The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
Episode: 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
Host: Harry Stebbings
Guest: Hussain Kanji, Founder and Managing Partner of Hoxton Ventures
Release Date: January 20, 2025

Introduction to Hussain Kanji and Hoxton Ventures

In this insightful episode of The Twenty Minute VC (20VC), host Harry Stebbings welcomes Hussain Kanji, the founder and Managing Partner of Hoxton Ventures, one of Europe’s premier early-stage seed firms. With notable successes like Darktrace and Deliveroo under his belt, Hussain brings a wealth of experience from his early days at Excel Partners to his current leadership at Hoxton Ventures.

The Evolution of Venture Capital in Europe

Hussain Kanji begins by addressing the landscape of venture capital in Europe. He emphasizes the critical need for dedicated venture players in the region, highlighting that when Hoxton Ventures was founded over a decade ago, Europe lacked substantial venture funds compared to the US, China, and India. Hussain notes:

“The venture world does not need yet another fund. We have a lot of them, right?” ([04:31])

He explains that many existing European funds either mismanaged capital or ceased operations, creating a vacuum that Hoxton Ventures aimed to fill with a long-term, contrarian investment approach.

Investment Strategies and the Importance of Large Seed Rounds

A central theme of the discussion is the correlation between investment size and the probability of a startup's success. Hussain argues that larger seed rounds significantly enhance the chances of scaling to unicorn status, especially when compared to smaller investments typical in Europe. He states:

“The average is about like $300 million. To get to unicorn status, your best path to scale from a financing perspective is America.” ([00:00])

Hussain advocates for raising funds based on the time frame rather than the size, advising emerging managers to:

“Give yourself 90 days. Whatever you get, go start investing.” ([00:23])

This strategy ensures that funds are deployed efficiently, allowing startups to grow without prolonged fundraising periods that can hinder progress.

Challenges in the European VC Ecosystem

Hussain delves into the structural challenges faced by European venture capitalists. He points out that many VCs in Europe are momentum investors focused on short-term markups rather than fostering long-term, durable companies. This contrasts with the American approach, where firms often act as business owners aiming to build substantial enterprises.

“The venture world is not a general type of industry. The averages and the medians are very deceptive in our industry.” ([07:22])

He further discusses the difficulty in raising funds, sharing his personal experience of struggling to secure initial commitments and the eventual breakthrough with key investors.

Case Studies: Deliveroo and Darktrace

Hussain shares detailed accounts of investing in Deliveroo and Darktrace, two of Hoxton Ventures' flagship companies. He highlights the strategic decisions and challenges faced during these investments, particularly in preserving ownership and navigating follow-on funding rounds. Regarding Deliveroo, Hussain reflects on the timing of their exit:

“We sold out Deliveroo at the IPO. We thought it was very fairly valued at the time.” ([20:23])

In contrast, with Darktrace, he admits to mistiming the sale but underscores the importance of holding investments for long-term gains:

“We should have probably programmatically sold.” ([19:32])

These stories illustrate the delicate balance between strategic exits and long-term investment retention.

Fundraising Insights and Lessons Learned

Reflecting on his fundraising journey, Hussain advises emerging managers to focus on the duration of the fundraising period rather than the target size. Drawing from Mike Maples' advice, he emphasizes the importance of deploying capital swiftly to build a strong portfolio before seeking additional funds.

“Give yourself a finite amount of time. Do not do what we did – 39 months to basically do nothing but beg.” ([11:55])

Hussain acknowledges that while this approach is ideal, it requires a robust LP base and sufficient fund size to be feasible, a lesson he learned the hard way during Hoxton Ventures' initial fundraising rounds.

Ownership Preservation and Portfolio Construction

Maintaining significant ownership stakes is another critical strategy discussed. Hussain explains how Hoxton Ventures aggressively doubles down on their best-performing companies, sometimes increasing their ownership to 15-20% through subsequent investments.

“If you see early traction in any one of our companies, we will figure out a way to put more capital in.” ([17:02])

This approach ensures that Hoxton Ventures can capitalize on high-potential startups, fostering deeper involvement and maximizing returns.

The Role of Government Funding in Venture Capital

When discussing government involvement, Hussain expresses caution about excessive government funding concentrating market power. He advocates for multiple smaller government funds to encourage competition rather than a single dominant player, which could distort market dynamics.

“I am a big believer in capitalism, I'm a big believer in the markets. If you have someone like the EIF where there are 30% of the aggregate capital of the LP commits, it's too big.” ([37:04])

He argues that without competitive structures, government funding can lead to inefficiencies and hinder the natural market functions essential for a vibrant venture ecosystem.

The Future of European VC and AI’s Role

Looking ahead, Hussain is optimistic about AI's transformative potential in Europe. He believes that London can compete with the US by leveraging AI advancements, provided that European startups receive adequate capitalization and support.

“This is a world of AI. I think this is the big seismic shift for the next 10 years.” ([53:14])

He underscores the importance of building companies that can scale internationally, particularly into the American market, to achieve substantial growth and success.

Social Responsibility and Diversity in Venture Capital

Hussain touches on the importance of diversity within venture capital firms. He acknowledges the challenges in hiring women due to their scarcity in the industry and emphasizes the need for established funds to invest in training and nurturing the next generation of female venture capitalists.

“...we 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, the problem falls on my shoulders.” ([63:38])

This commitment reflects Hoxton Ventures' dedication to fostering a more inclusive and diverse VC landscape.

Final Thoughts and Vision for Hoxton Ventures

In concluding the episode, Hussain shares his vision for Hoxton Ventures over the next decade. He aims to build a durable firm that can stand the test of time, transitioning leadership gracefully while maintaining the firm's core values and strategic direction.

“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.” ([73:36])

This forward-thinking approach underscores Hoxton Ventures' commitment to long-term success and stability in the venture capital industry.

Notable Quotes

• Hussain Kanji: “Do not do a fundraise for size of the fund. Do a fundraise for time of the fund.” ([12:53])

• Hussain Kanji: “Dense in data, we're in this weird predicament in the industry where you have to do things a little bit off-piste. You have to build for the big outcome and be a little bit contrarian.” ([07:22])

• Hussain Kanji: “We've ended up concentrating because the best companies aren't always the hottest early on.” ([22:08])

• Hussain Kanji: “If you're going to play this game, you have to get to the right size fund.” ([37:11])

Conclusion

This episode offers a deep dive into the intricacies of venture capital, especially within the European context. Hussain Kanji provides invaluable insights into effective fundraising, strategic investment, and the importance of building long-term, resilient startups. His candid discussion on challenges, successes, and future visions serves as a compelling guide for both aspiring venture capitalists and startup founders navigating the competitive landscape.

For more episodes and resources, visit www.20vc.com.