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
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.