Hussein Kanji (LBS MBA 2007) is a Founding Partner at Hoxton Ventures having invested in multiple unicorn startups, most notably Deliveroo, Babylon and Darktrace. Hoxton has recently raised its third fund, $215m to invest in early-stage startups. I sat down with Hussein to hear about what founders often get wrong during the fundraising process.
Ineffective strategies when approaching a VC
Approaching Venture Capital firms for fundraising can be an intimidating task for many first-time founders.
“Coming in cold is the worst approach. VC is largely a reference business and we want to see the founders that have figured out the system”, Hussein says.
The system relies on referrals and warm introductions. VCs ideally would like to see the founders have done their homework, knowing the key players in their space – investors, founders and industry experts. That puts them in a better position to approach potential VCs.
“The best way to approach a VC is through a founder introduction. Ideally, multiple founders who can vouch for the start-up”, Hussein says.
The ideal scenario would be founders in that particular VCs portfolio but it can also be founders in the broader start-up space. It still has to appear organic, not to have multiple founders calling on the same day but multiple touchpoints over the course of a few months. That builds a strong case for the fundraising founder and adds a sense of urgency to the interaction.
VCs invest across different stages from seed to growth equity, some focus on a particular stage whereas other funds invest across stages. The other nuance is sector focus. Some funds can be sector agnostic, especially in the early seed stage whereas others specialise in a specific vertical such as fintech or B2B. Understanding the investment thesis of the fund and at what stage it invests is critical to approach the right set of investors.
Biggest mistakes when pitching to a VC investor
“Not telling a narrative that is transformative, failing to showcase the potential of a truly large company”, Hussein says. As an investor, he looks for companies that can deliver 10x-100x and ultimately return the fund. He is looking for companies with unicorn potential, therefore framing a big vision for the company and the market is very important. It’s a different mindset to approaching angel investors.
“The idea is the precondition, the market is where it gets intriguing but the critical question is: can this team build and scale the business attracting top talent”, Hussein says. It’s a truism, “it’s all about the people” but for startups that want to achieve unicorn potential, hiring seasoned industry veterans is a big litmus test as to whether they can attract the right talent to take the business to the next level. Hussein shares a story of a mushroom leather company. Even though the founders did not have specific leather industry backgrounds, they managed to attract top scientists from around the world from big brands to join them during the initial stages of the product build. Having the ability to attract industry veterans at an early stage in the company’s journey is a great indicator that the founders were able to rally others behind their mission and fill in the industry knowledge gaps.
“Not knowing your numbers”, Hussein says. Even at an early stage, founders should know their unit economics, burn rate and how much revenue they’re generating. Most Fortune 500 CEOs who run complex and multinational businesses know their numbers inside out and this should be the same for startup founders. It is an indicator that the founder doesn’t know their business very well and doesn’t inspire confidence in an investor that they’re the right person to back.
Reasons why VC firms say no
“Almost always is Total Addressable Market (TAM)”, Hussein says. VC firms invest in unicorns, if the market is not big enough to support a billion-dollar venture then that is the biggest limitation. Peter Thiel, the founder of Paypal and Palantir, famously gives an example in his book Zero to One about trombone oil. You can dominate 100% of the trombone oil market but if it’s not big enough, you won’t get an outsized outcome.
“Asking for too much money”, Hussein says. Often founders can have unrealistic expectations about round sizes and go out to VCs asking for very big cheques. Even if firms like their venture, they may not be comfortable putting in such a big amount early on. In a way, founders price themselves out of the market. If the startup gets a lot of traction from the investment community, naturally the round size can increase to accommodate the larger demand. There is a self-correcting principle in the way rounds are priced.
“Founders don’t have the knowledge”, Hussein says. This could be in the form of either poor founder-product fit meaning that founders don’t have industry expertise for the product they’re attempting to build or haven’t surrounded themselves with the calibre of the team needed to plug the knowledge gap.
Should you re-engage with a VC firm after they say NO?
“For small, single-stage funds it’s useless”, Hussein says. For funds that invest only at the seed stage, once they’ve passed on an investment, re-approaching them will be a waste of time as their investment mandate doesn’t stretch to other funding stages. However, with multi-stage funds, there might be an opportunity to re-approach them at a later funding round. Nonetheless, if a business plan has already been shared with a VC, then the company needs to be performing above plan. Otherwise, it’s very difficult to make a compelling case to reconnect with the VC.
Another notable exception is if the business has pivoted since the initial pitch. In that case, a founder can re-approach existing funds but needs to show track recording of strong business performance.
About the Author: Kathryn Larin, London Business School MBA 2021 and former Co-President of Entrepreneurship Club. Kathryn hosted the podcast, Ride it Out, interviewing VC investors and LBS founders. She’s now the Entrepreneurship Alumni lead for the Institute of Entrepreneurship and Private Capital and strategy manager at Codat, a B2B Fintech scale-up. If you’re an LBS founder and want to be featured in the blog, get in touch via email.