Riding Unicorns

S4E2 - Hussein Kanji, Partner @ Hoxton Ventures

May 11, 2022 Riding Unicorns Season 4 Episode 2
Riding Unicorns
S4E2 - Hussein Kanji, Partner @ Hoxton Ventures
Show Notes Transcript

Hussein Kanji is the founding partner at renowned early stage venture firm, Hoxton Ventures. Following experiences at Microsoft and Accel Partners Hussein decided to set up Hoxton Ventures in 2013 in the hope that by backing Europe’s best global tech companies, his team would be able to bring a slice of Silicon Valley to Europe. As a result of backing four unicorns and creating $54bn of value both Hussein and Hoxton have gone on to develop a reputation as one of the best operators in the venture space. 

In this episode Hussein begins by reflecting on his time at Microsoft and how that experience went on to shape his approach to venture. James and Hector then dig deeper into Hussein’s personal motivations behind going into venture and lessons he has learnt from picking founders. 

Make sure to like and subscribe to the Riding Unicorns podcast to never miss an episode. Also don't forget to give Riding Unicorns a follow on Twitter and LinkedIn to keep on top of the latest developments.

[00:00:00] James: Hello. Welcome to the riding unicorns podcast. This is the podcast all about growth startups on James Pringle. I'm a technology entrepreneur and investor and founder of Pringle capital. My co-host is Hector Mason. Hector is a partner at B2B investor episode one ventures. This podcast is all about uncovering what it takes to build a unicorn business.

[00:00:36] We speak to some of the best founders and investors. Many from unicorn companies, and ask them about that journey, operational insight, tips, lessons, stories, and the thing that can help uncover what it takes to build a high growth business.

[00:00:52] Today's episode is with Hussein Kanji partner at Hoxton Ventures. Hoxton Ventures is an early stage technology venture capital firm. Investing in founders seeking to invent new market categories or transform large existing industries. It's back to the notable companies, such as Babylon, Deliveroo, Darktrace and super awesome. And many others.

[00:01:13] Great episode he's a very experienced partner in the venture space. So there's some really interesting insights in here. Let's get started.

[00:01:24] James: Hi Hussein welcome to riding unicorns. Thanks for joining us.

[00:01:28] Hussein: Thanks for having me.

[00:01:29] James: I wanted to start with a broad question, which is. What's the best thing about the venture startup sector in your opinion?

[00:01:38] Hussein: I mean, it's a lot of fun. I mean, you you've gotten, you've gotten everything from like robe and success stories to soap operas, to interesting people. there's never kind of adult day, whether it's a good moment or a bad moment, it's never dull. It's always.

[00:01:52] Hector: how important do you think it is to have operational experience as a, as an investor or if not important? What do you get from.

[00:02:00] Hussein: it depends on when you're investing in the market. I think if you're doing early stage investing, I think it's super important to have some experience on the operational side. You know, if you're a finance person, you get trained to basically build these complicated Excel models with this kind of cashflow models, as well as what everyone knows.

[00:02:16] There's no DCF in early stage venture. Like that skill set is basically garbage in garbage out. If like some startup can tell me, like with certainty, even if like plus, or minus 20% accuracy, what their revenues and what their profit and then their free cashflow is going to look like in five years. Like it's an entirely garbage in garbage out exercise.

[00:02:33] Like there's actually no point to doing this DCF models. And so all of your finance type training doesn't really make any difference whatsoever into the making of a company. And. The stuff that happens in the early days is like, can you build a team around the. And you build a product, and you go build a sales organization start taking the product out to market.

[00:02:53] And, There are a lot of great guys on like metrics, like for what should happen and what good metrics look like versus bad metrics. Like you can go to David's Dax his website and look at some of the stuff that he's written. There's a whole bunch of literature injuries in this bunch of literature, but there's a metrics which is the outcome.

[00:03:08] But the metrics are the outcome. They're, they're the thing that someone measures there's an input to that outcome, which is unless you built a company before or been around the trenches before, you're not really gonna know like how to drive those metrics up. And I would say that's the most valuable set of experience that a venture person can bring to the table, besides just writing the check and to some degree kind of getting out of the way, but if you don't want them to be fully out of the way, the most important thing is probably to have some.

[00:03:35] What kinds of inputs outputs.

[00:03:38] James: Yeah, it's really interesting. And I mean, what made you want to do VC? I mean, you you've been through the Microsoft leadership program. You probably don't do lots of different things. So what was it. Post business school, you were like, I'm going to go and be a venture capitalist. And how does that link to what you said earlier about, you know, every day being different and exciting think.

[00:04:00] Hussein: it wasn't actually post business school. It was, it was the second week of business school. I got a I got introduced by the same guy who, who said, don't, don't come work for me. Go get a proper job. I introduced me to one of the partners that XL Ameritech is partially funded by XL, which is why there's a link between those two firms and that you should go meet my friends who really get it from hall.

[00:04:20] Then go build a backfill in Europe. and you should go sit down with them. And that, that discussion turned out to be like a multi hour discussion. a lot of venture by the way in a lot of life is being in the right place at the right. I happen to be a tech person from the tech industry on the west coast, relocating to London.

[00:04:36] By the time we're buried, see people were in the industry in London and axle had set up it's office a few years prior, and we're thinking about expanding on its partnership and needed to figure out the generational type stuff that they've had. Venture firms that have to do. The stars kind of aligned.

[00:04:50] And they said, why don't you kind of, why don't you kind of help us on something? I mean, they never said anything about a job, right. But they said, why don't you look great to stay in touch when you help us out on something? And I helped out on something, I must've done a good job. Hey, I can help out on something else.

[00:05:03] Hopefully did a good, I think I did a good job again. And like we did a third time in someone kind of around the partnership said, look like we're kind of having fun working with him. Why don't we create a job for him? So. Some time. In my first few months of business school, I effectively had not an official full-time job because you weren't allowed to do that for visa reasons.

[00:05:24] But, uh, they, uh, they kind of opened up job and I basically spent most of my time at that point at the XL office, not, not at business school.

[00:05:32] Uh, and I kinda went to the parties for business school. Like I took advantage of the social stuff at school. And then I did, most of my, most of my life is actually working. And then I think once you end up in the venture, it's hard to go back, right? Because you're, the venture industry is so quirky and these are partnerships and partnerships being like small groups tend to be little bit like, you know, a little bit eccentric sometimes.

[00:05:54] Uh, and it's also really hard to transition. From a business where you find a store to do nothing for a living, other than a bunch of meetings, you know, you're not paid to produce any real output. And you may be paid to think about the output. You may be paid to like chat it out the output, but you don't actually have to do any real work as a venture person.

[00:06:11] you're just in meetings all the time. And then you're also, I think you become a train cynic as a venture person, right? you're taught. to basically shoot down ideas for a living, but the few times where you actually have the defendant's belief in how to write the check, but you see thousands of things over the course of a year and he keeps saying no to stuff.

[00:06:29] Yeah. I would say if there's any other job that can, you know, where you can be ability to deal with time, which is a venture person and a trace. And you can actually be productive. Like most people who are dealing with Huntsman, Sinek's, don't actually do very much with their life. Like they become journalist or critics, but like, that's the only other job that I can think of where you, where you get the same kind of stuff in journalists don't get paid very well.

[00:06:50] and the reporting versus kind of making the news, you kind of want to be on the front lines as someone who's an operating person. There, there were no other jobs. So when I left XL and I didn't leave cell very willingly when I left. I, I looked around and I talked to a bunch of the other venture firms and it was a, it was, it was really difficult, figure out like where job was.

[00:07:10] And there was no other jobs out there. And because there were no other jobs out there, the next best thing, if you want to stay in. You've realized you're kind of soured yourself from doing any other productive work as you've been so unproductive in this venture configuration for so long, you kind of have to stick to venture now for every life.

[00:07:26] you know, the first new kind of connected me and I felt that it was, was it's right. He was right. Like, you kind of have to. At these venture firms to be able to do well, and that wasn't a partner. Well, then the next best thing is to make yourself a partner and set up your own fund. And so we became a startup venture fund, which I would not ever recommend to anybody, but, we set up our own fund.

[00:07:44] It took 39 months to raise this silly thing. but fortunately we, we turned out to be pretty good investors. and so wait. A bunch of good picks. And I think we've been reasonably helpful with our companies, which is why we get to stay on the boards for a long time.

[00:07:57] Hector: I agree with what you've said, actually the, bit that resonates is the cynicism, which I think is in many ways, particularly in personal life it's a bit of a shame. But such is life. You make sacrifices. it's interesting hearing about your talk, how the sort of stars aligned because, Accela is a later stage fund and, think there's an interesting. well, I think it's interesting how people kind of end up in, whichever stage of venture investing they end up in and I think they're quite different skill sets.

[00:08:26] I think they require quite different character traits. and so I'm interested in kind of what you experienced accelerate with investing at later stage, and why you felt it was actually the earliest stages and seed stage. And pre-seed What were your strengths

[00:08:40] lay?

[00:08:41] Hussein: thanks. I was not a later stage from it's kind of, it's an early stage firm, but it kind of does. Men's a big firm, right? It runs hundreds of millions of dollars. and so I have to do kind of series a, quite frankly, we ended up in seed because we were broke. We couldn't raise an Xcel's type fund.

[00:08:56] And so when you have a much smaller balance sheet to actually invest out, those kind of have to find things that are going to take small check. one suggestion is you could just end up investing alongside of other people and writing a small token check, you know, a $10 million round happens and you write your a hundred K check as part of the.

[00:09:13] don't think of that venture. Right. And you're not taking, uh, you're not thinking that lead position. I mean, you're kind of, you're kind of following on and kind of piggybacking and, and you're piggybacking off of other people are actually doing a lot of the heavy lifting and let the people do this, but it wasn't very interesting to me.

[00:09:28] I don't think that's an interesting job. And so I did the limited cash that we have. you know, we couldn't do theory diets, so we wanted to focus a lot more on feed investing as opposed to series bay investing. And so that, what we focused on Buddhist birth is we were not sure when we set up whether we were in good and seed investing, right.

[00:09:45] Because benefit of being a slightly later stage investor, whether it's your exam or a series B or series C is you actually have data, right. There's a company out there, like the, build something and get some customers that you can actually talk to. You know, when you're doing seed and pre-seed investing, you know, your borderline kind of sheet of paper, with these companies.

[00:10:02] So, you're really taking like a lot more risks than a later stage investor would be. And we weren't sure if we could actually pull it off, like that was a big open question mark, that I don't think the world thought that we could pull it off. We just saw it took 39 months for anyone to get this money and for us to get that fund off the ground, it turns out a lot of this stuff that you learned in the later stage investing.

[00:10:22] translate perfectly well to see investing side, like, the only difference I think, I, I think XL or index or anyone in these guys could very easily do seed investing. The only thing is for them, if they write a $2 million check into something, $500 million fund. You know, you need the company to be able to return the funds. You know, even if you own 20% of the business, it's got to generate a ton of a ton of money back in order for you to generate their turns. You're much better off writing like 30, 40 fifties into companies who you get.

[00:10:49] You can move the fund with much more modest multiples, a, as an investment. Um, but it turns out like we were, we were good at the seed stuff and. Well, eventually, if you get typecast, if you keep doing something for long enough, so we've been doing your feed now for about like about eight to nine years.

[00:11:04] So we're now a seed from, and, and the market is also filled in quite a bit. and to be fair, we actually really liked this even investment side. So I think there's a part of us that would probably want to scale up to be a series a fund at some point in the future, because I feel like if you're going to do.

[00:11:17] It shouldn't really. And this is the beauty of being an automatic seller. Sequoia is cash is fundable, right? So it doesn't make a difference. if you see it at the seed stage, that's great to do it at the same stage of your miss it at the seed stage, you still get to do it at the series a stage, right.

[00:11:31] You should play across the spectrum, which is, which is kind of what axle does and what benchmark does on Sequoia. Yeah, you didn't need a lot of cash to be able to do that. We just don't have the cash to be able to do that, but we'd love to do that kind of over time. Uh, it just got multiple shots. Like there comes a point where eventually the company gets big enough, the financings and the valuations look more like financings.

[00:11:53] You can. It's discounted cashflow model because the company is actually delivering something and can predictably predict its revenue. By, by the time a company goes public, it better damn well be able to predict its revenue because otherwise the market they're going to be ended up. so you've got to really, really understand your numbers.

[00:12:07] So there comes a time where you look more like a financier than a company builds. I don't think that's for us. we're more on the company building side. We're more on the gut and instinctive side for picking investment versus like building a big spreadsheet to figure out if an investment is good or not.

[00:12:21] But, we're still a small fund. Our last fund was 200 million, 200 million is a lot bigger than our first fund, which was 40 million. it's a big jump in, size, but round sizes have gone from like half a million dollar seed rounds or maybe a million dollar seed round. So like $10 million seed rounds.

[00:12:37] And we, we feel, feel growth, uh, every once in a while. Cause we're still a small kid on.

[00:12:43] James: Yeah, it's fascinating. And had great success with both consumer and B2B. So in your view, how do you make decisions between the two and which one do you prefer?

[00:12:56] Hussein: The theory of being, I think in Europe is A hell of a lot more companies today than we used to end up at us, but we still don't. Companies after companies, after companies in the same field that, you know, the over and over and over again, where you kind of sort of have to be a specialist in order for you to have any ability to kind of win windows deals over us.

[00:13:15] We're still a very generalist field, right. But the companies that become great in Europe are almost the exception to the rule. So I, I don't see why anyone should specialize in venture in Europe because you want to catch as many of the big ones as you possibly can. And since you don't know where the big ones are going to come from, you might as well keep it as open-minded as possible about these things.

[00:13:34] Yeah. The other thing about Europe is I think it's much easier to. Like you don't need to be the world's smartest person to do venture in general, wherever you are. You just need a really good network and you have to know who to call, which is why the operating background matters so much. So you have to know who to call.

[00:13:50] You can actually, you know, pick up the phone and find out if something is really interesting or not. And you know, we've always left the door pretty open here about, but great ideas are going to be, we don't take a thesis view

[00:14:01] and that Xcel, they have a, they have a thesis view. Like they do these things called prepared minds. I think a lot of this is probably more marketing than anything, cause it's much easier to generate the prepared mind with a little bit of hindsight when things kind of go the right way. Bessemer does a great job at actually putting these things together on thematic stuff.

[00:14:17] And their website has a bunch of this stuff and they write great reports, but it's much easier to put the pieces together. I think when you actually see a little bit of this stuff, if you're doing early stage. There's no pieces to put together, right? Because you keep a, you keep a very blank slate. someone walks in the door explained to you why this is actually really interesting and the light bulb kind of clicks and do right.

[00:14:39] And your job is as a venture person is you're an allocator of capital to talent that you see the talent and they have the right idea and it's the right market. And you do some background checking to figure out if that's true or not. And then you write the check and you know, it's not writing. The check is a heck of a lot more expensive.

[00:14:58] Then writing the check, because if the check doesn't go anywhere and it goes to zero, like you get a zero, but if the check turns out cash in, and it turns out to be one of the great companies and we've, done this accident at Hoxton, like we beat ourselves up. Like we turned down UI path.

[00:15:11] Like we met them like months before most of the rest of the venture community. And it was just around inflection, maybe pre inflection. We, we talked ourselves out of it. and then, talking ourselves out of it probably caught. Somewhere between 100 million to a billion, depending on what the dilution factor would have been.

[00:15:28] And I guess it's probably closer to a billion, really expensive million dollar mistake that we would have had that we did.

[00:15:34] Hector: presumably you've made, quite a number of investments from fund one. Now, what have you learned about picking founders? And, are there any character traits that you've actually, told yourself you want to avoid now that perhaps previously you thought favorable.

[00:15:48] Hussein: Yeah. So they're all, they're all different. So Our first fund makes 17 investments and we took three companies public last year and the Raul multi-billion, I think we have a fourth, fifth and a six company that we'll get to multi-billion type status. The typical rule of some InVenture is like one in 20 kind of succeeds.

[00:16:04] You know, maybe it's a really good one and 10 succeeds, like we're way above even like top Cortel norms and stuff for venture. And then the returns of the thunder is the reason why we went from 40 to a hundred to 200 people now line up, they give us money. It's very different than the first three years holding the hat around for people.

[00:16:20] So we've been pretty good pickers. We're not pickers of people. We're pickers of markets. So we spend a lot of time thinking and that's obviously someone comes in the door, we're obviously allocating capital to talent, but someone comes in through the door and the light bulb goes off. And this is actually a big new market.

[00:16:35] This is something that's going to get disrupted. So for it to make this more concrete, you know, we wrote the first check into dark trace, dark trace is doing something that was anomaly threat detector. I think of it as like a home alarm system for your house, except it's not for your house, it's for your corporate network.

[00:16:49] And instead of the alarms, like as in burglars coming in, it's like cybersecurity attacks. It likes it's around. And like most alarm systems, if the alarm rings all the darn time, you kind of tune it out. And it's kind of not a very effective alarm system. And if the alarm system never rings, when someone is doing something bad and then it's clearly a defective alarm system and the trick for all of this is knowing when to ring the bell.

[00:17:11] So that you don't get inundated with, you know, uh, alerts and rain, a bell when it's actually really, when it really matters. An entire market category. And we looked at Darktrace, so was a name for it. It's called security information, enterprise management SIM the entire Tam of the SIM market was 300 million us dollars.

[00:17:29] There'd the added of all of the vendors in the market. And you looked at what they've made collectively was $300 million. And most people in venture will tell you if it doesn't have a billion dollar Tam or can't get the billion dollars, it's not worth investing into, but we still wrote the checks and splits.

[00:17:42] And why did we do that? All the other six. You're right. The rules. So it was almost like taking an alarm system and then writing down every single time the alarm should go off or when the alarm should go off. Right. So like if the cat paces on the floor, this like at this rate, then don't bring the alarm system.

[00:17:58] That's literally the kind of rules that people would have to write and then have to write like 10,000 rules in a normal company. Maybe as much as like 50,000 rules, those products. They're the kind of junk, right? Like having to maintain a rule set of 10 or 50,000 rules in a, in a modern company and keep those things updated for like all the next generation security things that are coming don't make any sense.

[00:18:17] And Darktrace is model is we're going to build software that figures out predicted. And auto generates the rules and ring the alarm bell and, and max. And so for us, we picked up the phone and we called a bunch of people. We called the CTO at RSA. It was like an old friend. We called the chief scientist at Cisco and Cisco just bought a big cybersecurity business source buyer for 3.4.

[00:18:37] So we called a bunch of people and they've said, look, if someone builds something like this, there's clearly a market for it. So it was kind of question number one. And then question number two is we're at London. Like London is not normally where you think like great cybersecurity companies come out of.

[00:18:51] who else is working on stuff like this? Cause usually when they're brand new markets, there are multiple people building things in those markets. It's not just one person like in the world who spots the market. There are multiple people who spotted. So who's the Israeli company. That's building something like this.

[00:19:05] Cause you know, there's tons of Israeli cyber deal companies. Like who's the Palo Alto version of this company. And so we ended up talking to a bunch of our friends and it turns out the number two company with angel invested in, by an old friend of mine. He'd sold his business to Citrix and was made a lot of money.

[00:19:18] And so we ended up in this like Starbucks, or you have this very awkward conversation where he doesn't want to tell me too much about the one that he's invested in. I don't want to tell him too much about the one I'm looking at. we have two horses in the race, right.

[00:19:29] We don't want to have, too much information sharing, but we want to know. Who's got the better horse, like to some degree. And so we have this awkward relationship when we were pretty confident that we had a pretty good force, uh, in Darktrace and he had a really good horse too.

[00:19:43] The single best thing that happens at Darktrace was his company got acquired the day after they announced its. Uh, by one of the big logging companies in the world, Splunk, and then Splunk is not a cybersecurity company. So even if it wants to be, and so that product basically died, it left. Darktrace pretty much unencumbered to kind of win the market.

[00:20:00] So, you know, we spend a lot of time thinking about. And the thing about the people for us is the people. Obviously you need someone to explain the market to you and figure this stuff out because like that's, doesn't happen in a vacuum. Like we could never predictively figure out what these markets are.

[00:20:15] So you need someone with the vision and the drive to do this, the single bed characteristic we've seen. And the thing that we get worried about. Great. People tend to attract other great people. So you spend a lot of time and energy thinking about, you know, a lot, a lot of the reasons, interesting companies extract really great talent into the company throughout the journey of the, and the founders who are weaker, don't tend to attract the same kind of caliber It's really simple, like what the, what the makeup of a company is. Right. There's a good idea. Capital, uh, which we provide and then there's people. And, you know, honestly the idea comes from day one. So a bit of a genius moment, but it's a one-time genius moment. The capital these days is like basically free.

[00:20:55] Like it's so cheap. Like you can get that from anybody. So the single best thing about a company like that's going to make a company actually work is the people. And you could rely on just the founder being accepted. But that's a hard bar, right? Because even if the company scales, they've got to build infrastructure inside, even if they're going to run the leanest company in the world, they still got to attract other people.

[00:21:14] So it's largely a signal it's like, who's going to come and join people along for the ride on that mission that we spend a lot of time working with founders on that, like, and evaluating founders on that other than the market stuff, the rest of this stuff. Honestly, like we don't know, like, don't know the answers to these questions until you write the check.

[00:21:30] Like, there's been a lot of companies. Like we had a company there's a mushroom. And these two kids they're like in their twenties, like mid twenties, they knew nothing about mushrooms. Like as an, they had no scientific background on machines and then no scientific background on leather, or they didn't cover the leather industry.

[00:21:46] but they had studied everything that there was to study about the mushroom leather industry. And they'd recruited five or six people who are the world's experts in the field to come and join them on this before a company was even formed. They didn't, they hadn't been incorporated and they needed half a million quid to kind of get going.

[00:22:01] And so. Internal discussion. Uh, and we, weren't really sure about what we wanted to do. there's big debate around the table and we wrote the check that half a million check, and six months later, they're, they're off to the races. we're going to announce a commercial product.

[00:22:16] Hector: it's very interesting. I think, particularly on what you said around. Dark trace on your reference calls with Cisco and others. where they said, if they can do this, it will be amazing is I think a key signal for particularly investing in deep tech. cause you're speaking to people, the reference customers are people who often don't know what is possible with the latest technology know they're working at incumbents.

[00:22:39] They're often not aware. And if they're just told about something that could exist based on new technology. And they say, if this is possible and we don't believe it is, it will be amazing. We'll pay for it. that's something that we've, we've heard on a number of reference calls as well.

[00:22:51] And, if you then believe that the founders are amazing and that if anyone can put it off, then they can then, that's a great reason to go ahead with an investment.

[00:22:59] Hussein: I mean, a lot of venture, like I said, is you're you're cynical, but you kind of have to know when to suspend this. to write the check and you know, the mud from leather, one is a, is one number we're really bullish on this one right now. But like, you kind of had to believe these 24, 25 year old kids we didn't come from the scientific background could actually pull this thing off.

[00:23:15] And you don't really know if they're gonna be able to pull it off unless something, unless you write the check. And so sometimes you have to write the check. Consumer businesses are much easier, right? Because you can see the traction, you can see the cohort retention. And then the question is like, is it going to scale up to be really large?

[00:23:30] Or is it going to Peter out and plateau at some point? But you know, there's a lot of data, right? It's much easier to be a venture investor sometimes with data, but a lot of there's venture business. it's just knowing like when to pull the trigger and write the check. When you see brilliance kind of coming through.

[00:23:43] That's what makes a job like incredibly fun, like that, your very first question like that. I can't think of a better job in many ways. Like when you get to do.

[00:23:51] James: Yeah, absolutely. And then you mentioned that you're backing markets. So this is probably. Might be a fairly quick answer, but do you ever back multiple horses in the same market and then as an add on to that, you've just obviously told us about one deal, but is there another deal that you've done in the last six months that you can share and explain why you've invested.

[00:24:15] Hussein: Yeah. we don't back multiple horses. I mean, it's, it's too awkward right now. We're a small firm. We're four people. you could maybe put a Chinese wall together, right. To separate like one company from the other, but it's almost impossible. sometimes companies that end up going in the same space and then you've got a little bit of competition, but like, would we knowingly invest in two companies at the same time?

[00:24:33] I think the founders would shoot us. Like if, they knew that, so like you kind of have to back the one you gotta, you gotta pick. Right. I mean, and this is what makes it really interesting sometimes in these brand new markets. A handful of companies that are all doing something kind of conceptually similar, but maybe a little bit different.

[00:24:49] And you don't really know, which is the one to write the check to. one of the beauties of being a seed fund is we cannot do this because if we don't write the check, then in there, we don't get another chance. Right. Whereas if you're a late stage investor, you'd be like, yeah.

[00:25:04] You know what? I don't really know. Right. There's not enough evidence just yet. There are two that are really interesting or three that are really interesting. I'll just take a wait and see approach. And you know, the beauty of being a seed fund is you cannot take a wait and see approach. Cause you have to write the check or you miss it.

[00:25:18] Uh, and so you have to train yourself to be really good about picking the one that you think is going to work and not be so scared of what happens if you don't pick the right one. we try and pick the right one kind of from day one. And by the way, we don't get it right. All the time. We get it wrong more times than right. But, the few times that we do get it right, they've really pay off for us as.

[00:25:37] Hector: Yeah, I think it's of the most important things in venture is to be comfortable with getting it wrong, because if you're not comfortable with that, you're going to stop taking risk and lose your nerve. I wonder if you've seen variation in how seed funds, select investments and, I wonder whether you've seen people that you think, why the hell are they doing it like that, or people who think, okay, I really like how they're thinking about that whether you've kind of learned and adapted the way you think about investing as a result of seeing, seeing what's around.

[00:26:05] Hussein: we've had a lot of good insights from other peoples go Mike Maples who run the flood gates. that'd be down, a few years after we'd started the first fund. And one of the problems in a feed fund is you have very limited, so you can't write the next check as easily as you can, the first check.

[00:26:20] And you certainly can't write the check after that it easily. And so, you know, these, extra checks are cold reserved, and you know, you just don't have very much in the way of reserves and out of a small fund. and I fell, we used to allocate our reserves kind of against each company at the time that we made the decision.

[00:26:34] So you kind of leave the money behind for every single company so that they can draw upon it as future rounds. And it was this more brittle way of doing it. might flood. You know, thinks about this as offensive reserves and defensive reserves, they take all their reserves together that blended into a pool and they take two thirds of that and they try and double down on the winning investment.

[00:26:53] So if you have early success in the fund, you want to take as much as the remaining money in the fund, that you've kind of earmarked future rounds and you want to slow it down on the, on the winning company, the danger to this, by the way. The first winning company may not be the ultimate winning company.

[00:27:08] So there's, there's a lot of nuance with it, but the idea of like offensive versus defensive reserves was a brand new idea. Wouldn't have gotten it if my guns on me down and kind of explained it to me, and we we've now adopted it. Uh, you know, we spend a lot of time talking to firms out on the west coast who are much more seasoned investors than people in.

[00:27:25] To figure out what best practice is kind of really look like, and best practice to keep changing, right? Because the world keeps changing and the way venture is working is also very dynamic. were just going through a lot to change, but we compare notes all the time. there is a Hoxton way.

[00:27:40] Like we are still a very. a 1970s style venture person. Like we take a limited amount of beds. very passive investors. Like we're not like control investors at all. Like, you know, we don't want to run companies or very engaged with our company is like we're active board directors.

[00:27:55] Like, you know, we believe that that matters. we've doubled down on our winners. Like, we're not like an SPV, like we're not doing party rounds. We're not doing SPV stuff, not passive, like we're old school venture. Uh, in that sense, like we're not very focused on our brand. Like we don't have a head of platform.

[00:28:12] we don't really give a damn about that stuff. we don't care about like a head of talent. Like, you know, what we care about is just pitching really interesting companies and, and being on the journey with them and making sure they actually turn out to be, to be really big company.

[00:28:24] That is probably less contemporary these days. Cause it's a little old fashioned, but we think that's the way you get really high returns in this business. and then the people who kind of align with us take money from us and people who don't don't. but I think people who generally take money from.

[00:28:39] Have a view that they want us on the cap table. Like they want us around the table for these kinds of discussions and all of our deal flow comes inbound. So, we run an old school model in a very, new wave in this.

[00:28:52] Hector: Yeah, I think it's interesting how resilient the traditional venture model has, has remained to, you know, Standard fee structure. exactly. As you talk about high conviction bets in a relatively small number of companies, even the last year or two, I think we've seen a lot of.

[00:29:11] Change emerging. But I wonder what you're excited about over the next 10 years. what are some trends. In VC rather than, you know, what sectors are you excited about? What are some trends happening to the, venture industry that you're excited about and that you think are important to take that.

[00:29:27] Hussein: Yeah. I mean, so this idea of like angels being able to set up kind of syndicates or funds, I mean, we struggled for like three years, right. To raise 40. You can raise $40 million as a syndicate today platforms that exist like angel is like, there, are founders who don't want me on the board.

[00:29:43] They want an experienced angel investor who was an operator before, who has a lot of domain experience, but the problem that they're solving on the board, right, the world is changing very rapidly in venture. And we have friends who've raised hundreds of millions on just SPVs, alone doing these kinds of deals, and, and very, very successful investors.

[00:30:02] You're attending this massive deep fragmentation in venture where the power used to be in a very small set of firms. You know, it kind of expanded out as some of the people in those firms went off to go raise other funds. just the amount of wealth that's been created in tech now.

[00:30:16] And the amount of knowledge that's in tech is now means it's really distributed. And so that's, uh, that's the biggest, I think, change and, you know, tire, et cetera. There's just a bunch of new entrance. This money becomes very fungible. And the question is like, if you're trying to build a tier one type firm, like how do you build a team around all this stuff so that you can stay, you know, close to the top because it gets increasingly harder.

[00:30:37] I think, to be at the top, uh, in that.

[00:30:41] Hector: Yeah, I think there's like a critical nuance that people often miss and certainly the media doesn't often report on, which is that there's been an explosion of follow-up. And, and people think, okay, well, the number of venture funds is triple. I mean, I'm plucking that number out of the sky, but what people don't think about is actually how many of those, new investors or conviction investors who are making the initial decision to lead an investment round?

[00:31:03] And I don't know the numbers, but my suspicion is that that number hasn't increased by nearly the amount that the total number of venture funds is, has grown by. Because I think there's just, there are now so many more. Pots of follower money who are probably in some way value add whether it's just through network or specific skills who wants someone who is considered to be a good stock.

[00:31:24] Picker has made a decision on a company, that they'll come in behind and pick your value, adds to pin onto around. Um, and so I think that been kind of an interesting nuance that I've seen. I think people sometimes ignore.

[00:31:36] Hussein: But there are a ton of seed firms now that are in the market that just weren't there before. Like seed funds are now a thing, right there used to not be a seed funds as a thing. And there are lots of people are doing syndicates. And so there's just a lot more money in this industry than there ever was.

[00:31:50] And I, I wonder how much it will stay around. Like some of it's going to go away. Like when the market goes into more recessionary type markets, There's always a pullback. And then I wonder how much of it stays around. But I do think that we're getting a much more decentralized distributed world in venture, and there are a handful of firms that can kind of still command their top spot, because it's a reverse inquiry business for them, but trying to build a reverse Inquiry business for everyone else is going to be pretty.

[00:32:14] It's going to be just much more challenging

[00:32:16] James: Yeah, it's really interesting. This is sort of a bit of a shake off he's going to be where in the market. so it's then we also like to get to know about you as the person, as well as understanding your business and what you do. So maybe you could explain a bit about what kind of drives you within your career.

[00:32:34] I mean, do you have like a career mission statement or anything as formal as that, or like what what's really driving you to do the best work?

[00:32:42] Hussein: I always came from a culture where, you know, you, you were kind of scrappy and you worked really hard to, prove to the world that you were good. I grew up in New York. Uh, I grew up like a block away from the projects, which would be. Kind of the council by the Portland. They're a bunch of people told me, like, I'm surprised you didn't grow up rich.

[00:32:57] Cause that's what we thought you, I didn't, I grew up like, not even modest, like pretty reasonably poor. and I worked hard. I went to a great school in, in New York, which is a fake school, like a public school, a government school, which was a feeder school for a lot of the Ivy leagues.

[00:33:12] it was full of type a people who drove me nuts. Uh, and so I made this very conscious decision. Okay. Today's borrowing from them as possible. Uh, and I went to a school on the west coast, which at the time was known, but not known the way it is today, which is Stanford. there were very few people in my, high school, everyone to Harvard, Yale, Princeton, Dartmouth, et cetera, no one went to Stanford.

[00:33:33] There were six of us out of the 700 person plus class that went to Stanford, that went to Stanford. did well, you know, I think the one thing, part of what drives people. There's a bit of a chip on the shoulder syndrome. Like, you know, there's something to improve. I think we, we have been pretty underrated for a lot of my career and, and there's something to be, there's something to prove, right. To prove to the world that, you're undeservedly underrated.

[00:33:56] Right. So I think when I left. Like I would've guessed that I should've been able to get a job at any other venture fund because I was pretty good at what I did. That was not the case. And that put a chip on the shoulder to kind of form Austin. No offense. First fund is probably one of the best thing funds in Europe.

[00:34:12] but still hard to raise fund to give you even more of a chip on your shoulder, uh, to prove to the world that the first button like we have one investor, as soon as down and say, you know, you were just. And that's like complete BS, right? Like you're going to be lucky ones when you have a unicorn company.

[00:34:26] And this is like unicorns, like before everything got printed into unicorns, which is kind of the state of play in the last year. But like, have one successful company out of a seed fund and to have two successful companies out of the seed fund and debt will gummies out of the seed fund, but all kinds of go public like You could attribute it to luck, but at some point maybe, maybe just, maybe there might be an element of skill to this. so having that chip on their shoulder, Kind of matters, right? For I've given up at this point, I'll never submit an application to the Midas. What's the gun. because we've submitted Midas list things, and we know some of our peers and we know the returns of our peers and we know our returns are higher, but we've never made the cut at the Midas list.

[00:35:02] And you know, the world's is kind of underrated. it's the world's decision, but it just makes you even more hungry to actually prove to the world that the world is fundamentally wrong. that stuff can be, double-edged like when it's really bad, but it can also be a really positive quality, right.

[00:35:18] When you harness it correctly. And I think that is sadly, like one of the qualities that's on this shop. Like we're very, very driven to prove to the world that they have the wrong idea about.

[00:35:26] Hector: I would love to survey, of around. Of a thousand people in the UK and ask the question, have you ever felt underestimated and then try and correlate that to success? because I, yeah, I think that'd be very

[00:35:39] interesting. You saying it's been a, it's been an absolute pleasure having you on the podcast. we've covered a huge amount. We've got lots of insight around selecting founders views, on venture, what people are doing well, what people are doing badly, all sorts. it's been a real pleasure.

[00:35:52] but we always like to finish the podcast with asking our guests who they would invite to a business dinner. who would you invite? They can be dead or.

[00:36:00] Hussein: I'm, I'm in a bad month right now. I'm, I'm a Muslim. I, I, I, you know, fat than pray. and I I'd be really curious to get Adam Moses, Like Abraham Muhammad Jesus, that's all at a table. You have to see how much divergence there is. Cause there shouldn't be any divergence, right?

[00:36:17] If you're a Muslim, that's kind of what you believe. It's all kinda the same, it's less business, but there's so much impact that religions had on the world. Good and bad. I'd be really curious to see like what the views are to actually get all the people on this.

[00:36:30] Hector: That'd be absolutely fascinating. I'd love to join. so yeah, send me an invite, but, uh, it's been great having you on the show. Who's saying, thanks. Thanks so much. And, um, stay in touch.

[00:36:39] Hussein: That was good. Thanks guys.

[00:36:40] James: That's it for this week. Thanks very much for listening. To stay up to date with the latest episodes, please follow or subscribe on your favorite podcast platform. We also have a newsletter called reading unicorns, which is another great way to get every episode direct to your inbox. Please tell your friends about it and engage with us on social media And we'll see you on the next episode.