there's a chance now for a few more funds to be on that list. I think you have that ambition. I have that ambition. And Ophelia has that ambition to blossom. And some of us are going to make it.
i don't know if the world right now needs yet another emerging manager yet another microcap fund i think what we need is like five to ten dominant superstar venture funds in europe kind of the way in the bay area they're like 10 or 15 of those yeah but we don't have the supply of entrepreneurs We will do a lot of first-time founders.
I think a lot of people in Europe won't back someone if they look like they're first-time founders. But I think a lot of the interesting outcomes in our industry, and you can think about this anecdotally. Do you prefer younger founders? It doesn't matter, younger or older.
I think people who are doing their life's work, usually if the company captures their life's work, that's kind of the only thing they do with their career.
But we had Nick on the show from Revolut, and he said that actually when they look at the work they do with quantum light and analyzing founder age, 25 to 35 is actually the optimal time they find best performance.
Yeah, because I think if you're saddled with a family, it's harder because you have dual interests and you end up in this like solo, like one mindset, right? Which is build my company. And that's much harder to do when you're like raising your family.
And I think if you're like 15, 20, unless you're like a superstar and really precocious, you probably don't have the accumulated wisdom to learn the lessons. And I think there's like that 25 to probably 35 age or 25 to 40, like you can grind and you have enough experience to know what to do.
Do you think there is enough high-quality seed companies graduating out of London and out of Europe for the multi-stage funds to do?
I mean, I don't know about the general market, but in our portfolio, for sure. That's why we've ended up concentrating. Because you are seeing the U.S. players come in with large amounts of cash. Again, the challenge in Europe is most of these companies need a little bit of tinkering versus like being you can't just fully, fully leave them alone.
You have to think of Europe the way venture was in the 80s or 90s in the U.S., where these companies, if they didn't have a strong partner on board helping them build, and you read these oral histories, you will see what I mean by companies actually getting guidance on what to build. We're in that mode.
And I think the industry has shifted in the US to be like, you know what, the market takes care of that stuff. I just have to deploy capital. And in Europe, the market doesn't take care of itself.
Do you think founders are aware of that? They read Founder Mode from Paul Graham, and they read the US articles, and they read everything that the US founders consume, and then it's maybe operating in a different environment.
I don't know if this necessarily always resonates, but the minute there's a hiccup and you have these hard conversations with founders, people grok it.
Do you think the criticism levied towards Europe today, which we both see on Twitter like never before, do you think that's fair or completely unfair?
From a macro perspective, that's not what I do, right? I think of this as like underlying fundamentals for my business. We're living in a world of AI. I think this is the big seismic shift for like the next like 10 years. This is where we're going. This is where the next wave of wealth creation is going to be. I'm looking at the conditions on the ground.
We used to produce really interesting gaming companies when I was at Accel. Like, we were really strong in Europe. And that was probably the only thing we were really strong at. And then the government, like, lowered the regulation in finance. And so we were really good at building, like, fintech companies here. Monzo, Revoluto. 100%, I remember. And this was the place to build fintechs. Exactly.
And the FCA really made it easy from a sandbox perspective. When you look at this new big, but those who are niche, they're big niches, but they're niches like in the tech industry. AI is much more horizontal. When you look at what's happening in AI, you got DeepMind down the road in London. You got Meta running its AI stuff in Paris.
Like we are for the first time ever in European history on par from the company creation or technology creation as the US in not a niche field, but in a horizontal field. I I cannot interpret that in any other way than there's going to be opportunity in this stuff. Yes, I'm really terrified that the German car industry is going to get wiped out by China, by the EVs in China.
I think they're asleep at the wheel. What happens then? I don't know. And I don't know what's going to happen to energy prices in Germany. I am worried and petrified about UK growth stagnating and quality of life here deteriorating. But from a company creation investing perspective, These two things or these things are not at all related to what we do as an industry. And then I would argue.
Are they not? Because actually, if you consistently say in your Keir Starmer and Rachel Reeves, we consistently will not have growth for the next three years. You are not putting up a banner for great entrepreneurs say, hey, come build here. And so there is a correlatory effect.
I don't know if entrepreneurs or engineers and techies are thinking about macro when they're thinking about doing something that is a problem. And then the question is like, how do you scale the company? And I do worry that if you're scaling the company, your best path to scale from a financing perspective is America. The rounds are bigger.
Chances of success are correlated with bigger round sizes. Experience set is bigger in the U.S. The market is bigger in the U.S.,
the trajectory of travel and by the there's always been the thesis at oxford like dark trace made more money in america than it did in the uk from the very early days and more staff in america than it did in the uk our directory of direction of travel is find the best here and be the bridge to america and take them over there from my perspective i feel fine regardless of what's happening in macro as someone who's living here though i'm terrified about macro because i think there's real quality of life repercussions if policy makers here do not get this stuff right
But I find that the policymakers here are focused on the wrong problem. Everyone here is talking about the London Stock Exchange. I just told you the pension funds in the UK defined contribution schemes are investing 10% into the big tech names in the US.
It is not hard on a Bloomberg terminal to put a few extra characters and to buy a share on a New York exchange or a NASDAQ exchange as it is on the LSE exchange. It just doesn't matter. The world is global these days. And if you live in a global world...
I still don't understand why the LSE doesn't matter or misuse of time. We need to have good, strong local liquidity markets, which we don't have. Why? Why don't you just take the companies public in the US? And have no local liquidity markets?
What does a local liquidity market matter? If the pension funds here were like they were 20, 30 years ago, where they had to invest locally, it matters because the pensioners are being screwed. The pension funds can invest globally. The only people who realistically get screwed are the service providers around the company. If you list on the LSE, Goldman in London gets the mandate.
Lazard in London gets the mandate. Ernst & Young gets the mandate in London. You create more jobs around the industry. But the company is fine. The corporate tax is still a UK company.
Well, I think you'd argue then that it only allows for the top 1% to flourish. And what I mean by that is only if you are Spotify or Revolut. I'm sorry.
If you're not going public these days, unless you're a top 1%.
I'm saying the top 1% of IPOs, which is a Revolut or a Spotify, which can go to the US.
So we looked at the data. The bar for an IPO today in the US is north of 200 to 300 million. Gone are the days where you could take a company public, where you could raise... I remember when I was growing up in the industry, like 10, 15 years ago, an IPO is like 100 million of revenue or an IPO candidate. It doesn't exist anywhere. That world has shifted. That was a 10-year-old world.
There used to be a time, by the way, remember Yahoo when Yahoo went public? Yeah.
yahoo in public on like 10 20 million of revenue etc and like it was worth billions in them in the market those days are gone we now have very deep very liquid very large markets across the industry the other thing is the private markets are so big now that there are non-way there are other ways than going public of getting liquidity i i just don't know if this is that much i mean why are you solving a problem that is a really hard to solve and i would argue really probably doesn't matter
If the path to New York Stock Exchange listing was closed from here and our best companies here couldn't go public, fair. We have a real problem. And if our pensioners couldn't access that, fair.
We have a real problem. Can we access NASDAQ in US markets en masse? Not the one or two, but like hundreds?
We have to go build those companies, get those companies to 200. We have a company in our portfolio. It's about two years away from IPO. It's appointing bankers right now. 150 million net, 160 million net revenue right now on a run rate basis. We'll easily get to 250 of revenue, which is, I think, where the bar is to be able to go public. New York Stock Exchange.
By the way, the first two big tech IPOs and the LSE that was supposed to reinvent, repower the LSE were ours, Deliveroo and Darktrace.
And we know- Deliveroo's on the LSE.
Deliveroo's LSE, Darktrace was LSE. And then right after that, Tabit went public with Wise on the LSE, and I tried to talk him out of it. I said, go in America. Would Deliveroo be performing differently if it was in America? I'm not so sure about that one. I think Darktrace definitely would. How so? I think it was trading a huge multiple discount.
$732 million of revenue, like I said, trailing, trailing, got privatized to $5 billion. And that was a premium. I forget what the number was, 20% to 37% premium over the stock price on the day of the acquisition or the announcement of the acquisition.
So we had Klaus Hommels on the show, and he was like, no, what we need is actually a European liquidity.
Why? Why? It's like the same thing. It's like people want to solve Europe Inc. They want to make it really easy to incorporate a company in Europe. Like why? Incorporate in Delaware, the UK, like problem solved.
Is this not, I mean, I've seen these, I think we signed the petition, whatever. I mean, I'd love for it to happen because it just makes it easier.
It removes the borders and it makes, but I think. Anything that makes it easier, I'm supportive of. If the LSE is able to transform itself and become a viable exchange, great, another path of liquidity. But as a policymaker, if that's the problem that you're focusing on, I'd much rather have the how do we make sure our companies get capitalized the right way and can become the top 1%.
I was at a dinner, a CEO dinner last week. The Wall Street Journal threw it. But I was told one of the biggest impediments to housing in the United Kingdom, and housing is a big deal in the United Kingdom. We don't have enough houses, is we did not build reservoirs 30 years ago. And I had to look this up because I didn't believe it. This is a country, by the way, where it rains a lot.
Like water is not our scarce resource. I'm British. You're not. I know this. So we do not have enough reservoirs. If we wanted to build 10 million additional units of housing for 10 million more people, we would not have enough reservoir infrastructure. And I think the worry that I have for the governments in Europe, and it's also true in the U.S.,
But definitely pronounced here, are we making the long-term right bets that take 20, 30 years that are not election cycle bets? You don't get elected because you built a reservoir and it takes like a few years to kind of build a reservoir and really kind of fully come online and you benefit 30 years from now. Are policymakers doing that kind of stuff?
The infrastructure that makes our lives easy, that allows our countries to thrive, is oftentimes being neglected. And this reservoir is just one of many problems. And then it cascades and creates all kinds of problems 30 years from now. You are advising Keir Starmer. I am not. I've never been called. You are. I was. I was. Oh, in a hypothetical. In a hypothetical. What would you advise him?
I would not have tinkered around with the tax rates. I feel like there was enough own goal. The non-dom removal is bullshit. Yeah. And I don't say I mean, I've passed my Don Dom. So I'm in I'm in the camp. I've said it publicly on X. Like, I have no problems paying income tax on carried interest. Like, I think it's I think it's income. Right. I mean, it's not it's not my capital work doing it.
It's because I'm doing my job. So I have no problems with this. But I think tinkering around with stuff and tinkering and changing it frequently. And the worry that I have is, OK, capital gains has now gone up. When the UK fine. Are they going to tinker it next year? Like I want stability, right? I want I want these infrastructure things long term, stable, consistent.
So I can focus on the really hard things of like building these companies. If they start tinkering with the stuff that I'm taking for granted, it becomes infinitely harder for me to actually like figure out how to adjust to that and build these companies up or have the founders kind of navigate. So it'd be, hey, stick to a strategy.
Boring is good for governments, but that's not the world that we're in, especially in an amplified social media where being a little bit more exciting is more fun and also gets you more credit and more kudos and more attention.
We mentioned that like, oh, well, you know what? Actually, in terms of liquidity markets, we need to go to the US or not at all. We have PE, we have different players. The extended window of privatization or like the private capital is so real. You've got Stripe, you've got Databricks, you've got SpaceX, you've got Starlink, you've got all these companies.
But they don't need to go public for the foreseeable. I mean, the SpaceX demand right now is off the fucking charts.
And I don't think most people realize this. Like, once you get to that kind of size, you end up having to comply with all the SEC stuff. So, you may not be publicly traded, but you're complying and you have all the infrastructure to actually go public at any time that you want because you've had to build that because you've got too many shareholders.
Do we have to navigate secondary's liquidity markets differently?
I don't think so. I think as a seed firm, you build great companies. By the way, if someone offers you like 50x on your first investment, maybe there's actually a reason to take some money off the table. But normally you would have said do that. You get your 50x at the IPO stage or at the very late stages. And the same argument would apply.
But if you get that in one year, the same logic applies, right? And you just do it one year. You do it one year in.
Are you ready for a special type of round? Sure. We get these questions from...
either mutual friends or industry okay and we put down a number and you can either answer the question or donate the number to a charity of your choice okay so what number do you want to set as the donation what's market in this between one and five thousand two thousand okay let's do it you caused a bit of a furore on social with a post about hiring women what did you say and what did you mean
It is hard to find people to come into a partner only organization and you require people to be reasonably well trained. You're taking a chance on them, but you expect them to kind of be able to hit the job running. There are some great women who are very capable.
It is hard for me to poach them because they're very well taken care of in their existing funds for very good reasons because there's a shortage of them. One of my LPs is a woman sat down with me. She's an individual entrepreneur.
And she's like, the one thing that I didn't think about, and this is a genuine thing that she really made me reconsider, is I always used to think of us as like a two-year scrappy startup as a fund. Brand new fund, like 39 months to go raise fund one. It's like sketched in. It's like etched in my brain, right? It's like hard, hard yards. years old, we managed a $200 million fund.
As much as I don't like to admit it, like we're one of the establishment now. Like we're no longer the scrappy startup. Like we're establishment. And if there is a shortage of women that I can't recruit from laterally because they're well taken care of, And there's a shortage of women in the industry.
It is incumbent upon me, like I have a responsibility to grow the next generation because if I can't recruit laterally and I know there are not enough people coming up through the pipe in the industry and I'm one of the establishment now, I can't be scrappy anymore. I probably have to invest some dollars and train someone and fix this problem. Like the problem falls on my shoulders.
I think that's an interesting lens to think about this. And that's kind of lens. I can't do that just yet. I don't have enough partners in my partnership. We're a small partnership. We're three GPs. Do you feel like you have freedom of speech today? Yeah, yeah. And you get freedom of speech and then people will call you out on it, which is what happened. Do you think it was a fair response?
I do not. I reached out to the person who wrote the LinkedIn post multiple times to grab coffee before that went out, the day that it went out, after it went out, and I've chased... afterwards, she's never met me. That's where society has gotten a little bit more toxic. I would have much rather had that debate. You can have the debate on LinkedIn and call me out.
Look, if I say something stupid, call me out. I have no problems with that. I can take it. And it was a fair criticism, I thought. But then sit down with me and have coffee and let's break bread.
You said $2,000. You split up with your partner, Rob. What actually happened?
That's also an easy one. So 10 years in, we grew apart. That's what happens. I think as we've gotten success, the nice thing about having success, and we made real money on fund one, even though it was a $28 million fund, we did really well for ourselves personally. You get to build the firm in the way that you want to build it.
And the big difference between Rob and myself is Rob wants to build a different type of firm. And we can think about how to make that work within the constructs of Hoxton, but it would be hard, right? You'd have to change the character of the firm. You'd almost be like a millennium where you have people like or PMs running their own book. Or you could say, go gracefully, go build it.
By the way, I'm LP and what Rob's fun and go do your own thing. I'll be the first check in the fund. You've got the full support. You have no restrictions on trade, et cetera, et cetera. Like you keep your track record, you keep the LP base. and go do it the way you want to do it. And that's basically what we ended up deciding. It took us a while to be able to do that.
But like we very much want to build the next generation, bigger, earlier stage firm. Like we want to be one of those dominant five to ten firms. I think Rob does not want to do that. And Rob very much wants to build a very science oriented, deep tech type firm. And it's just different.
Which venture investor do many people in Europe think is great that you do not? That's a good one.
$2,000?
I don't want to name a firm that's not good.
That's not nice. Listen, I want to do a quick fire. So I say it.
I love the way the guy at Sneak was like, yeah, sure. Just like slam. Listen, I want to do a quick fire. I say a short statement. You give me your immediate thoughts. Sound okay? Yeah. What have you changed your mind on in the last 12 months?
That you can actually make money across the spectrum in AI. Cusp was one of these. The foundational model. We would have been, we are not doing foundational model deals. They're too expensive, too capital intensive, never going to go in. Not a seed funds, not a small seed funds place to do that. And then Cusp walked in the door, which is this foundational model for material science.
We wrote down a double check, took our reserves and did one big investment, own 11%, decent size investment. And if it goes the distance and they raise $100 million or $200 million, like some of these, then it will be fine.
What's the best investment advice you've ever received?
Play the long game, be contrarian, but you got to make sure that the market sees you as right within a very short amount of time. So you can't be contrarian for like 10 years plus. What's the biggest sin of the zero interest rate environment? So much money went into some of these things and people just relax diligence. Are we seeing that today? Do you think we'll see many more frauds?
Frauds, like just people not paying attention to details, people not turning up to things. It was a mess. And I think we're seeing some of that same stuff in AI. There's so much euphoria for AI that people feel they have to have some of these companies in their portfolio. We as a venture industry have to think about how to create monopolies.
The regulator doesn't want monopolies, but we want monopolies. We want companies with increasing returns to scale, with deep defensible moats.
You build this thing, it has this huge moat, and every extra revenue, customer, whatever it gets, increases the size of the moats, puts distance between it and itself, until eventually it has to get broken up by regulators because it's just too darn powerful. That's what I want to put money into. I'm not so sure most of these companies, which get highly commoditized, super fast,
where there are 20 versions of the same thing. And the expression that Brian and our team uses is knife fight in a phone booth. I'm not so sure. And the reason why we're doing them is because people want to deploy. They want to write checks into these things. They don't want to miss out on the next big thing because they look foolish as a big firm missing out on the next big thing.
This doesn't sound like a rest. And it sounds like it can go the right way, but it reminds me like hauntingly of like 1995, 1996, 1997.com. Do you play the game on the field? You have to. You can't sit down. Does that not go contra what you just said? Yes. But most of our investments are figure out how to be contrarian and still play the game on the field. Is that possible? Yes.
You have to be prepared to be a little bit lonely and you can't be too lonely for too long because if you are, your companies don't get capitalized. So you need the capital to come in, but you have to be prepared to be a bit of an iconoclast for a little bit.
Do you think we will go through an AI winter in 2025?
I think we're going to go through something, and I don't know what the something is. You look at the dot-com industry, the household name companies of the time didn't necessarily turn out to be the big outcomes, the Yahoo's, the Netscapes. They went away. Amazon powered through, but Amazon was never the super hot company. eBay was the hot company back then. And then the Googles didn't exist.
The sales forces didn't exist. They came at the tail end of that. I don't know what AI is going to look like five years from now.
Do you think Nvidia is undervalued today?
One of the pieces of investment advice is you can't think of something as too cheap or too like you can't walk away. You can't go into a company because it's too cheap and you can't walk away from a company because it's too expensive. The big question for me for Nvidia, Nvidia has grown its net margins from 10% to 50%.
And besides the revenue growth, which everyone looks at, it's become this natural monopoly. But if you look at what everyone is doing today, you look at what Apple is doing, you look at what Amazon is now doing, and Matt has been working on this, they're all building chipsets to remove their dependence on NVIDIA. I don't know if those chipsets will actually get anywhere.
I don't know what's coming around. I'm not a semi guy. I don't know what's coming around the corner that could commoditize it. 50% net margin feels high. And if that margin comes back down to even a very good margin, 30% net margin, the multiple changes.
The end answer for that question, and this is why I think you have to be a technologist to do technology investing, is what do you think is coming around the corner that may or may not threaten that margin? If you can figure out the answer to that as a semi-person, you can play the NVIDIA game.
OpenAI at 160, Anthropic at 40, Axe at 50. Which one do you buy?
I mean, OpenAI has real revenue, and I think there's increasing returns to scale, but I think the same thing I just said about NVIDIA applies to a lot of this AI stuff. And the AI stuff, like I had dinner with Alex, who founded Wave, which is one of the AI companies here that does self-driving cars. In our discussion, this market is commoditizing so fast.
The tools are getting so good and then other people are building tools. I mean, you saw like a couple of weeks ago, China is now like Kaifu has a company, Kaifu is my old boss at Microsoft. Kaifu is a company that's been able to replicate what GPT has, but with like a fraction of the compute because China doesn't have the computers and they kind of published around this stuff.
It's commoditizing so fast. I don't know how much of this ends up as consumer surplus. In other words, we all benefit as humanity because the spend kind of goes in and everyone benefits, but it commoditized so fast, no one company ends up skimming off enough of the cream to become the big, kind of the big winner.
I just don't know where any of this stuff goes, but I think if you don't play, you have no way of knowing where this stuff goes. You have to be on the field to even learn.
You've got to choose one of the three. Open AI. Does Trump open up M&A and IPO markets?
Yes, because I think J.D. Vance has made that very clear. That sub $500 million deal is the FTC has no business trying to block transactions.
Which is phenomenal for seed funds on recycling and actually really getting as much dollars to put to work.
I mean, it helps that our vice president used to be a venture capitalist.
Final one. Where do you want Houston to be in 10 years? You said, I want us to be one of the big generational players. 10 years out, 2034 or
I'll answer it a little differently. I mean, you know the direction of travel for the company. I would love for us to have built a partnership, and I'm thinking actively about this, and I can hand the reins over where I'm just one of a few and someone else is running the firm. If I can do that successfully over the next decade, I know I have a durable firm.
I want to build a firm versus a boutique versus a project. It's not a shell over me. I want the firm to be around, and I want to be able to pass the reins over within the next decade.
It's only been nine years. So, you know, not a huge amount of time. I've so enjoyed this. Thank you so much for coming. And I really appreciate it. Yeah, my pleasure. And hopefully we do this again in another decade. I have to say, I really like Hussein. I think his willingness to not be popular is very special, respectfully. And also, he's a very, very good picker.
That was such a special show for me to do. As you heard, we'd done one nine years ago. So an even more special one to do there today. If you like the show and you want to see more, you can find it on YouTube by searching for 20VC. That's 20VC on YouTube. But before we leave you today, it can be difficult to build a team that's aligned on everything from values to workflow. But that's
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