With so much innovation coming out of Silicon Valley, perhaps it’s a foregone conclusion that those who live in the Valley (and some outside of it) consider it the center of the tech universe. However, the truth is much more complex: global markets are vast, rich, and possess the opportunities necessary for expansion, growth, and talent acquisition. The tech hubs in Europe play a major part in the global tech landscape, and as competition grows in California, overseas markets and VCs are the best choice for hungry startups.
Craig Hanson, partner at early-stage rapid-growth venture capital firm Next World Capital, has his finger on the pulse of the European markets. Next World, who recently raised $122.75 million for its second fund, is the only U.S. venture capital fund that operates a full European expansion platform, offering strategy, introductions, and partnerships to help its companies go global, fast. Hanson and the partners of Next World’s “no short-cuts” approach to investment have produced some incredible exits: BrightRoll, NexGen Storage, a solid state storage company that sold to Fusion-io, and DynamicOps, which sold to VMware.
Hanson and I recently sat down to chat about Next World Capital, how they became so successful, and straddling the line between Silicon Valley and Europe:
Tell me about you and your fund.
Next World Capital is an international early-revenue stage venture capital firm. We focus solely on enterprise technology, and within that we focus on certain thematic areas. These are trends in certain sectors that we dive into very deeply, usually over the course of several funds making several investments behind us. We don’t try to be technology generalists. We don't think it's realistic for VCs to think they can be experts in everything, so we pick certain focus areas and go deep in those.
Primarily our investment team is located in San Francisco, and we also have offices in London and Paris. One of the unique things we do with our companies is help these fast-growing U.S.-based enterprise technology companies access and expand into the European market, which is the second -- and equally large -- enterprise IT market in the world. We run a full program in Europe with advisors, programs, events, and a full sales and development platform that helps these companies access and grow into the European market.
What are some of the other brands that people have heard of that you’ve worked with?
In the past we've invested in Zuora, Host Analytics, Origami Logic, and First Fuel Software. We've also done quite a bit in big data and analytics with companies such as DataStax and Datameer.
Other sector areas we invest in and go deep on include security, storage, analytics, and IoT, so we recently led the latest round for Airware, the leading commercial drone company, where we’re investors alongside Andreessen Horowitz and Kleiner Perkins. We're also looking at new and emerging fields such as AI and machine learning, as well as some others.
What is your typical investment size?
We just focus on early revenue stage, which is typically series B and C for us. We don't primarily do seed and series A like the large majority of early-stage venture capital firms out there. We’re still coming in early, but it's the beginning of that inflection point of growth when these companies start to have initial traction with a handful of customers. Right when they start having competitive data points and we’re starting to see how the economics of the model come together.
Do you have a typical range of investment size?
Our initial check is usually five to ten million dollars.
What kind of revenue are you looking for when you say “initial revenue?”
It can be anything from the very beginning of that revenue as it starts to ramp up with a company’s first 10 or 20 enterprise customers, up to say $10 million to $25 million in revenue. Most of the companies in whom we are investing at that series B to C stage are doing a run rate between say $5 million and $20 million in revenue.
How do you find your deals?
Through the thematic process that I mentioned. It’s all proactive and outbound. We don't want to take the lazy VC approach of waiting for the companies to come to us, so we focus on these thematic areas, these large sectors and trends that we call waves: 10 to 20 year major impact shifts within enterprise IT. Things like big data, solid state storage, AI and machine learning, and SaaS software that we'll invest behind to follow these trends. Those are the areas that we specialize in and go deep with investments in several companies.
In a lot of cases, we’re filling in the contextual knowledge of these sectors for months or years prior to actually even making an investment, so we find the companies directly, go out and build relationships with the ones that we're intrigued by, and then get to know their teams over time.
What’s your competitive advantage? Why should people take money from you?
There are three main competitive advantages Next World Capital has. The first is our thematic focus, which is a very strong win in a space where a lot of VCs are very generalist. They don't get that deep knowledge in certain areas to truly be helpful to companies, and really identify which ones are going to be the breakout winners. That thematic expertise helps us to start working with companies and really add more value to them.
Second is our stage focus. We’re not trying to do the early stage side, we’re not trying to do late-stage VC, and we’re not trying to be multi-stage and do everything, but focusing on that beginning of the hockey stick growth where we can help companies through that scale and execution risk. How do you go from the initial couple of million in revenue and a couple salespeople to now growing very quickly to $200 million in sales and establishing a worldwide sales force, marketing effort and operations team? That's exactly the point in the hockey stick where we specialize and help companies make it up that ramp curve.
The third, unique, competitive advantage that we have is being able to offer companies the full platform and program to access and expand into Europe. For enterprise tech companies, it’s almost always top of mind for them as they're hitting this stage. Increasingly, these U.S. tech companies are starting to move internationally and even get pulled international by some of these larger enterprise customers, especially as within the last ten years the global IT buying landscape has significantly flattened.
It used to be you’d have more regional enterprise tech players. You’d have a software company grow up in Germany and sell locally, the British firm would grow up and sell to UK customers, the Americans grow up in the U.S., and then everyone would get big and start competing on an international scale. You really don’t see that as much anymore. The global IT buying landscape is much flatter, such that from day one the leading international companies are looking worldwide for the best software and other technologies, and increasingly they’re looking in the U.S.
So, these U.S. tech companies are moving international faster. They’re finding huge market opportunities there like you’ve seen with the international share for public companies such as Salesforce, and yet, they don't have the expertise or the prior investor experience around the board table to know how to get there, or know the best practices for expanding internationally. Our unique ability to offer that full expansion program for them is a powerful tool. At this point we’ve worked with a number of our portfolio companies to help them expand internationally and we've got all the proof points behind just how significant that can be.
What do you think your team does best?
The team itself is from many backgrounds; we all came together from the bigger firms doing enterprise tech investing to build a best practices firm that we think encompasses all the best traits. That's the design that gets you to a small, very focused, nimble team that doesn't try to be expert at everything, but just picks certain thematic areas. We operate in a very flat hierarchy, a collaborative style where everyday we're all talking about and working on these investments together, and then figuring out how to add more value to our companies post-investment. That was something that was very important as a cultural and a mission statement for us.
What tips would you have for a tech companies trying to get investment in today’s environments?
It’s the same advice we've been giving entrepreneurs over the last few years, but it's become much more pointed and striking just within the last six months: always focus on growing a solid, sustainable business with the operations, practices, and metrics to really back it up. I think the last couple of years during the boom times people lost sight of that, entrepreneurs and VCs alike. They’ve just funded overwhelmingly based on pure growth prospects, and in a lot of cases ignored things like capital efficiency, or productivity in your metrics. The emphasis was all about how fast you can grow, rather than how you're growing, and whether or not that’s sustainable.
What you find is a lot of those companies raised a lot of money and then burned a lot of money in the same period of time, such that they didn’t extend their runway and a lot of them ended up over their skis on valuations. The better ones that are doing well in this environment are those that are focused on growing sustainably, building a business with good solid operating metrics, and prioritizing customer value.
When it comes to financing, don't focus on trying to raise too big a round or trying to get the highest valuation you can. Focus on the right partners, capital efficiency and raising the right amount of capital, and over time that has proven again and again to be the right formula for success.
Who else do you see doing a great job of investments out there?
Amongst other VCs there are a number of great firms, many of which you know. We’ve done investments with firms like Benchmark, Sequoia, General Catalyst, Accel, Shasta Ventures, and True Ventures. There are a number of others whom we really respect and like working with. All of us have been around in the Valley as investors and operators for a while, so you know who you like working with and the people who are greater value-add board members to serve alongside.
