Uni­corn hunters zoom in on the next big deal

Bri­tain’s ven­ture cap­i­tal­ists have taken to us­ing video calls to con­tinue the quest for to­mor­row’s start-up suc­cesses, writes James Cook ‘The way we’ve been ap­proach­ing it is we’ve been keep­ing calm and car­ry­ing on, we’re not really fol­low­ing the stock ma

The Daily Telegraph - Business - - Business -

Rob Kniaz, one of the UK’s most prom­i­nent tech­nol­ogy in­vestors, sits in a shed in his gar­den work­ing through an­other day of video calls. But his vir­tual back­ground on the video call soft­ware Zoom is a more lux­u­ri­ous set­ting: A lav­ish cor­ner of­fice in a sky­scraper in New York.

Scenes like this have be­come the new nor­mal for tech­nol­ogy in­vestors flush with cash and de­ter­mined to seek out fu­ture “uni­corn” start-ups worth more than $1bn (£807m), even dur­ing the pan­demic.

Ear­lier this month, Kniaz’s fund Hox­ton Ven­tures an­nounced a new $100m fund which it will use to back fledg­ling com­pa­nies across Europe.

To­gether with his long term busi­ness part­ner Hus­sein Kanji and new re­cruit Rob Lud­wig, Kniaz is hop­ing to sniff out more uni­corns be­yond food de­liv­ery ser­vice De­liv­eroo, cy­ber­se­cu­rity com­pany Dark­trace and dig­i­tal health­care busi­ness Baby­lon, all of which Hox­ton backed through its first fund.

But uni­corn hunters in the UK are fac­ing un­prece­dented times. Unable to phys­i­cally meet founders, they’ve had to rely on video calls to seal deals.

Many funds have sim­ply paused in­vest­ing dur­ing lock­down, while others are see­ing the value of their port­fo­lio fall as start-ups face un­cer­tain fu­tures.

“Prob­a­bly a quar­ter to a third of all funds in Lon­don are on some kind of slow­down or stop­page where the bar is much higher for them or they’re just tak­ing the sum­mer off,” says Kniaz, who is dressed in a typ­i­cally ca­sual out­fit of a base­ball cap and grey T-shirt.

The dip in the amount of com­pe­ti­tion in the typ­i­cally cut-throat world of ven­ture cap­i­tal has re­sulted in a gold rush for funds which are newly flush with cash.

In­dex Ven­tures, an­other Lon­don­head­quar­tered fund, is also con­tin­u­ing to in­vest dur­ing the pan­demic af­ter rais­ing $2bn in fresh fund­ing in April.

“The way we’ve been ap­proach­ing it is we’ve been keep­ing calm and car­ry­ing on,” says In­dex Ven­tures prin­ci­pal Ari Hel­ga­son, “we’re not really fol­low­ing the stock mar­ket.”

Ven­ture cap­i­tal firms such as Hox­ton and In­dex face a daunt­ing task in sift­ing through Europe’s thou­sands of start-ups to find the small per­cent­age of them which have the po­ten­tial to be­come in­ter­na­tional busi­nesses.

Com­pe­ti­tion is in­tense, with in­vestors of­ten mak­ing short-no­tice trips across the con­ti­nent in an ef­fort to woo the founder of a par­tic­u­larly ex­cit­ing in­vest­ment op­por­tu­nity.

Some­times, in­vestors end up kick­ing them­selves for miss­ing op­por­tu­ni­ties, as Hox­ton does over its de­ci­sion not to in­vest in bank­ing start-up Monzo be­fore its founder Tom Blom­field even started the com­pany.

“I didn’t know how they were going to do cus­tomer ac­qui­si­tion,” says Kanji, Hox­ton’s other long term part­ner who speaks less than Kniaz dur­ing meet­ings but con­stantly posts on Twit­ter.

“Lit­tle did I know that build­ing a par­tic­u­lar coloured card and be­com­ing the hip card for mil­len­ni­als was going to work,” Kanji says. “Tom didn’t quite ex­plain that. He just said ‘trust me, I’ll fig­ure out’. That wasn’t enough for us.”

Monzo is in many ways a prime ex­am­ple of the health of the UK’s tech­nol­ogy start-up scene dur­ing the pan­demic. The com­pany’s val­u­a­tion bal­looned to £2bn last year, but has since dropped to £1.25bn.

Re­search busi­ness PitchBook said in a re­port pub­lished ear­lier this month that the coro­n­avirus pan­demic is likely to cause sim­i­lar falls in val­u­a­tion across many uni­corn start-ups.

“Uni­corns val­u­a­tions are likely to flat­ten or fall as growth be­comes harder to cap­ture in the cur­rent en­vi­ron­ment,” the re­port said.

How­ever, Kanji re­mains op­ti­mistic that the UK’s strong­est start-ups will weather the storm.

“The up­per ech­e­lon of these start-ups is still com­pet­i­tive, peo­ple still bid up on these things,” he says. “As long as there’s one other per­son who thinks there’s some­thing big and is will­ing to pay up, prices tend to con­verge on that number.”

The im­pact of the ex­pected re­ces­sion on the start-up sec­tor is un­clear. Some of the world’s largest tech­nol­ogy com­pa­nies emerged af­ter pre­vi­ous crises, but fi­nan­cial hard­ship is likely on the way for the fledg­ling, so-called “seed” start-ups. The Bri­tish Busi­ness Bank said in a re­port pub­lished last week that the 2008 fi­nan­cial crisis had the largest im­pact on seed busi­nesses, with the number and value of deals drop­ping.

De­spite these con­cerns, ven­ture cap­i­tal­ists are more in­tent than ever on find­ing so-called “uni­corns”.

Hel­ga­son says he has taken to going on so­cially dis­tanced walks with start-up founders as a way to con­tinue in-per­son re­la­tion­ships dur­ing lock­down.

The pan­demic has also given funds the time to fine tune their se­cre­tive data­bases which hoover up in­for­ma­tion on peo­ple and start-ups around the world and then out­put a list of po­ten­tial in­vest­ment op­por­tu­ni­ties.

EQT Ven­tures, a Swedish fund with an of­fice in Lon­don, swears by its ar­ti­fi­cial in­tel­li­gence sys­tem “Mother­brain” which it uses to hunt down deals.

Hox­ton, too, has built its own track­ing sys­tem which Kniaz is cur­rently op­er­at­ing from his shed. The tool tracks peo­ple and com­pa­nies, watch­ing for signs that start-ups are grow­ing quickly.

“If a com­pany starts to get really hot in Ro­ma­nia, I want to make sure I see it,” Kniaz says, “prefer­ably with­out spend­ing half my time in Ro­ma­nia”.

“I thought of all the ways we’ve ever missed com­pa­nies or didn’t see them fast enough and fig­ured out what are the best sig­nals I can har­vest,” he adds.

These data­bases are still flag­ging promis­ing new start-ups, even while the pan­demic and lock­down have changed the way ven­ture cap­i­tal­ists in­vest.

The con­tin­ued strength of the UK and Euro­pean start-up sec­tor has led to many Amer­i­can in­vestors, such as Y Com­bi­na­tor’s in­vest­ment wing, Peter Thiel’s Founders Fund, and Face­book backer An­dreessen Horowitz in­creas­ingly seek­ing Euro­pean start-ups.

But that’s a stark change from sev­eral years ago, when many in­vest­ment firms head­quar­tered on Sil­i­con Val­ley’s Sand Hill Road were far more dis­mis­sive.

“There was a part­ner at An­dreessen Horowitz who took me on a walk,” Kanji re­calls, “he said ‘just come back home, give up on this silly Euro­pean ad­ven­ture that you’re on.’

“Now all those US firms are com­ing out here,” Kanji adds proudly.

For the UK’s uni­corn hunters, the pan­demic has changed the game and left them stranded at home just like ev­ery­one else.

But their hope is that their deep pock­ets will see them snap up lu­cra­tive stakes in fu­ture tech­nol­ogy gi­ants, even if they have to spend hours on video calls to seal the deal.

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