20 VC 011 London's Early Stage Funding Scene with Thomas Jones



In episode eleven of the 20 minutes VC, host Harris Debbings interviews Thomas Jones, founder and partner at London-based VC firm Charlote Street Capital, which specializes in early-stage UK technology investments. Jones shares his journey from creating a market surveillance software platform at Smarts Group International to becoming a venture capitalist. He emphasizes the importance of investing in teams with passion and knowledge of their market, rather than focusing on immediate exit strategies or financial projections. Jones discusses the differences between European and American VC practices, noting Europe's service-oriented culture and smaller market size compared to the US's product-driven, larger market. He also expresses skepticism about the sustainability of high startup valuations and the effectiveness of crowdfunding as an investment strategy. Jones advises aspiring VCs to start a business to gain valuable experience and suggests insurance as the next industry ripe for disruption.

Summary Notes

Introduction to Thomas Jones and Charlote Street Capital

  • Thomas Jones is the first European-based VC guest on the "20 minutes VC" podcast.
  • He is the founder and partner at Charlote Street Capital, a London-based VC firm.
  • Charlote Street Capital invests in early-stage UK technology companies, with investments up to £200,000.
  • The firm's portfolio includes companies like Chilango, GoSquared, and Seedcamp.
  • Prior to Charlote Street Capital, Thomas founded Smarts Group International, which provided a real-time market surveillance platform to stock exchanges worldwide.

"Thomas is founder and partner at Charlote Street Capital, a London based VC firm who invests up to 200,000 pounds in early stage uk technology companies."

This quote introduces Thomas Jones and his VC firm, Charlote Street Capital, highlighting their investment focus on early-stage UK tech companies and the investment size they typically offer.

Background of Thomas Jones

  • Thomas Jones has a background in software development for stock exchanges.
  • In the 1990s, he co-developed software for analyzing trading on computers, which led to the foundation of Smarts Group International.
  • Smarts Group's software was sold to stock exchanges globally, including London, Zurich, Hong Kong, and Moscow.
  • The company was eventually acquired by the Nasdaq stock market, which did not require the founders to stay on post-acquisition.

"Together with a fellow student and our professor, I built a piece of software for analyzing the trading that was happening on computers. And we realized that that software could be sold to stock exchanges for market surveillance."

This quote describes the inception of Thomas Jones's entrepreneurial journey, detailing the creation of market surveillance software that became the cornerstone of his company, Smarts Group International.

Transition to Venture Capital

  • After selling Smarts Group International, Thomas did not have a clear next career step.
  • He first got involved with Seedcamp, an accelerator program in London, as an investor and mentor.
  • Through Seedcamp, he met his future business partners, Bo and Anton, with whom he discussed deals and shared views on investment opportunities.
  • Together, they established Charlote Street Capital, which actively makes five to six investments a year and sometimes leads investment rounds or sets up businesses themselves.

"And through the Seedcamp program, I got to first of all, see a lot of very exciting companies, but also to meet my two business partners, Bo and Anton."

This quote explains how Thomas Jones's involvement with Seedcamp led to meeting his future business partners and the creation of Charlote Street Capital.

Charlote Street Capital's Investment Approach

  • Charlote Street Capital has set up businesses like Kidslocks, an app for parental device management, and Vizscore, which helps companies assess their marketing spend.
  • They are active investors, often leading investment rounds and seeding businesses that have some traction.
  • The firm does not focus on spreadsheets and projections at the early stages of a company's life.

"We now find ourselves probably actively making five or six investments a year. And also these days, we're trying to both lead the investments or sometimes actually set the businesses up ourselves."

This quote summarizes Charlote Street Capital's investment strategy, indicating their active involvement in both leading investments and creating new businesses.

Venture Capital Exit Strategies

  • Thomas Jones and Charlote Street Capital do not have a fixed timeline for exiting investments in early-stage companies.
  • They believe that focusing on a clear exit timeline is more relevant for later-stage or private equity investments, where the time to exit significantly impacts the annual return.

"And that is no, we don't. And I think it's quite different if you're investing later stage."

This quote clarifies Charlote Street Capital's stance on not setting a predetermined exit strategy for early-stage investments, contrasting it with later-stage investment strategies where timing is more critical.

Importance of Team in Early Stage Companies

  • The people running the company are crucial; their compatibility with investors and ability to adapt are key.
  • The market and product are important, but expected to evolve over time.
  • A strong, hardworking, and adaptable team is vital for navigating the inevitable changes in vision and market understanding.

"So the people, whoever it is, who's running the company, the key thing is that we like them, that we get on with them, and that we believe that they're the right people for this opportunity."

This quote emphasizes the importance of the team behind a company, highlighting the need for investors to have confidence in the team's capabilities and to have a good working relationship with them.

Team vs. Product

  • Thomas Jones believes the team is more crucial than the product for a startup's success.
  • The passion and knowledge of the team in their operational space contribute to the likelihood of finding the right opportunities.

"I know absolutely the team."

Thomas Jones confirms his stance that the team is the most important factor in the potential success of a startup.

Investment Strategy and Team Passion

  • Thomas Jones is excited by teams that have a passion for their industry.
  • A passionate team is more likely to succeed because they understand and care about their space.
  • Teams that don't naturally fit their market pose a higher risk of failure due to potential disinterest.

"Because if someone's passionate about an area, as in they discovered something or they're working somewhere that they just want to stay in, then they will find the right opportunity eventually in that area, if it's there to be found."

This quote highlights the significance of a team's passion for their industry, suggesting that such passion can lead to the discovery and exploitation of opportunities within that space.

VC-Founder Relationship Dynamics

  • The relationship between VCs and founders can be both professional and social.
  • Early-stage VCs like Thomas Jones prefer lighter contractual agreements and more social interactions with founders.
  • The aim is to align the VC's and founder's interests, sharing successes and failures together.

"But ultimately, really we want to be on the same side of the table as them."

Thomas Jones expresses the desire for a collaborative relationship with founders, where both parties work together towards common goals.

Differences Between European and American VCs

  • Thomas Jones offers his perspective on the differences between European and American VCs.
  • The US market's size allows for greater product focus without the need for international expansion.
  • Europe's smaller market sizes lead to a stronger services culture and consideration of international issues.
  • Cultural and market size differences influence career paths and startup ambitions in the US and Europe.

"The product culture is stronger in America and the services culture is stronger in Europe and in particular in London and the UK."

Thomas Jones outlines the general trend that the US tends to have a stronger product-oriented startup culture, while Europe leans more towards services, partially due to market size differences.

American Entrepreneurial Culture

  • The American entrepreneurial culture is characterized by a willingness to take big risks, possibly due to higher success rates.
  • This has fostered a strong venture capital (VC) culture, with a cycle of successful entrepreneurs becoming investors.
  • American companies often acquire startups, capturing the value created by these startups, even if they are not American-founded.

"There's a greater willingness in America to take big bets, maybe because there's a greater chance of success."

This quote highlights the risk-taking attitude prevalent in the American business culture, which is a significant factor in the success of the VC industry in the U.S.

"When companies are sold, they tend to be sold to American companies."

The quote emphasizes the trend of American companies acquiring startups, which allows the U.S. to retain a significant portion of the value created by these ventures.

Value Capture by American Companies

  • American companies have a history of acquiring startups at a relatively low cost and then growing them into much larger entities.
  • The example of Priceline acquiring Booking.com demonstrates how value from European startups can be captured by American companies.

"Priceline, who run sites like Booking.com, absolutely. They actually acquired booking.com in the Netherlands. So it's a Dutch company for less than 100 million, say, dollars. And I mean, Priceline is now worth well over, I think, $10 billion."

This quote illustrates a specific case of an American company acquiring a European startup and then realizing a significant increase in value, demonstrating the trend of value capture by American entities.

European Entrepreneurial Landscape

  • Europe has seen successes in non-tech sectors with companies like Zara and Ikea.
  • There are emerging tech companies in Europe, such as Just Eat and TransferWise.
  • TransferWise is highlighted as an example of a company leveraging London's financial services expertise, particularly in the fintech sector.

"There's some real wins in Europe, like Zara and Ikea, which are not tech companies, but have massive global companies that have been built from the ground up."

The quote recognizes significant European successes outside the tech industry, indicating that there is potential for growth in various sectors.

"TransferWise is a good example. It's also an example of a company which might be playing for some of the strength of London and Europe in particular."

This quote points out TransferWise as a notable European tech company that capitalizes on the region's strengths in finance and fintech.

American Investment Attitude and Valuations

  • The American "gung ho" attitude may contribute to the high valuations of tech companies.
  • The current investment climate is compared to the dot-com boom, with valuations based on potential rather than substance.
  • Companies like Uber are seen as creating new markets, justifying their valuations.

"Yeah, it's a good question. I think we all know, at least know in theory about what happened in the dot-com boom."

This quote sets the stage for a discussion on investment attitudes and how they relate to the inflated valuations seen during the dot-com era.

"I think Uber is genuinely creating a new market."

The quote suggests that some high valuations, such as that of Uber, may be justified due to the company's significant market impact.

Valuation of Startups

  • Early-stage startup valuation is less about specific metrics and more about the amount of money needed for the next step and the investor's desired ownership percentage.
  • For more mature companies, there are established valuation methods using metrics like customer acquisition cost, market size, and customer lifetime value.

"When you're in the early stage world, which the really early stage world valuation is a bit of a distraction and probably the right way to think about it."

This quote reflects the speaker's view that traditional valuation methods may not be as relevant for early-stage startups.

"Once you get a bit more mature, then there are ways of valuing SaaS companies and so on that have cost of acquiring customers and market size and lifetime value of the customer."

The quote explains that as startups mature, there are more concrete metrics that can be used to determine their valuation.

Investment Strategies and Equity

  • Investors have varying strategies and desired equity percentages when investing in companies.
  • The concept of "enough to care" is mentioned, which implies investors seek a meaningful stake to justify their investment and involvement.

"Enough to care means that it's some number of p"

Although the quote is incomplete, it suggests that investors have a threshold of equity that they consider sufficient to warrant their investment and active interest in a company's success.

Venture Capital Investment Criteria

  • Venture capital firms typically take a small percentage of equity in the companies they invest in.
  • The equity stake has to be meaningful enough to ensure the venture capital firm cares about the company's success.

It's not less than a percent. In some cases, though, we've taken a lot more than that. It just has to feel like it's meaningful if something good happens, that we're going to care about it.

The quote emphasizes the importance of the venture capital firm having a significant enough stake in a company to be incentivized to contribute to its success.

Evolution of Funding Methods

  • Since 2008, there has been a significant change in funding methods, with crowdfunding becoming increasingly popular.
  • Chilango, a portfolio company, successfully raised funds through the Crowdcube platform.

Funding methods themselves have changed rapidly since 2008. We've seen the rise of crowdfunding. And one of your portfolio companies, Chilango, recently raised funds through Crowdcube.

This quote highlights the shift in how companies raise funds, with crowdfunding platforms like Crowdcube being used successfully by startups.

Crowdfunding as a Funding Mechanism

  • Crowdfunding can be beneficial for companies with a retail product that is ready for the market.
  • Crowdfunding can result in a high valuation and provide marketing benefits.
  • It creates a base of shareholders who may become champions of the company.

If I'm the one selling the equity, especially if I have a retail product, and I'm happy that that product is mature enough to be really pushed out into the market, if those things are all true, then I'm quite a fan of crowdfunding.

The quote suggests that crowdfunding is favorable for companies with mature retail products, as it can lead to a good valuation and marketing advantages.

Risks of Crowdfunding for Investors

  • Early-stage investing is risky and requires a long-term perspective, often beyond five to ten years.
  • It is challenging to pick winning companies, and most early-stage companies require further funding or fail.
  • A broad portfolio is necessary to mitigate risks in early-stage investing.
  • The Financial Conduct Authority (FCA) reported that many crowdfunding investors lack prior investing experience.

I mean, the FCA, which is the regulator here in the UK, they commented on a survey recently which suggested that I think nearly two thirds of crowdfunding investors admitted they had no previous investing experience.

The quote raises concerns about the lack of experience among crowdfunding investors, which could lead to uninformed investment decisions and potential financial losses.

Advice for Aspiring Venture Capitalists

  • Starting a business is recommended for those wanting to enter the venture capital industry.
  • Young entrepreneurs have the advantage of understanding the latest technology and fewer lifestyle costs.
  • Involvement in programs like Entrepreneur First, Seedcamp, or Techstars can be beneficial, but not necessary.

I'd probably say start a business, because I think starting a business is...it's the right way anyway, though.

This quote advises aspiring venture capitalists to gain practical experience by starting their own business to understand the challenges and opportunities of new ventures.

Predictions for Industry Disruption

  • The insurance industry is seen as the next sector likely to be disrupted.
  • Insurance companies often lack a holistic view of their customers and rely on inadequate data like credit ratings.
  • Techbridge London is an initiative aimed at connecting insurance companies with startups to address industry problems.

I think my answer there is probably insurance. And the reason is, and it's a big area, it's boring, it has a lot of data, the kind of young startup kids don't tend to focus on it.

The quote identifies the insurance industry as ripe for disruption due to its size, reliance on data, and the current lack of focus from innovative startups.

Closing Remarks and Resources

  • Gratitude is expressed for the guest's participation in the show.
  • Listeners are directed to the show's website and social media for additional resources and updates.

Now, for all the resources and services mentioned in today's show, do head on over to WW dot the 20 minutevc.com where you can find all of them under episode eleven.

The quote provides listeners with information on where to find further resources related to the podcast episode, emphasizing the show's commitment to offering value beyond the conversation.

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