IPO Watch: How to spot a unicorn

·5 min read
Unicorn turquoise head paper isolated on black background. Copy space
One of the main conditions needed to produce a startup that will become a £1bn unicorn is spotting change early, according to experts. Photo: Getty

The business world's future unicorns are in markets that don't even exist yet. That's according to one early stage funder who has a knack for spotting companies that are going to go global. 

Hussein Kanji, partner at Hoxton Ventures in London and formerly of Accel, was one of the early stage investors behind ubiquitous food delivery app Deliveroo (ROO.L), cybersecurity company Darktrace (DARK.L) and health startup Babylon Health, and has led a wave of new money in the London market. 

Hoxton Ventures is about eight years old and, from its first fund, four out of 17 companies the firm invested in have reached unicorn status — worth £1bn ($1.4bn) or more. The firm thinks there is potentially a fifth or a sixth unicorn in that same set. 

Kanji says that a hit rate of one in 20 would usually be considered good going, and despite a difficult start, the waters for these kinds of funds in London are now much more hospitable. 

The market in Europe is growing. Some €49bn ($57.6bn, £42bn) was raised by European startups in the first six months of 2021, nearly three times that of 2020.

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Kanji links the influx of cash into European startups to market conditions created after the financial crash in 2008, as well as the internet allowing companies such as Google (GOOG) and Facebook (FB) to access a global set of customers.

He says there are more people "doing it the Silicon Valley way" in London now as a lack of financial services jobs following the crisis led people to make less traditional career decisions — therefore growing the start up scene. 

The internet also allowed access to the global market creating a flatter landscape, and allowing different regions to compete. 

Alongside this, there were virtually no venture firms in London 10 years ago and therefore there was no tradition of investing in early stage startups. 

The flood of money into the European market has emulated that of the Chinese market, says Kanji — where companies are funded to the extent that they are almost subsidised while they build the product and build their customer base, and then seek to be profitable and stick as part of people's lifestyles. 

Coventry, UK - October 18, 2018 - Delivery food courier guy from Deliveroo checking order via mobile phone.
Deliveroo was one of the first bets made by Hoxton Ventures, and has grown into a unicorn. Photo: PA

Recent examples of this come from the grocery delivery market with companies such as Gorillas and Weezy. 

One of the main conditions needed to produce a startup that will become a unicorn is spotting change early, says Kanji. At the point when a new company is created as a response to change, new markets emerge. 

The flood of challenger banks such as Monzo or Starling, and the change in FCA banking regulations, is an example of entrepreneurs and founders being given the opportunity to run with an idea when the market is young. 

The money given by early stage investors allows the market to grow in the first place and gives it oxygen. 

"The right entrepreneur walks into the room and the lightbulb clicks. You say — I get it, it's a new market. And you ask yourself all these questions as to why it's a new market. The only way you really know if that market is going to grow is to write the cheque." 

Read more: Could Boots' Deliveroo partnership lead to 'dark pharmacies'?

Another crucial aspect of success in this business is being willing to bet on something that might not be a perfect product from the off, and also being willing to act therapist when things go wrong. Companies that have what Kanji calls "organisational debt" should not be discounted. 

"When you're trying to build something from scratch and you're trying to be perfect it just doesn't work," he says. "Our general view is everything in these organisations is super raw — almost broken — except for one thing, and the one thing makes up for all the other mistakes." 

That one thing carries the company to the next stage of growth. 

Kanji understands the process of growing an organisation, and where the tolerances lie with the aspects of it that are and aren't working, due to having built and sold several different ideas in his early career. 

One company Kanji believes could achieve future unicorn status is Peptone, a so-far small company that has built the world's first protein engineering operating systems. 

The website describes it as a "Molecular Computational Physics company that is focusing on bringing to the market an AI-orchestrated operating system for completely automated protein drug engineering."

It's a company doing something nobody else is doing just yet in a market that doesn't really exist — it also has Hoxton's stamp of approval — fitting Kanji's criteria for a new unicorn.  

"It's a difficult game, because you write the cheque and don't really find out for six to 10 years if it's paid off," he says. "It's a multi-round game about the life of a company."

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