Wal van Lierop (Chrysalix): We are more than just a financial investor; we are a very active contributor to scaling up companies.
30 Nov, 2021
Rob Kniaz is Partner Hoxton Ventures. He spent most of his career in Silicon Valley, then came to London in 2008 to join the investments team at Fidelity Ventures, focusing on consumer internet and software-as-a-service sectors. Prior to Fidelity, he was on the new business development team at Google and was previously a lead product manager for AdSense’s front-end systems. He began his career in Intel’s highly selective technical sales program where he worked to grow their entrepreneurial reseller channel in the Federal Government vertical and later in Latin America from Bogota and Miami Beach.
I spent my career in Silicon Valley, before I came to Europe – a lot of time with pre-IPO Google, for example, with Intel, etc, and before that in Stanford. When I was at Google, as a product manager, we were allowed to run deals, often an acquisition, so I led a few acquisitions inside Google and saw how the buy-side of deals works. That was quite interesting – the process of finding small companies, buying them, and how VCs are interacting. I came to Europe about 12 years ago with Google and just stumbled upon the opportunity with the VC frontier. At that time, especially in Europe, very few funds had any kind of Valley operational expertise, it was a very rare skill set to have California product managers here in London. Also, most of these VC firms had sort of telco DNA or very finance-oriented DNA. It was very interesting for someone who has done deals on the buy-side to be on the VC side. So I cut my teeth with Fidelity Ventures (now known as Eight Roads), learned the business with them, and about 8 years ago started Hoxton with my current partner Hussein Kanji. We had a common approach to venture. In California, most VCs are operators, they have a product or computer science background. We thought it was a good fit for the gap in the market, as the world becomes flatter and more and more interesting companies come from Europe now.
The most noteworthy was FeedBurner. I was a product manager for ads and they were very complimentary to what we did. I can’t disguise the terms of this deal and, speaking about the efficiency, I’m not sure that we had a quick return on this acquisition (still, I’m sure, we made our money back over time), but it was very useful as we were able to put text ads in places people can see, as RSS was growing. Of course, things go another way now and Google Reader eventually was shut down. Anyway, it was a good move for Google, because we acquired a lot of great talent that went for many great things both inside and outside Google: Rick Klau, who went to Google Ventures, Dick Castolo, who became CEO of Twitter, а couple founders who left the team and made their own companies. It was great talent acquisition.
I’ve seen lots and lots of exotic startups, especially in Europe. Unlike the Valley, where things are so cutthroat you have to have really deep expertise and be really specific, the European market is still far and wide and still scattered, and we’re very generalists. Our day-to-day things may include female first gaming company and quantum computing; we’ve done a couple of BioTech deals, Life Sciences, like a company that does radiology AI looking at mammograms and analyzing them for tumors as good or better than a radiologist can do. We are very broad, we take opportunities to look where interesting things may be happening. We are looking for companies that can be winners in the whole world, not just in Europe, be the top 1 or 2 in any given sector in the world. If you’re investing in a company to get a venture-scale outcome, you need to know that it has the potential to win the whole world. You need to understand how big is the market, can they enter the USA or China, because that means really big market, while the European market is still very fragmented, and it’s not easy to go from the UK to Germany to Greece, while the US is 7 times as big as the UK. It is always going to be our main criteria – can it get millions of users, customers, downloads?
It’s a combination. You must trust your sources – your friends and your network. Lots of deals come from that source, like regionally-focused VCs who may show us some interesting things happening in a region, our friends that we have invested along before, other founders that we backed, and sometimes even founders that we passed on if they enjoyed the process and may be helpful in introducing other people they know. The vast majority is inbound. We also do a decent amount of research, tracing companies across Europe, when somebody leaves a big company to start something new and potentially interesting, especially when a company goes from 0 to 20+ people in half a year. In Europe, the information doesn’t flow the same way as in California, where you have to work hard to keep your company secret. Here, if you’re outside London or Paris or Berlin, you might be out of radar. If you’re in Warsaw or Kyiv, people don’t really know about you unless you’re raising your hand saying, “Hey, I’m here!” We put a lot of effort into trying to locate things.
It’s very different depending on the business, but it all comes down to is it a very large market? We look at the market trying to figure out are they disrupting an existing large market by being 10x faster-cheaper-better in some way or are they creating a brand new market. Then we look at product-market fit, can they show some initial traction, do they have initial customers, do customers love their products and use them every day, or paying money for them. To build a multi-billion dollar company, something has to work really well on the sales side and some products sell themselves, like games, but enterprise software requires the product-market fit, especially in the organizational mapping to understand who your customers are. We want to see in a leadership team this ability and desire to scale the business, we want them to show us this potential for extensional growth, as growing numbers of users or increasing volumes of deals with SaaS users.
We look at probably 1500, between myself and my partner. We will dig into about 100 of them, or a little bit more, to arrange meetings or short calls. Out of those 100 we spend a serious amount of time on about 30 companies and make 10 to 15 deals a year. This is a very flat organization, just me and my partnership, we can make quick decisions. We know each other well and we know our criteria and can communicate the opportunities. With these volumes you make first decisions quickly, evaluating market, sectors, etc.
It’s everything across the board. In Europe, you have to be generalists. We like DeepTech, Machine Learning, interesting applications of computing power. We look for things that are interesting, that open new markets. Babylon Health is doing innovative things around the frontline in medical AI, because a lot of preliminary data can be collected and examined before a patient needs to see an actual doctor. Again, we look at things that we think are disruptive for big markets.
We’re fairly flexible. We consider ourselves a seed/Series A fund. The funding spectrum is going to change; there are no longer really defined baskets. Our investments can range from $1M to $4M on average, which sometimes is the Series A, sometimes seed. Usually, it is when there is a product, something they really believe and passionate about. We’ve done some pre-seed deals in order to do a follow-up seed round if that’s someone we know really well or something we particularly like. At the pre-seed stage, our check is, usually, around $500K.
Some products are very self-evident, and as I’d like to hear the background story, I’d love to see a product. But also, if you show me nothing but numbers, and that’s a very liked application, I can see a lot from the numbers very quickly. For me it’s a combination – can I see the product, can I understand the product, can I understand why the customers want the product, understand what kind of growth they are expecting, etc. I might not be the core user at the core market, but I still can understand the product. Numbers help me understand what can we look at right now – not at revenue necessarily, as we may invest at the pre-revenue stage, but if people do use beta and enjoy it, it can tell us a lot about the future of the product.
We’ve done things as short as 1.5-2 weeks. The process depends on the state of the company and how much there is to due diligence. We pull all the data together, look at the company’s formation documents, the legal review. A lot of it is around the market intelligence – who do we know in the space that is smarter than us. I think the key in the venture is having a lot of people around you that are smarter in terms of advisors – angels, friends – and talk with them. Of course, you get references on the founders as well to understand who they are, what is their backgrounds. It can be very compressed depending on how much time we have and how well we know the space.
As venture fund we’re going to every deal thinking “Can this return the fund?” meaning will this investment, assuming we take out pro-rata as we go, exit at a rate that deliveries at least the amount of capital of the fund. So, when I’m buying 20% of a company, I want to know if my $2M going to turn into $90M? A multiple is different at every deal depending on how much money we put in and at what stage we come in. In Series A deals you’re coming at a much higher valuation so you’re expecting it to be a very large company.
Usually, it’s 10 to 20%. If it is a billion-dollar company and you own 20% of that, it is a 2x+ fund returner, assuming that you’re going to be diluted as you go. We have 3 unicorns in our portfolio so far, each of them is more than a fund returner. The model looks like that: I’m going to be diluted every round, every round I’m going to take my pro-rata out of reserves as long as I can, and at some point, I run out of reserve so start diluting a little bit more, and by the time of IPO may own 5%, but if it’s $2B company, that returns the fund, if it’s $4B, it’s doubling the fund. And you need to calculate each stage, how much can you afford to dilute and how much can you afford to invest. And if you have a $100M fund, you can afford to invest initially only $50M because you need a reserve for follow-up rounds. The size of the fund is a very deceptive number because you need to have reserves, you need to be able to recycle some of the money you’ve invested into new deals, being able to maintain your pro-rata as long as you can, if you believe in a deal. It’s difficult with any size fund to juggle that balances with every new deal. Ideally, a fund needs to make a minimum of 13 to 15 deals to ensure that you have a chance of getting some big outcome, but you cannot just divide your initial money to 15 and live on it. Maybe, in the end, you will have fewer deals, but your portfolio can really work.
Especially with a European-specific mentality, it is this “Can I take over the world?” In Europe, a lot has changed in the past 10 years, but historically most European deals were like you build a software company in the UK, you’ve got a sales team in France, the sales team in Germany, it was a very linear process to go across the continent, and eventually, maybe, you go to the USA, but someone else probably had the same idea and win the USA market already, because they went up to raise a bunch of money in California. And as there is much more money there, they were in a much better situation than you – they grow faster. When they decide they want to come to Europe, they may buy you for a small amount – or even a decent amount. So in Europe, we used to see $50M-$100M exits, that are not so good as fund returners. It is all change now. If you look at the number of unicorns getting created in Europe every year, it used to be, like, 1 every year and now there’s 6 to 10 every year. If you look at the best funds in California, each of them has one or two $10B+ companies, and that means they can return a big fund many times over. In Europe, you have to be size disciplined: it’s very hard to return the $500M fund with any deal in Europe because $10B companies are pretty rare. On the other hand, the world gets flatter every year, it is getting easier for companies to be more global, to do more things in the US, to go to the US earlier. Also, European costs for engineering are lower than in California, so you can do more with less and you can find great talent in the UK, Germany, Ukraine, or Poland and get a good value for talent, selling your products to the US, so you can get the best from both worlds.
I try and think… We have a couple of times when it was 1.5 person, meaning the second person was nearly ready to come full-time. We don’t do pre-seed. If we do pre-seed, those are people we’ve done already and know from our contacts, we trust them, they trust us. Usually, by the time we invest, there is some initial product or prototype, something tangible. But if it’s the right person with a great idea in a space we know well and can see product-market fit, we can invest earlier.
Neither, to be fair. I mean, you have to say “Jobs” because he was more successful, while Wozniak was a nicer person. To make more money for our LPs, we need to choose Jobs more often. As a VC, you want to find out that kind of magical combination where there is both Jobs and Wozniak, so you can actually get it. They both made big money on Apple, but Steve Jobs had great sales skills, great charisma, and vision. You want to work with people you like, and Steve Jobs doesn’t seem to be very good to work with, but he was very successful and made a lot of money to a lot of people.
Transparency and honesty are really important. Some founders are very fast-talking but don’t know their own numbers. I like founders that know their numbers really well, and if you’re running a business and can’t do it, it’s a big red flag, meaning that you don’t have a grip on your business, don’t watch it close enough. We look for the ability to hustle, to work hard. Being a founder is a shitty job: it’s a grind, you’re spending the prime years of your life doing something with no real guaranteed success at all, you raise money along the way, but there’s no guarantee anyway – do they understand what it takes to be a startup founder? It looks glamorous for an outside – to be a founder. You see the success stories, but for every Travis Kalanick there are thousand of founders who tried and fell, and that sucks: you spend 2-4 years working on ideas, you’ve got to spend all your money, and that one day you have nothing to walk away with. It’s not going to be fun. Even when we’re starting our own fund, we work for a couple of years without salary, while we were raising the funds, doing odd jobs here and there. Even overnight successes take 3-5 years to become “overnight.”
Lots! Companies like UiPath – we looked at them and underestimated the market size for that sector. It is a really disruptive sector, and we miscategorized it and didn’t do the round. It’s a huge company now ($35B as of February 2021). There is a lot of deals we didn’t do in Fintech, like Monzo or Starling, because we thought it was too local but it turned on to be the fund-returners for their investors. Those are the things we lose sleep over – if we are missing a good opportunity, is it inside our scope, do we see it. I wish I could see every multi-billion company in Europe, and sometimes you do, sometimes you don’t, so you’re trying to figure out how can I see those kinds of deals in the future. Like Spotify – everybody had been looking at Spotify at various points, but you look at it trying to figure out how it fits the fund strategy, and Fidelity Ventures was very cash focused in terms of revenue, and it was very hard to see Spotify as revenue model at those days, but you could see the product was excellent. It was a pass for Fidelity, but a good outcome for everybody involved.
It’s hard to say you’ll never invest in something, because as soon as you say, “no,” you’ll find something interesting. In general, I don’t love AdTech, but I’ve done a marketplace for learning which was a marketplace plus AdTech. Right now we are in a cycle where there’s not a lot of innovation happening in AdTech and Marketing Tech, so those are very hard sectors to be in. Travel is very hard: we have some travel Investments but it’s a much higher bar now, especially post-COVID, and if you write Series A check, there ain’t be many folks writing Series B check. There are certain sectors that were open-minded about and we’ll take a look, but for things like E-Commerce we’re very selective, and a lot of sectors tend to be very nationally focused making the French or British equivalent of whatever. For us, some things just not transfer well to a new country and don’t scale well afterward. It also needs to be scalable worldwide, and it is, for example, mortgages for the UK market, it cannot be transferred on the US or Latin America markets easily – you can make a big business out of that but it’s hard to see a $10B business just because of the size of the market. Uber, which builds the playbook model, easily adjusted to a new city or country, is a scalable model.
Certain sectors, like Travel, are even harder now – you just don’t know when it’s going to be rebound, so businesses closer to Travel, Hospitality or Food, unless they’re doing something around delivery, are just you’re going to have a hard time and the funding cycles can be longer for them. We look at the customer’s pipeline and how exposed are you to customers – with difficulties. On the other hand, COVID made some markets more attractive, like Online Learning, and it is actually good. COVID made companies either track downward for 6 months or track up really good for 6 months. When it started we were very cautious about will the entire world slow down, and we’ve seen that enterprise sales were slow at the beginning of the summer and then by the end of summer it picked up again back to their normal pace.
If we go back in history, Ford Motors made dramatic changes in the 1920s, as well as Carnegie Steel. If you want to look at tech companies of the recent era, IBM and Microsoft are phenomenal companies, they captured the perfect market at the perfect time. Google is an amazing company, one of the biggest cash printing companies ever. Putting aside all the other things they do around Android, Google searches is the money printing machine. The idea of the auction is extremely good and efficient, it’s an amazing business by itself. If you cut over all of the other non-core things, you still have a 95% net margin type business. That’s why they have a lot of money to do other things. The same is with Amazon – they reinvest their capital into other projects, but even if they won’t, they will be hugely profitable. Every generation has its companies – look at Intel and Fairchild Semiconductor that modernized computers in lots of ways and made the computer industry what it was. Go back to the Silicon Valley history and look at the lineage of huge companies going back in time, like eBay or Amazon, and Google and Yahoo, and before that, there was Intel and Apple and IBM, and you can come and see how this lineage goes back to a few companies in the 60s and 70s. And if Apple and Google are still strong, Intel, which has been on top for 30 years, not lost its mojo and lots of weight while ARM chips are taking over a lot of devices and encroaching into the server space where Intel always made most of it. This is the fun of the industry – everything is moving and changing, and tomorrow might come and bring in a better money printing machine than Google or Facebook. Or Apple. Things require constant contemplating. Intel is a great example, and Andy Grove was notorious for this. He saw the value of going to CPUs and he was doing a high margin business selling memory, realizing that memory was going to be commoditized so effectively commoditized it himself, and CPU grew into a hugely lucrative business. Without Andy Grove around the house, they decided not to compete on mobile phone chips thinking they were just too low margin and lost this market to the ARM chips. Now Apple launched its own chips that are all self-designed, they are very customized for the Mac but extremely performant. If you look at the battery life and the value, it’s better than any Intel laptop out there, as far as price to performance ratio. For me, that’s a real threat, because those chips are optimized vs generalized by Intel. And Intel hadn’t disrupted themselves, didn’t go to that market at all. If you don’t disrupt yourselves, someone else comes and disrupts you.
You can look at catastrophes in terms of money raised and lost. Quibi is a good example that burned $2B in a year and a half. You can look back to the DotCom era, which burned lots of billions – it wax, actually, the right idea just the wrong time. It is more interesting to find why the company fails, what were the reasons – was it fraud, mismanagement, or just timing. If you look at the ideas for 1999 and 2000, most of those ideas are successful companies right now. There is an awesome grocery delivery service Ocado here, in the UK, and that’s exactly the vision WebVan had, they just way overspend and the market wasn’t there because people won’t order on their phones and wanted to use e-commerce. For me, it’s always the question of was the failure market dependent or timing dependent or founder dependent, or a combination of those three.
Intellectual curiosity. You can be very domain-focused and that’s fine: in this case, your network and deep understanding of your sector will help you. But an ability to see across sectors is important, being able to see a certain technology and think about how this is applied to other sectors. As our portfolio is growing we’ve seen interesting ways to put our portfolio companies together, to introduce, see different applications when we realize that one company is working in a very lucrative area no one else is focusing on. You need to look at new markets and jump into those markets quickly, do the homework and get up to speed where you can talk knowledgeably enough to understand is it going to be a good company. That’s why journalists often make good VCs: the key here is the same intellectual curiosity. Journalists ask lots of “Whys?”; their job is to take a story they know nothing about and build knowledge around it. If you do tech-related VC deals, it is helpful to understand the technical side of things. So, curiosity and then an ability to execute. In this business, there is a lot of fear to fail. It’s easy to back companies behind some big funds, like Sequoia, but the most successful VCs go into unsexy or crazy areas, do DeepTech deals no-one would touch 5 years ago, and make it success, predicting where the markets are going.
It is quite like Poker: you can work hard, you can make informed decisions, but there is still a lot of luck involved. You’re kind of betting on the market and the founders, but often the best technology is more the matter of psychology around. You can play it as a chess game, strictly logical, but the market is not logical, there are many intangibles involved like COVID happens and great travel businesses are cut off for the knees, while some other business triples overnight. It is a gave where you need to be prepared for lots of different contingencies and try to act on them when they become clear. You’re always making bets on sectors or teams; sometimes something doesn’t look good but turns out to be great, and sometimes something that looks like a sure thing turns out to be a flop. My mentor in Google told me, “You try to find the biggest ocean to surf in.” I’d rather be #3 globally than the #1 in the UK, just because it would be much more valuable business.
It’s a great job, but it’s not totally transferable. I like it and want to keep doing it – you talk to great founders every day, you solve problems every day, and every morning you wake up to something new. Sometimes it’s slow, sometimes it’s frantic. It’s enjoyable and suits my curiosity. It’s good if you have ADD!