Hussein Kanji is one of the founders of early stage venture capital firm Hoxton Ventures, which behind some big disrupters like Deliveroo and Yieldify. He tells Toni Sekinah why he thinks Europeans do not know how to invest in venture and why SEIS and EIS schemes are like ‘corporate welfare’.
Hussein Kanji only intended to be in the UK for two years to take a break from the US. He wanted to study in London and get a bit of ‘international colour’ because “Americans don’t think about the rest of the world nearly as much.” He has now been here for a decade.
With a hand in setting up three startups after completing his undergraduate studies at Stanford, he chose to move to the other side of the table after his MBA.
Two months after completing his studies, he became an associate at Accel Partners, which he describes as a great fund and probably one of the best in London. However he felt it was a bit too big for him.
‘I like doing small things so I left and started a smaller fund which I’d like to think is a bit more nimble and earlier stage than the Accel guys,” he says.
He set up Hoxton Ventures with fellow American Rob Kniaz, who previously worked at Google and Fidelity Ventures. “Sweet spots” for Hoxton Ventures are startups focused on the internet, mobile and software but Kanji insists this preference is not an exclusive specialisation.
“We don’t specialise. We look for companies that we think can turn out to be billion dollar companies,” he says. “Rob and I are software driven because we’re both software guys. For us, it’s a question of where the new market is and if the company is driven by software at the end of the day.”
The 14 companies in the Hoxton portfolio are an eclectic bunch; Yieldify is a predictive marketing company, SuperAwesome facilitates kids marketing, Darktrace is a cyber security software company, and Raptor Supplies is in procurement. Some of the unannounced companies operate in cloud security, agriculture insights, travel analytics and fintech.
The Hoxton Ventures team invests in European founders from “any country that competes in the Eurovision Song Contest” as the firm is geographically neutral.
Kanji says: “There’s nothing that prevents us doing something in Scotland or Manchester. We don’t care about where these guys are. We care about where they’re going.”
Some of the portfolio companies even have links to India and North America, which keeps them on their toes. “I’m on a plane once a week,” says Kanji.
The team likes to follow investments and remain shareholders for seven to 10 years. They write cheques for $250,000 at the seed stage up to $2m to lead a round.
Kanji doesn’t think that other members of the European VC community are particularly generous to their entrepreneurs.
“They’re not doing a great job. I don’t think Europeans really know how to invest in venture and I think the Americans do. Half of the money in London venture right now is American and that’s not including the Accels Partners of this world,” he says.
He’s right. Figures compiled by London & Partners, the mayor’s promotional company for the capital, show that in 2014, London-based technology firms attracted $795m in investment from the US. Compare this to the total investment in London startups of $1.35bn in 2014 and it represents 58%.
Kanji says that the Americans are stepping in because there are startups with good ideas that can become large billion dollar companies in London and the rest of Europe but they are not being taken care of by the local venture capital community.
“The Europeans underpay, they write smaller cheques, they worry about profitability over growth. Americans overpay, they put a lot of money into a company and are focused on building really large billion dollar outcomes,” he says.
Kanji believes that the lower cost of starting up a technology business in Europe is no longer a justification for VCs to write small cheques to founders.
He says: “There was a time when you could get away with writing these very small cheques of $150,000, $250,000 or maybe $1m and then try to own 30%, 40%, 50% of a company. That kind of BS would never pass muster in Silicon Valley and as the world gets more global people realise that.”
As a result he says that American venture firms are catching on that there are high-quality, underpriced companies here that are not really being taken care of so they come over and it’s not that competitive.
He cites the TransferWise $58m series C round and the Improbable $22m series A round, both led by California-based Andreessen Horowitz, as cases in point.
As well as the small cheque sizes – which he says limits a company’s ability to scale quickly – Kanji also thinks UK tech companies have a major problem stemming from the scarcity of talent.
He says that companies looking to grow from a 100 to a 1,000-person operation need senior level engineering managers, product managers and senior level executives but they are hard to find in London.
“I can count on one hand, maybe two, how many people per domain exist,” he says. The only way he sees this problem being resolved by former employees of successful exited companies “peeling off and go be instrumental in the next generation.”
As this solution would take four or five years, in the meantime he suggests UK tech startups move to or import talent from California.
He also thinks it would be beneficial to the UK tech ecosystem if more professional investors with bigger pools of money were investing at the seed stage.
He says that the current situation of high net worth individuals putting money into tech companies through SEIS and EIS tax relief schemes means “people who shouldn’t be writing cheques are writing cheques.”
He goes on: “They are writing cheques not because the ideas are good or bad but because they want their tax money back. As a result of that you’re going to get some bad behaviour.”
Kanji calls such tax incentives “corporate welfare” which he thinks is unnecessary in as we are in a boom market.
“I think the private market should be mature enough to be able to do the right sets of things and the government should stay out and people should stop asking for welfare.”
*This article was first published on TechCityinsider in August 2015.