Hoxton sees bridge to US investors as key to becoming top European VC

Hoxton Ventures has its eyes on becoming a major venture player in Europe over the next decade. Having cultivated close ties with major US venture funds in recent years to help its portfolio companies continue to grow, the London-based firm is well positioned to do that.

Although no longer an emerging venture investor, Hoxton is “still very much a young firm,” its co-founder and partner, Hussein Kanji, recently told Venture Capital Journal.

Since its founding in 2013, Hoxton has raised more than $360 million over four funds. It closed on $215 million for its Fund III in March 2022, beating its $150 million target, with British Patient Capital and Private Equity Holding AG among the more than 90 investors in the fund, according to regulatory filings and fundraising data from affiliate Private Equity International (subscription required).

There are just a few firms investing in Europe now that Kanji considers truly exceptional – Index Ventures, Accel and Sequoia. But if the European venture market continues to mature as it has over the last decade and “keeps producing company after company, there will probably be five to seven significant venture firms over next 10 years,” he said. “No different than in the [San Francisco] Bay Area, where you probably have five to 15 venture firms occupy the rarified air of the tech community. There’s a chance to do that in Europe now and I think we have a pretty good shot at doing that.”

Being an early partner in promising new tech companies with the ability to recruit top talent from the US, in part by sharing profits equally among partners, will help that happen, he added.

Whether such ambitions would entail eventually becoming a multi-stage investor, Kanji concedes he doesn’t know. For the foreseeable future, Hoxton will continue to focus on early-stage opportunities “where there is the most need for local capital that understands risk and can act as a bridge to the US market,” he wrote in a follow-up email. “It is the early stage of the start-up market where the need is most pronounced, and if you’re going to build a firm of record for the future, it’s the early-stage market you have to win first and foremost. You can always build up from early stage, but it’s very hard to come down to early-stage from late-stage. So our near and medium focus is early-stage. But never say never to greater ambitions.”

Last month, Hoxton hired Bryan Gartner from Khosla Ventures as a partner as it continues to build out its value proposition as a provider of introductions for its founders to growth-stage investors in Silicon Valley. Before his two-year stint as partner at Khosla, Gartner was a vice-president at Insight Venture Partners and a partner at Sidewalk Infrastructure Partners, where he is said to have pioneered a business model called “CoFi,” which brings equitable 5G wireless access to underserved US municipalities.

Gartner joined Hoxton less than six months after Payton Dobbs, a 15-year veteran of Google, came aboard as a partner to help build out the firm’s European business. All of Hoxton’s partners are transplants from the US with extensive networks in the San Francisco Bay Area.

These transatlantic relationships have become more critical amid what VCs across the pond identify as a scale-up gap that makes it difficult for European start-ups to find adequate capital in their own backyard as they seek to grow.

Major US-based venture firms are increasingly setting up shop in London and other European cities to be closer to promising companies looking to raise later and larger capital rounds. Sequoia Capital, General Catalyst, Lightspeed Venture Partners and Bessemer Venture Partners all have offices in London now, and Andreessen Horowitz is seriously considering opening one, Kanji noted.

“The bridge between the two communities [UK/Europe and Silicon Valley] is being built with or without us, which is nice to see as an ecosystem because it means it’s really maturing,” said Kanji. It’s not a perfect bridge, however, due to the advanced levels of aggregate experience and capabilities in the US venture community, he is quick to add.

VCs’ networks tend to be persistent because based on prior investments they know what to expect when the next company comes along. “You also know who to call, everything from service providers to executives to middle management,” said Kanji. “When these companies hit crises like in the last two years – we have seen a dearth of funding and a bunch of people wrestling with the unit economics and having to make hard calls – experience really counts for something.”

Getting that level of experience around the boardroom table for Hoxton’s portfolio companies matters to Kanji. “There’s a lot that we can do, but our voice gets amplified quite a bit when there are other experienced voices around the table, so many of our companies end up raising from that US ecosystem.”

Hoxton’s bets have put its first two funds into the top quartile by US metrics, with Fund I arguably in the top decile, Kanji wrote in an email. But a couple of its exits have stirred controversy for underperforming since their IPOs. Food delivery platform Deliveroo has yet to turn profitable and this week is trading at less than half its price after listing publicly in March 2021. Babylon Health collapsed after it did a reverse IPO with a SPAC in 2021, and its largest lender, credit fund AlbaCore, announced in May plans to restructure and recapitalize the digital primary care provider. A business combination of Babylon’s core operations with the brain technology company MindMaze Group proposed by AlbaCore this summer fell through.

Deliveroo returned to investors more than the size of the fund that backed it, while “Babylon made us no money, unfortunately,” said Kanji.

Access to industry expertise

The bridge to US funds with deeper pockets is also essential in light of Hoxton’s focus on brand new market categories, which often aren’t clearly defined when the firm initially invests. “We’re trying to get up to speed on the category as the category’s forming,” said Kanji.

One of the more interesting companies in Hoxton’s $100 million Fund II is a UK-based AI drug discovery company called Peptone, whose $2.5 million seed round was led by Hoxton in November 2020.

“We are not drug discovery folks. AI itself was pretty brand new when we were doing this [investment],” Kanji noted. “I don’t think that’s how we would have described the company at the time the company was meeting us, because all of this generative AI and computational bio – we didn’t even know [about it].” That market category has since been dubbed “tech bio,” which denotes the computational arm of biotech.

This US bridge makes a huge difference when a venture firm is trying to pick best-in-class technology in a new category, because GPs need to know what’s being developed in the US biotechnology industry, on the West Coast and in industry hubs like Boston, Kanji said. “Otherwise, you may be picking best-in-class by London standards, or by UK standards or by Europe standards, but you may not actually be picking best-in-class by global standards.”

Fortunately, companies that are exceptional by global standards are now emerging from Europe. “But you’ve got to know at the very early stage, which is what we do, that those are the right ones to take a bet on,” he said. “The only way to do that is to leverage your network in California to give you a steer as to what you’re seeing.”

Lastly, the US bridge is significant from a customer perspective and partner perspective. Historically, the tech industry has been clustered in the Bay Area, “so you need to be talking to that universe,” he said. “Irrespective of any kind of funding, you want it to be a bridge back to the West Coast simply because if things weren’t working, those are the natural buyers for the companies. And if things were working, those are the natural partners and the early customers and eventually some of the executives that you’d want to recruit.”