20 VC 086 Starting A New Venture Fund and How London Compares To The US with Hussein Kanji @ Hoxton Ventures

Harry Stebings interviews venture capitalist Hussein Kanji, founder of Hoxton Ventures, on the "20 minutes VC" podcast. Hussein shares his journey from Microsoft to Axel Partners, his seed investments, and the founding of Hoxton Ventures, a fund with $40 million under management. They discuss the challenges of raising and establishing a new fund, the state of London's investment scene, and the global shift in startup distribution platforms. Hussein details the difficulty in raising funds, with skepticism from both US and European investors, and the eventual success of Hoxton's portfolio, including Deliveroo and Darktrace. He emphasizes the need for more early-stage investment in Europe, admires firms like Index and Axel, and is bullish on cybersecurity and digital healthcare as emerging markets. The conversation also touches on maintaining networks, the role of venture capital in market creation, and the importance of backing companies that pioneer new industries.

• Hussein Kanji has a notable background in the venture capital industry.
• Started his career with Microsoft before moving into venture capital.
• Worked with Axel Partners, participating as a board observer for companies like Playfish.
• Made seed investments in companies such as Opengamma and Dapper.
• Founded Hoxton Ventures, a fund launched in 2013 with $40 million under management.
• Hoxton Ventures has an impressive portfolio including Deliveroo, Dark Trace, and Campagno.

"Hussein really is a pedigree in the industry. Having started off his career with Microsoft, he then made the leap into venture with the world-renowned Axel Partners, where he was a board observer with the likes of Playfish, which were acquired by Electronic Arts. And he made seed investments in the likes of Opengamma and Dapper, which was acquired by Yahoo."

The quote highlights Hussein's transition from a tech giant to venture capital, his role at Axel Partners, and his successful investments, establishing his credibility in the industry.

• Hussein's entry into venture capital was somewhat accidental and due to a series of circumstances.
• Moved to London in 2005 for graduate school.
• Introduced to Axel Partners by a colleague and eventually joined the firm while still a student.
• Initially viewed venture capital as a career for the later years but found it a good fit due to his experience in building companies.
• Joined Axel Partners full-time in 2007 and left in 2009 to start Hoxton Ventures.

"I moved out to London in 2005 to go to graduate school here. And I think the second week of graduate school, one of my colleagues from the Bay Area who knew the Axel partners pretty well, and specifically one of the partners made an introduction on my behalf to them."

The quote describes the fortuitous events that led Hussein into the venture capital industry, starting with his move to London and the pivotal introduction to Axel Partners.

• Left Axel Partners due to its shift towards later-stage investing.
• Large funds like Axel Partners found it challenging to write small checks due to the economics of the fund size.
• Observed a vacuum in early-stage investing around 2009.
• Believed in the potential of Europe for startups due to global distribution platforms.
• European companies historically underfunded and limited to local markets.
• Shift to global platforms allowed startups to scale globally, leveling the playing field with U.S. competitors.

"The firm made a conscious decision to do more later stage investing, which made a lot of sense, which meant that they were writing 1020 $30 million checks in addition to the early stage checks."

The quote explains why Hussein left Axel Partners; the firm's shift towards larger, later-stage investments created an opportunity in the early-stage space that he aimed to address with Hoxton Ventures.

• Venture capital in the U.S. began in the 1960s and grew due to early successes.
• UK's venture scene struggled as it lacked massively scaling companies.
• Early UK venture pioneers shifted towards private equity and growth equity.
• The advent of global distribution platforms changed the landscape for European startups.
• New ability for European startups to scale globally and compete internationally.
• Recent successes in Europe now make the transformation of the European startup ecosystem self-evident.

"So it started off earlier and it became very self-reinforcing. So it started off in the 60s. That's probably when the industry started in the U.S. You had a bunch of successes in the institutional, money flew back in, people tried to do the same thing in the UK."

The quote illustrates the historical context of venture capital growth in the U.S. compared to the UK, emphasizing the early start and self-reinforcing nature of the U.S. venture scene, in contrast to the UK's initial struggles.

• Hussein and his partner decided to start a new venture fund to address a market gap.
• They aimed to connect European companies with the Silicon Valley network.
• The gap was identified in the European market where companies were not as plugged into Silicon Valley.
• Establishing the fund was more difficult than anticipated.

"So we set up, I think no one told us it was going to be so difficult."

The quote emphasizes the unforeseen challenges Hussein faced while setting up the new venture fund, highlighting the difficulty of the task.

• Raising the fund was extremely challenging and took 39 months.
• Initial expectations were that it would take 12 to 24 months to establish a new fund.
• The goal was modest, aiming for a $25 million fund, which is small compared to larger funds like Axel.
• Reasons for rejection varied between American and European investors.
• Americans doubted the potential of Europe for venture investments.
• Europeans viewed venture investing as gambling and preferred to invest directly.
• The success of the fund relied on the trust from people who knew Hussein and his partner.
• The fund is now profitable, having moved out of the "J curve."

"Oh, yeah, it was downright impossible. So you had different reasons for different reasons for why people said no."

This quote summarizes the various obstacles Hussein encountered while trying to raise the fund, with investors having different reasons for their skepticism or reluctance to invest.

• Hussein and his partner felt the European market was underserved.
• They believed that new, next-generation funds could complement established ones and strengthen the ecosystem.
• Despite opportunities in Silicon Valley, they were committed to their vision for Europe.
• Hussein was offered a position back in California but decided to stay in Europe.
• The perception was that once you leave California, you lose connection to the ecosystem.
• The European venture landscape has since evolved, with more U.S. funds investing in European startups.

"So why don't you come back home to California and get jobs at good venture funds and go build your careers the right."

The quote reflects the advice given to Hussein by American investors, suggesting he return to California for better opportunities, which he ultimately declined in favor of pursuing his vision in Europe.

• European venture investing was initially seen as unorthodox.
• Early-stage markets and companies often appear raw and weird before they become successful.
• Hussein saw the potential in European investing despite skepticism.
• There has been a significant shift, with two-thirds of Series B funding in London coming from U.S. VCs.
• The European venture scene is now recognized as a lucrative market.

"And now that you can see the pieces connect, you start to see money kind of plow in. So this was actually a really good time to be in a venture in Europe."

The quote captures the transformation of the European venture market, where the initial skepticism has given way to active investment and interest from U.S. venture capitalists.

• Long-standing relationships are key to maintaining a strong network.
• Connections from education and shared work experiences are enduring.
• Hussein's network in California remained strong despite his move to Europe.
• The narrative that leaving California disconnects you from the ecosystem is challenged by Hussein's experience.

"Our Rolodex is very live and current."

This quote reinforces the importance of maintaining a strong, active network and dispels the myth that moving away from Silicon Valley necessarily weakens professional connections.

• Importance of personal connections in the industry, particularly in Silicon Valley.
• The value of face-to-face interaction for maintaining relationships.
• Physical presence in Silicon Valley helps in staying updated and remembered within the network.
• Traveling frequently to maintain these connections is necessary, despite the inconvenience.

"A lot of the people who are around you will go on to do really exceptional things, and that's because they're exceptional people. And so a lot of those exceptional people are now decision makers across the industry in California."

This quote emphasizes the caliber of individuals within one's network and how they progress to influential positions, which can be beneficial for maintaining professional relationships and opportunities.

"I think when you're really disconnected or far away, you need to spend time face to face with folks because people forget, right. There's a lot of human interaction that just happens face to face."

This quote highlights the importance of in-person interactions to keep relationships active and prevent being forgotten, especially when one is geographically distant from their network.

"But when you're out in Europe, you kind of need to go back out there and go hang out with folks again."

The quote illustrates the need for physical presence, especially for someone based in Europe, to maintain relevance in the Silicon Valley ecosystem.

• Hoxton's strategy as an early-stage fund focusing on outliers and new market creation.
• The importance of physical presence in California for Hoxton's brand.
• Hoxton's value proposition includes providing shortcuts and connections for their entrepreneurs.
• The success of Hoxton's portfolio companies enhances the firm's brand reputation.

"So we're very much of an early stage fund, and there are a lot of other early stage funds, but we like investing and kind of being the first guys in."

This quote defines Hoxton's investment strategy of being early investors in companies, which sets them apart from other funds.

"We're very focused on new market creation."

The quote highlights Hoxton's emphasis on investing in companies that pioneer new industries, which is a core part of their investment philosophy.

"But our brand, at the end of the day is not us. It's the companies that we back."

This quote illustrates that Hoxton's brand is largely defined by the success and reputation of the companies they invest in.

• An abundance of capital chasing few deals in California, but not the case in Europe.
• London, despite progress, still lags behind in terms of venture capital per capita compared to U.S. cities.
• The European ecosystem would benefit from more venture capital firms to support more seed deals.

"I think that's definitely true or more true in California? I don't think that's true in Europe."

This quote conveys the speaker's belief that the oversaturation of capital is more of a problem in California than in Europe.

"So I think it's the opposite in Europe. I actually think we need more money in Europe, not less."

The quote suggests that Europe needs more investment to support its growing tech ecosystem, contrary to the oversaturated investment landscape in California.

• Admiration for established venture firms in Europe.
• Recognition of the need for a denser venture capital environment in Europe to support startups.
• The importance of having multiple quality venture firms for a healthy ecosystem.

"So the big ones here are index, Axel Balderton. Those are kind of the household names."

This quote lists some of the most respected and well-known venture capital firms in Europe.

"But if you were making a list of the Silicon Valley firms, you'd easily come up with ten really high quality names. And if you sat there and you'd probably be able to build 20 or 30 very high quality names, that starts getting really thin in Europe."

The quote compares the density of top-tier venture firms in Silicon Valley to Europe, indicating that Europe has fewer such firms, which affects the funding landscape for startups.

• Hoxton's focus on identifying and investing in nascent industries.
• The firm's track record of backing companies that pioneer new markets.

"So more than anything else, what we're looking for is new industries that are kind of being formed and then backing a company that can turn out to pioneer that industry and watch that industry kind of grow and mature into a real industry."

This quote explains Hoxton's strategy of investing in companies that have the potential to lead and shape emerging industries.

• Hussein Kanji expresses uncertainty about the potential for market creation.
• He discusses the process of identifying emerging markets through patterns of similar ideas presented by smart individuals.
• The concept of the "prepared mind" exercise in Excel is mentioned as a way to refine market theses.
• Hussein reflects on the proactive bet on cybersecurity made three years prior and the subsequent growth in that sector.

"So the answer is, I don't know. And I think what happens is in these next generation markets, you get a bunch of smart people who around the same time start approaching you kind of at the edges of that market with kind of the same idea."

This quote underscores the difficulty in predicting market creation, highlighting that it often involves observing patterns and similar ideas emerging simultaneously from multiple smart individuals.

• Hoxton Ventures took a proactive approach to investing in cybersecurity based on the prediction of increasing attacks.
• They backed a company formed by ex-Canonical employees, which has landed SurveyMonkey as its first customer.
• Hussein discusses the investment in Darktrace, which has become a cybersecurity winner.
• He emphasizes the challenge venture capitalists face in proactively identifying opportunities.

"So we thought that the range of attacks, the sophistication of attacks and the pace of attacks were only going to increase."

This quote explains the rationale behind Hoxton Ventures' decision to invest in cybersecurity, anticipating a rise in the frequency and complexity of cyberattacks.

• Hoxton Ventures is currently focused on next-generation healthcare, recognizing the potential for technology to transform the sector.
• Hussein reflects on the past success of identifying the disruption of financial services and mentions companies like TransferWise and Funding Circle.
• He notes the importance of being early in market identification, as it becomes too late to invest at the early stage once a market is self-evident.

"Today we spend a lot of time thinking about next generation healthcare, and there's just a lot more technology that can gather all this data."

This quote indicates the current focus of Hoxton Ventures on the healthcare sector and their interest in how technology can leverage data to innovate in this space.

• Hussein advises founders to have a good idea and a solid thesis.
• He recommends social engineering to garner support and excitement from well-regarded market players to secure venture firm interest.

"The best way to get any kind of round done is do the social engineering that you need to do to make sure other people in the market who are pretty well regarded are talking you up, because that's the best way to get venture firms super excited."

The advice given here is for founders to engage in networking and build a reputation among respected market players to attract venture capital interest.

• Hoxton Ventures aims to be a sought-after early-stage investment firm in Europe.
• Hussein mentions the possibility of a second fund and the intention to remain small but slightly larger to better support entrepreneurs.
• Hoxton Ventures does follow-on rounds almost always.
• The most recent investment is in a digital healthcare company that aims to change healthcare delivery through an app.

"We'd like to be a really good early stage shop that founders want to choose in Europe."

This quote outlines Hoxton Ventures' ambition to be a premier choice for founders in Europe seeking early-stage funding and support.

• Hussein's favorite book is "Flowers for Algernon," which he describes as a sad story.
• He regularly reads the "Abnormal Returns" blog/newsletter, which focuses on the financial services industry.
• When asked about a successful VC, Hussein names Mike Moritz.

"Flowers for Algernon and I forget who wrote it. It's a really sad story."

This quote shares Hussein's personal preference for a book that has made an impression on him, reflecting his interests outside of venture capital.

• Hussein refrains from commenting on public market acquisitions, stating that he is not a public markets guy.
• He acknowledges the difficulty in predicting the future success of companies like King.com post-acquisition.

"The tough part about gaming is you've got to keep doing it right."

This quote highlights the ongoing challenges in the gaming industry, where continuous innovation and success are necessary to remain relevant.