Markets are experiencing something similar to what happened in the late 1990s, when the fear of missing out caused investors to pump money into startups, which in turn, stimulated the economy to new heights.
An abundance of funds along with a scarcity of startups not only caused the value of companies to rise at that time, but also opened the door for new participants to enter the market, according to U.K.-based Hoxton Ventures Founder Hussein Kanji.
“We used to call them tourists, and in California in the Bay Area, you saw the highways jammed up by this flood of money that was coming in,” said Kanji, who prior to Hoxton, spent several years working for Index Ventures in London. “You’re seeing that same exact phenomenon today.”
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Too Much Of A Good Thing
In a conversation with Karen Webster, Kanji said that even though the enthusiasm for startup funding remains high, the significant amount of funds flooding in can be too much for firms to handle.
“Companies are much more robust, but if someone is giving them five years’ worth of credit for the future today, and then they under-deliver, or the next five years has a bump in the road, then all lot of these sensitivities kind of go very much against the company,” he said.
Kanji, whose company has invested in several European unicorns, including DarkTrace and Deliveroo, cited an example of a major venture fund that recently issued a complete term sheet in less than 24 hours because of concerns about being outbid by another company.
“We’ve almost become too accommodating, and all of that’s in response to the fact that there’s so much money coming in,” he told Webster, adding that this 24-hour turnaround shows that no diligence is being done in these scenarios.
There are exceptions to the rule, nonetheless. Leading U.S. investment firm Tiger Global, for example, is inking deals on average about every 1.3 days, an accelerated pace of investment that could suggest that they’re making bets without some measure of risk analysis and proper vetting of companies.
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But while most investors wait to meet a company and might come in at the 11th hour to put a term sheet on the table, Tiger Global has the deep pockets to engage in a forward-looking type of due diligence.
“They hire advisors before they meet the company, and they do all the diligence up front so they’re playing a very different game than the traditional venture game,” he explained.
An Advantage
Kanji said he is not fazed by competition, however, and operating a small firm has come with its advantages.
“Our checks have never been what defines us,” he said. “We can’t pay the way other people can pay up, and we’ve been in some really great companies along the years.”
That heritage has caused interest to remain high, and despite being “somewhat underfunded compared to the market, we’re still able to win what we want to win because people really want us on the board,” he said. “That’s a luxury position to be in this market.”
For a company operating in the U.K., Horton Ventures is benefitting from the forward-thinking approach U.K. regulators have adopted aimed at breaking up the concentration of the big banks and encouraging innovation. These regulatory changes have made it easier for new participants to enter the market and explain in part why the U.K. leads on next-generation FinTech companies.
“This has all been a pretty carefully coordinated, although pretty distributed kind of effort on the part of a whole bunch of people in the U.K., including the government to actually put the conditions in place to produce these kinds of companies,” said Kanji.
The U.K. is now third in the world, after the U.S. and China, when it comes to “Decacorns,” those startups valued at over $1 billion.
“It has overtaken India, it’s overtaken Israel,” he said.
This regulatory shift in the country is also why his company has been focusing more on U.K.-centric businesses versus global businesses. The early-stage investor currently has a company in his portfolio that’s just about to raise a new round, one that has a very bright outlook given its potential to “take a drug that’s failed and basically turn it around using a bunch of computation,” he said.
Today, a major part of his fund is focused on “next-generation” companies, particularly those at the intersection of medicine and technology, which are increasingly catching investors’ attention. This interest is spurred by the changes in how people consume general practice medicine, from the pandemic-related telehealth boom to growth in next-generation drug discovery.
“It doesn’t quite fit cleanly into what pharma companies do, and it doesn’t quite fit cleanly into what tech companies do,” he said. “It’s a bit of an intersection, and we like those intersections where there’s change.”
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