Hoxton Ventures aims to bring Silicon Valley DNA to Europe with a new $40M early stage fund

By Michael Carney , written on December 4, 2013

From The News Desk

Like most startup ecosystems outside of Silicon Valley, Europe could use more venture capital. But it goes beyond simply a lack of cash. Europe is short of investors willing to forgo near-term revenue and profitability in favor of long-term, massive growth. Hussein Kanji, one of two American founders behind London-based Hoxton Ventures, calls it unicorn hunting, and hopes his firm’s newly announced $40 million early stage fund will herald a change in investment attitude.

Kanji and his co-founder Rob Kniaz are well positioned to inject a little Silicon Valley DNA into the European startup ecosystem. Collectively, they have more than a decade of experience working at Google, Intel, Microsoft, and Sun Microsystems, and about half that much time investing under the London arms of Accel Partners* and Fidelity Ventures, respectively. Kanji and Kniaz have rounded out their team through the addition of European serial entrepreneur Dylan Collins as a Venture Partner.

“The idea of being an outlier-driven fund is more new here than it should be,” Kanji says, “and as a result, entrepreneurs have trained themselves to optimize for what’s available in the marketplace. The good news is there’s a big gap in the market here in terms of funds willing to follow the typical Silicon Valley playbook."

What's more, he adds, valuations are a bit lower, "although we tend to pay a lot more than market rates, but the challenge as investors is that you have to make up for gaps in the ecosystem with sweat equity.”

Scrounging up the $40 million proved more difficult than the Hoxton partners expected, and the fundraising ultimately took more than two years. The money came equal parts from existing relationships in the US and from new ones formed in Europe, according to Kanji, with the latter proving far more challenging.

“We have two European family offices that made sizable commitments, but it wasn’t easy,” Kanji says. “Along the way we heard from a number of investors here that tech investing is outright gambling, and there’s no way to make money from it. Others said that if they were going to invest in tech they wanted to do so directly, because that way, at least they could lose their own money making their own decisions.”

This pessimism is one born out of hard-earned experience, Kanji concedes, as Europe has historically performed the worst among global venture capital markets. As a result, 60 percent of all venture dollars invested in the continent today comes from the government in one form or another. Despite an aggregate economy roughly equal to the US, Europe has one third the venture capital flowing. Hoxton is a bet that the market has turned a corner in terms of both startup quality and investor appetite.

“It takes time for markets to catch up,” Kanji says. “Unfortunately results are a lagging indicator.”

Hoxton is a generalist firm in terms of industry focus, something its founders consider a necessity given the lack of startup density across Europe. The firm’s primary filters will be around the potential to build a large, enduring company. Kanji expects to London, Stockholm, and Berlin, to be the firm’s key markets, while adding that he wants to spend more time in Eastern Europe.

Hoxton will make four to six investments per year with the explicit goal of each being to build large, category-defining companies, Kanji says. While this may seem like marketing speak and a goal shared by every VC firm, it’s a rarity in Europe, where base hits and low-risk bets are the prevailing model.

There are approximately 12 to 15 unicorns, or $1 billion-plus venture backed companies formed each year globally, in Kanji’s estimation. Approximately two of these come from Europe, he says, as compared to the four to six that emerge in the US annually. But while the winners are fewer, relative to the US, the competition is equally sparse.

“There are probably more prominent VCs in Boston than there are in the whole of Europe,” Kanji says.

A few American firms have expanded across the pond, with the short list including Index, DFJ, Balderton Capital (formerly Benchmark), and Accel Partners, but even these are focused primarily on writing larger, growth-stage checks. Hoxton wants to fill the Seed and Series A gap. The good news is that with less competition, Hoxton doesn’t anticipate much difficulty getting into the best deals Europe has to offer. The firm began investing before it closed its fundraising and has already made bets in Llustre (London, ecommerce, acquired by Fab), Campanja (Sweden, ad-tech), Tizaro (London, ecommerce), and GoCardless (London, merchant payments).

It will take more than early stage capital to foster these unicorns. A large component of Hoxton’s investment will take the form of sweat equity. The partners plan to devote a significant portion of their time to recruiting from overseas, conceding that Europe lacks a deep pool of talent experienced in scaling technology ventures.

“The market here is full of great entrepreneurs and engineers who are cheaper than in California but on par talent-wise,” Kanji says. “But it’s difficult once you get beyond 10 to 20 guys to build out that next growth layer, which in the US typically comes from the previous generation’s winners.”

The story is similar for follow-on capital, business development partners, and acquirers. While there are growth stage investors in Europe, Hoxton will run a high reserve ratio, setting aside more capital than the typical VC firm to write follow-on checks. Kanji and Kniaz also plan to be intimately involved in fundraising and making business development and corporate development introductions for their portfolio companies.

Hoxton’s other challenges center around fostering a so-called Silicon Valley mentality among its portfolio companies. For example, the firm mandates that companies create large employee equity pools, a practice that is far less common in Europe than the US, and will often share the dilution with its founders as a sign of good faith, Kanji says.

“When you’re forming an ecosystem, you need to make lots of people rich,” he says. “Very few people made money on Skype outside the founders, which was a missed opportunity. But the biggest thing for us here will be driving the mentality of putting growth above profitability in the early stage.”

Europe has had a few recent success stories, including the billion dollar IPOs of ad-tech company Criteo and business intelligence company Qliktech. The shift to mobile gaming has also seen the emergence of Rovio, Supercell, and King, as money-printing juggernauts. Even Zendesk, which is now based in San Francisco, got its origins in Denmark.

So it’s not out of the realm of possibility that the next decade will see Europe produce a handful more startup unicorns. Like Hoxton as a firm, each of these startups will be fighting against the grain every step of the way toward that lofty summit. To stretch a metaphor, there’s value to being a small fish with big pond experience in an otherwise unoccupied big pond, a position Kanji and Kniaz hope to exploit to their full advantage.

[* Disclosure: Accel Partners is an investor in PandoDaily]

[Illustration by Hallie Bateman]