The Exchanges

Q We're gonna get to that. So, but the contrarian, even in the partnership, we're partners. Dude, I wanna do this deal. You really don't. You think I'm nuts. Can I do this?

A So we do it on the basis of, is there a, is there a red line? Like, is there some flag? I mean, red lines are on work. Is there a flag that we can throw down that says it doesn't make sense? Which is, I looked at the cohorts. I looked at the early cohorts. And, and, you know, all of those cohorts are deteriorating. So you thought it was really good. It's growing exponentially, but the data suggests that maybe that's not the case. By the way, that's a real world scenario. I got super excited about a company in Portugal, and one of my partners looked at it and was like, Hussein, like, you missed the trick here. And, and by the way, this is why I love working in partnerships. Like, I think partnerships are way better Than solo GPs, because you get this error correction mechanism from other smart people. But if the error correction mechanism is they're blocking you for no good reason, like as in they're just running interference on you, then it's really, it's obnoxious.

AI assessment note: “you get this error correction mechanism from other smart people”

Q And talking about brand new markets now, you mentioned obviously that you look for brand new markets. Um, so what do you think those are? Where's your analysis led you to believe that there is the potential for market creation?

A So this is, this is, this is a hard one to answer. So the, the, the, the answer is, I don't know, you know, and I think what happens is in these next generation markets, you get a bunch of smart people who around the same time start approaching you and Kind of at the edges of that market with kind of the same idea. And so you can do, we used to do this Excel inside of, uh, inside of, we used to do this exercise instead of Excel called the prepared mind. And you can take kind of a market thesis as to where you think the market is going. To be fair, you really refine it when these folks who are building the companies come and talk to you. And you start seeing that all of a sudden people are talking kind of about the same stuff, which means that there might be something going on under the surface. So, you know, One area where we were a little bit more proactive when we started it about three years ago is we took a very big bet on kind of cybersecurity. So, you know, we thought that the range of attacks, the sophistication of attacks, and the pace of attacks were only going to increase, and that's kind of what's happened over the last three years. And so we started looking to see what can you do, what can you build, you know, that can find, you know, that can automate some of this stuff and take the load off of the security staff for the IT staff inside of an organization. We backe…

AI assessment note: “One area where we were a little bit more proactive... we took a very big bet on kind of cybersecurity.”

Q What does it mean to do things that are off-piste today, though? Because, you know, vertical SaaS, you think in a world of, like, AI and agents, shit, vertical SaaS has never been hotter. We just did a bluntly very boring vertical SaaS company, had 13 term sheets.

A Yeah, so I, I think the whole industry is like, is massively grown, so there's a lot of money to be made, but if you think about the big, iconic, you know, the household name companies, the Googles, the Facebooks, the Ubers, the Netflixes, they were all mostly brand new category creators. That category didn't exist. There wasn't an Uber before there was an Uber. There wasn't a Netflix before there was a Netflix. There wasn't, there was a search, there were a bunch of search engines, but none of them really succeeded. And then Google kind of became this thing. There was also Friendster before, before Meta, but it never really succeeded. So these, these were kind of inventing new categories, and I remember even at Facebook went public when we were fundraising for Fund One, and when it went public, people really were skeptical about how it was going to make money.

AI assessment note: “they were all mostly brand new category creators”

Q What does it mean to do things that are off-piste today, though? Because, you know, vertical SaaS, you think in a world of, like, AI and agents, shit, vertical SaaS has never been hotter. We just did a bluntly very boring vertical SaaS company, had 13 term sheets.

A Yeah, so I, I think the whole industry is like, is massively grown, so there's a lot of money to be made, but if you think about the big, iconic, you know, the household name companies, the Googles, the Facebooks, the Ubers, the Netflixes, they were all mostly brand new category creators. That category didn't exist. There wasn't an Uber before there was an Uber. There wasn't a Netflix before there was a Netflix. There wasn't, there was a search, there were a bunch of search engines, but none of them really succeeded. And then Google kind of became this thing. There was also Friendster before, before Meta, but it never really succeeded. So these, these were kind of inventing new categories, and I remember even at Facebook went public when we were fundraising for Fund One, and when it went public, people really were skeptical about how it was going to make money.

AI assessment note: “they were all mostly brand new category creators. That category didn't exist.”

Q And were you tempted then to take a job back in, in Silicon Valley and back in a traditional venture fund and, and build your career the right way?

A Yeah. So, you know, both Rob and I spent a bunch of time out in California and, you know, we talked to folks before we started the journey of, of, of building a European fund. And, you know, this was really tugging at us, right? We really thought that the market here was underserved. There were some great, big established venture funds, but there weren't very many newer next generation funds, which if you look in California or in the U S right, you have first round capital, you have true ventures, you have floodgate, you have all these next generation kind of micro, micro cap funds that really were able to shake up the market. We thought the same thing would happen in, in Europe, and it would be very complimentary to the big funds. The whole ecosystem would kind of strengthen, and this really tugged at us. But, you know, we spent a bunch of time in California, and, you know, we were, and this is, I, I got one offer from a, from a big venture fund out on the West Coast, and basically what they said, look, you were a smart guy. You know, you went to Stanford. You did a bunch of startups. Um, you know, you, you built them reasonably successfully. You know, you kind of moved up to Seattle, which is a little bit of a puzzlement. You know, why would you leave the Bay Area with that? It's Microsoft. It's a, it's a leading software firm. You know, you ended up kind of distinguishing yo…

AI assessment note: “I got one offer from a, from a big venture fund out on the West Coast”

Q So is this extended window a problem? Is this good? Is this bad? How, how do you think about it?

A It's too hard for me to know. Like, I don't, I think, like I said, we live in a very different world in 20, 24 than we did even 10 years ago, and definitely like 20, 30 years ago. The markets have just evolved in such a different way, and they're so much bigger that I don't know, I don't know, I don't know how this is all gonna play out. I don't know if they're gonna be good things or bad things. For me, I'm just a realist, right? This is just the way it is. This is the world I play in. This is how it's gonna be. I don't see it going back anytime soon to the way it was in the nineties, and I'm just gonna adjust To, you know, to adapt to this new reality.

AI assessment note: “It's too hard for me to know.”

Q But that like four is the fun, right?

A Yeah, yeah, yeah. We, we made a lot of money on, on Darktrace, but, but we, you know, we, we should have probably programmatically sold. And so I think the formula that we now have is at the time of the IPO, as soon as you're out of lockup, A third of it you sell, a third of it you sell six months later, and then a third of it you sell another six to 12 months after that. Just make it a formula, because I think there's too much human error in this. Like, and by the way, long term, like, I was right, but the markets and what you think long term don't always like, they don't always map one to one.

AI assessment note: “Yeah, yeah, yeah. We, we made a lot of money on, on Darktrace”

Q Are we seeing that today? Do you think we'll see many more frauds?

A Frauds? Like, just people not paying attention to details, people not turning up to things. Like, it was, it was just, it was a mess. And I think we're seeing some of that same stuff in AI. Like, there's so much, there's so much euphoria for, for AI that people feel they have to have some of these companies in their portfolio. We as a venture industry have to think about how to create monopolies. Like, the regulator doesn't want monopolies, but we want monopolies. We want companies with increasing returns to scale, with deep defensible moats. You build this thing, it has this huge moat, and every extra revenue, customer, whatever it gets, increases the size of the moats, puts distance between it and itself, until eventually it has to get broken up by regulators, because it's just too darn powerful. That's, that's what I want to put money into. I'm not so sure most of these companies, which get highly commoditized, Super fast, where there are 20 versions of the same thing, and the expression that Brian and our team uses is knife fight in a phone booth. Like, I'm not so sure, and the reason why we're doing them is because people want to deploy. They want to write checks into these things. They don't want to miss out on the next big thing, because they look foolish as a big firm missing out on the next big thing. This doesn't sound like a rest, and this sounds like it can go the r…

AI assessment note: “I think we're seeing some of that same stuff in AI.”

Q So is this extended window a problem? Is this good? Is this bad? How, how do you think about it?

A It's too hard for me to know. Like, I don't, I think, like I said, we live in a very different world in 20, 24 than we did even 10 years ago, and definitely like 20, 30 years ago. The markets have just evolved in such a different way, and they're so much bigger that I don't know, I don't know, I don't know how this is all gonna play out. I don't know if they're gonna be good things or bad things. For me, I'm just a realist, right? This is just the way it is. This is the world I play in. This is how it's gonna be. I don't see it going back anytime soon to the way it was in the nineties, and I'm just gonna adjust To, you know, to adapt to this new reality.

AI assessment note: “I don't know if they're gonna be good things or bad things.”

Q K. Have you ever had a reserve check where you'd really double down extensively and it hasn't worked out?

A You know, we've learned a couple of things along the way. People don't really need much from your investors when things are going well. They just need money and kind of get out of the way. Whenever there's a hiccup, you usually end up picking up the phone and call your investor, and we're usually the ones working it. I think this is a big transition right now in the, in the seed world. Sometimes when those calls are being made, it's not the Series A guys or the multi-stage funds that are doing the work. There used to be a time where you wrote the check as the seed firm, Then the big boys came in. You exited politely, and the big boys ran the business, and they did the board stuff. They did the hiring, firing, if things had to happen. They did the acquisitions. But these days, with the growth of those guys, it's all call options for them, right? They will invest into something and see how it plays out, so they can write the 30, fifty million dollar check, where it starts to get meaningful. Whereas for us, it's always meaningful. So we end up usually doing all of this heavy lifting. And as a result, there's a bias that comes into this, which you then think you can fix a lot of stuff. So we, we had a company that hit a, hit a stumbling block. We, we, we doubled down, like not with a lot of capital. We doubled down, like rolled up the sleeves, started working. The other investor wi…

AI assessment note: “we had a company that hit a, hit a stumbling block. We, we, we doubled down”

Q Okay. Let's do it. Um, you caused a bit of a furore on, on social with a post about hiring women. What did you say? And what did you mean?

A It is hard to find people to come into a partner only organization, and you require people to be reasonably well-trained. You're taking a chance on them, but you expect them to kind of be able to hit the job running. There are some great women who are very capable. It is hard for me to poach them because they're very well taken care of in their existing funds for very good reasons, because there's a shortage of them. One of my LPs is a woman sat down with me. She's an individual entrepreneur, like, and she's like, the one thing that I didn't think about, and this is a genuine thing that, that, that she really made me reconsider, is I always used to think of us as like a two-year scrappy startup as a fund. Brand new fund, like, 39 months to go raise fund one. It's like, Sketched, and it's like etched in my brain, right? It is like hard, hard yards. You know what? We're 11 years old. We managed a two hundred million dollar fund. As much as I don't like to admit it, like, we're one of the establishment now. Like, we're no longer the scrappy startup. Like, we're establishment. And if there is a shortage of women that I can't recruit from laterally, because they're well taken care of, and there's a shortage of women in the industry, and we know this, it is incumbent upon me, like, morally, like, I have a responsibility To grow the next generation. Because if I can't recruit laterall…

AI assessment note: “it is incumbent upon me, like, morally, like, I have a responsibility To grow”

Q Do you invest differently when you've delivered real DPI? And what I mean by that is, bluntly, you're not downside protection thinking. You are not thinking, oh shit, I've got to put numbers on the board. You are able to see greatness kind of more easily having proven yourself.

A Yeah, so we, we just had our AGM yesterday, and we have told most of our investors do not pay attention to TVPI for the time being, because what we have been doing is proactively finding ways to put more money to work inside of our best companies. We know what the best companies are. It's about a third of the portfolio. In the second fund, that's now shifted to a little bit over 50% of our capital is in the top third of the fund. And in the third fund, it's getting closer to about 60, 65% of the top, like, The, the, the money's going into the best companies. And so when that happens, you're obviously putting money to work at like slightly depressed prices, right? You're not sending them out to get ridiculous markups because you don't want ridiculous markups on those companies. I mean, if the founder wants it, then we're along for the ride. But if you can find a way to not get the ridiculous markup and put more money to work, you're buying more ownership. And if you're right, three, five years later, that will make a material difference in DPI.

AI assessment note: “we have told most of our investors do not pay attention to TVPI”

Q Do you invest differently when you've delivered real DPI? And what I mean by that is, bluntly, you're not downside protection thinking. You are not thinking, oh shit, I've got to put numbers on the board. You are able to see greatness kind of more easily having proven yourself.

A Yeah, so we, we just had our AGM yesterday, and we have told most of our investors do not pay attention to TVPI for the time being, because what we have been doing is proactively finding ways to put more money to work inside of our best companies. We know what the best companies are. It's about a third of the portfolio. In the second fund, that's now shifted to a little bit over 50% of our capital is in the top third of the fund. And in the third fund, it's getting closer to about 60, 65% of the top, like, The, the, the money's going into the best companies. And so when that happens, you're obviously putting money to work at like slightly depressed prices, right? You're not sending them out to get ridiculous markups because you don't want ridiculous markups on those companies. I mean, if the founder wants it, then we're along for the ride. But if you can find a way to not get the ridiculous markup and put more money to work, you're buying more ownership. And if you're right, three, five years later, that will make a material difference in DPI.

AI assessment note: “we have told most of our investors do not pay attention to TVPI”

Q K. Have you ever had a reserve check where you'd really double down extensively and it hasn't worked out?

A You know, we've learned a couple of things along the way. People don't really need much from your investors when things are going well. They just need money and kind of get out of the way. Whenever there's a hiccup, you usually end up picking up the phone and call your investor, and we're usually the ones working it. I think this is a big transition right now in the, in the seed world. Sometimes when those calls are being made, it's not the Series A guys or the multi-stage funds that are doing the work. There used to be a time where you wrote the check as the seed firm, Then the big boys came in. You exited politely, and the big boys ran the business, and they did the board stuff. They did the hiring, firing, if things had to happen. They did the acquisitions. But these days, with the growth of those guys, it's all call options for them, right? They will invest into something and see how it plays out, so they can write the 30, fifty million dollar check, where it starts to get meaningful. Whereas for us, it's always meaningful. So we end up usually doing all of this heavy lifting. And as a result, there's a bias that comes into this, which you then think you can fix a lot of stuff. So we, we had a company that hit a, hit a stumbling block. We, we, we doubled down, like not with a lot of capital. We doubled down, like rolled up the sleeves, started working. The other investor wi…

AI assessment note: “We doubled down, like not with a lot of capital. We doubled down”

Q OpenAI at one 60, Anthropic at 40, Axe at 50. Which one do you buy?

A I mean, OpenAI has real revenue, and I think there's increasing returns to scale, but I think the same thing I just said about NVIDIA applies to a lot of this AI stuff. And, and, and the AI stuff, like, I had dinner with, um, with Alex, who founded Wave, which is one of the AI companies here that does self-driving cars, and our discussion, we, it, this market is commoditizing so fast, the tools are getting so good, and then other people are building tools. I mean, you saw, like, a couple weeks ago, China is now, like, Kaifu has a, has a company. Kaifu's my old boss at Microsoft. Kaifu is a company that's been able to replicate what, what GPT has, But with like a fraction of the compute, because China doesn't have the computers, and they kind of published around this stuff. Um, it's commoditizing so fast, I don't know how much of this ends up as consumer surplus. In other words, we all benefit as humanity, because we, we, the spend kind of goes in, and everyone benefits, but it commoditized so fast, no one company ends up skimming off enough of the cream to become the big, the kind of the big winner. And I just don't know where any of this stuff goes, but I think if you don't play, You have no way of knowing where this stuff goes. You have to be, you have to be on the field to even learn.

AI assessment note: “no one company ends up skimming off enough of the cream to become the big”

Q Is that how you would say that you've established the Hoxton brand? Because obviously Hoxton being a new venture fund, you have to establish yourself as kind of the smart money in London and the new smart money in London. Is that how you say you've established yourself as smart money through being that physical presence?

A Yeah, I think, you know, kind of what, if you boil down to what we stand for, right, so we're, we're very much of an early stage fund, uh, you know, and there are a lot of other early stage funds, but we like investing, we kind of being the first guys in. We're very, very, very focused on outliers, so we're trying to find these next generation, you know, billion dollar plus companies, uh, we're, um, you know, and we're happy to invest super early into them. We're very focused on new market creation, so more than anything else, you know, what we're looking for is New industries that are kind of being formed, and then backing a company that can turn out to pioneer that industry and watch that industry kind of grow and mature into a real industry. And a lot of these things at the inception don't look like real industries. I mean, today we talked about the on-demand economy, but in the early days of that industry, you know, there was no term for an on-demand economy, right? This whole sharing economy stuff, there was no term like that. Social gaming, there was no term in social gaming when we at Accel did play Phish. Um, You know, so, so you, you back these new industries, so we stand for that, and we, we're very much connected to California, and I kind of, our value proposition to our entrepreneurs, uh, is that we're pretty good about providing shortcuts to people, you know, so on…

AI assessment note: “if you boil down to what we stand for, right, so we're”

Q Has the Series A product worsened over the last three years?

A I don't know if it's worsened, but I think we've gone to an era where, where people are writing like checks and then letting things play out. There's a great transcript oral history. I do a lot of reading, right? So like there's a, there's an oral history that the Computer History Museum does in California, and they've gone back and interviewed all of the good and the great in our industry, like top 35, like the founders of our industry, like the early venture capitalists. And they, they did his oral histories, like eight to 12 page, like PDFs that you can kind of read. And if you read those transcripts, the way venture looked in the sixties and seventies and eighties and nineties looked really different than it does in like 20, 24. Like these folks give you another story. Like back in the day, Dave Markhart was the only investor. He was at August. He was the only investor in Microsoft. Very few people know this. In the early days of Microsoft, Microsoft was structured as a partnership, not an ink. It was not a company. It was a partnership. And there was weird tension between Bill and Paul, uh, And so they needed a third party to come in and clean it up. And his firm complained that he was spending a lot of time helping these two kids out. They're all in their twenties at this point. The industry is really young, like, like it even is it is today, helping these kids out. And h…

AI assessment note: “I don't know if it's worsened, but I think we've gone to an era”

Q Has the Series A product worsened over the last three years?

A I don't know if it's worsened, but I think we've gone to an era where, where people are writing like checks and then letting things play out. There's a great transcript oral history. I do a lot of reading, right? So like there's a, there's an oral history that the Computer History Museum does in California, and they've gone back and interviewed all of the good and the great in our industry, like top 35, like the founders of our industry, like the early venture capitalists. And they, they did his oral histories, like eight to 12 page, like PDFs that you can kind of read. And if you read those transcripts, the way venture looked in the sixties and seventies and eighties and nineties looked really different than it does in like 20, 24. Like these folks give you another story. Like back in the day, Dave Markhart was the only investor. He was at August. He was the only investor in Microsoft. Very few people know this. In the early days of Microsoft, Microsoft was structured as a partnership, not an ink. It was not a company. It was a partnership. And there was weird tension between Bill and Paul, uh, And so they needed a third party to come in and clean it up. And his firm complained that he was spending a lot of time helping these two kids out. They're all in their twenties at this point. The industry is really young, like, like it even is it is today, helping these kids out. And h…

AI assessment note: “I don't know if it's worsened, but I think we've gone to an era”

Q Do you think the criticism levied towards Europe today, which we both see on Twitter like never before, do you think that's fair or completely unfair?

A I mean, I don't know. I mean, I don't, from a macro perspective, that's not what I do, right? I mean, I, I think of this as like underlying fundamentals for my business. We're living in a world of AI. I think this is the big seismic shift for like the next like 10 years. This is where we're gonna, this is where the next wave of wealth creation is gonna be. I'm looking at the conditions on the ground. We used to Produced really interesting gaming companies when I was at Accel. Like, we were really strong in Europe. Today, and that was probably the only thing we were really strong at, and then the government, like, lowered the regulation in, in, in finance, and so we were really good at building, like, fintech companies here, Monzo, Revolut, exactly.

AI assessment note: “I don't know. I mean, I don't, from a macro perspective, that's not what I do”

Q Do you think the criticism levied towards Europe today, which we both see on Twitter like never before, do you think that's fair or completely unfair?

A I mean, I don't know. I mean, I don't, from a macro perspective, that's not what I do, right? I mean, I, I think of this as like underlying fundamentals for my business. We're living in a world of AI. I think this is the big seismic shift for like the next like 10 years. This is where we're gonna, this is where the next wave of wealth creation is gonna be. I'm looking at the conditions on the ground. We used to Produced really interesting gaming companies when I was at Accel. Like, we were really strong in Europe. Today, and that was probably the only thing we were really strong at, and then the government, like, lowered the regulation in, in, in finance, and so we were really good at building, like, fintech companies here, Monzo, Revolut, exactly.

AI assessment note: “from a macro perspective, that's not what I do, right?”