Oxx, a European venture capital firm co-founded by Richard Anton and Mikael Johnsson, this month announced the closing of its debut fund of $133 million to back “Europe’s most promising SaaS companies” at Series A and beyond.
Launched in 2017 and headquartered in London and Stockholm, Oxx pitches itself as one of only a few European funds focused solely on SaaS, and says it will invest broadly across software applications and infrastructure, highlighting five key themes: “data convergence & refinery,” “future of work,” “financial services infrastructure,” “user empowerment” and “sustainable business.”
However, its standout USP is that the firm says it wants to be a more patient form of capital than investors who have a rigid Silicon Valley SaaS mindset, which, it says, often places growth ahead of building long-lasting businesses.
I caught up with Oxx’s co-founders to dig deeper into their thinking, both with regards to the firm’s remit and investment thesis, and to learn more about the pair’s criticism of the prevailing venture capital model they say often pushes SaaS companies to prioritize “grow at all costs.”
TechCrunch: Oxx is described as a B2B software investor investing in SaaS companies across Europe from Series A and beyond. Can you be more specific regarding the size of check you write and the types of companies, geographies, technologies and business models you are focusing on?
Richard Anton: We will lead funding rounds anywhere in the range $5-20 million in SaaS companies. Some themes we’re especially excited about include data convergence and the refining and usage of data (think applications of machine learning, for example), the future of work, financial services infrastructure, end-user empowerment and sustainable business.
The companies who partner with Oxx have already started to take off and are going through a growth spurt, which they want to accelerate. They have already notched up a good number of repeat customers and now it’s all about internationalizing and scaling their business. Geographically, they always come from somewhere on the right-hand side of the Atlantic Ocean and they almost always have their eyes on its left-hand side, too! The U.S. market is enticing, but it’s a difficult place to succeed and that’s where our experience and network comes in.
Mikael Johnsson: We invest exclusively in European B2B SaaS companies at the scale-up stage. ‘Scale-up’ means companies that have proven product/market fit and who can display emerging, leading indicators of business model/market fit. The companies we partner with are often: 1) companies that have either bootstrapped, or taken a moderate amount of capital from friends and family, angels and local investors, or 2) companies backed by traditional VC funding, but who raised a modest A-round and have the ambition to ramp up before a big, international B-round.
You’ve been critical of the “growth-at-all-costs” mindset of B2B software investment, particularly the widely touted “triple, triple, double, double, double.” For readers that don’t know what that is, can you explain the thinking and why you believe that a more “patient capital” model is more viable, especially with regards to SaaS.
RA: Received wisdom in Silicon Valley is that the best SaaS companies should grow their revenues by a multiple of three in each of their first two revenue-generating years, and by a multiple of two in each of the three years thereafter. This can be a great model, but it’s high-risk, it demands a lot of capital from the early days (thus precluding bootstrapped companies), it can bring a lot of bad disciplines into a company and it rules out a lot of other promising, great companies that don’t quite reach these stratospheric levels right away.
An annual growth rate of 50% isn’t too shoddy, after all! And growth at this rate often goes well with companies generating more of the cash they need from customers than from investors. We much prefer this, because the “world experts” in what customers need are… customers. Not investors. The companies that best meet their customers’ needs always end up winning.
MJ: T-T-D-D-D refers to a revenue growth pattern where a company triples its revenue in a year and then does so again the year after, to be followed by a doubling, a doubling again and then yet another doubling. Usually this “paradigm” is applied to companies that have around $1 million of revenue, meaning they’d go to $3 million, $9 million, $18 million, $36 million and $64 million of revenue in five years. This is very aggressive growth that is often displayed in consumer markets where winners take all — but in B2B software companies, growing this fast often comes with a lot of baggage in terms of product debt, architectural debt, wrong deals being struck that don’t necessarily fit with the company’s long-term vision and focus, unhappy customers, organizational chaos and human burnout. This can therefore result in an abrupt decline in growth, and all sorts of messy issues to clean up.
What we’re saying is that it’s okay to not follow this pattern, but instead a slower (yet by most comparisons still very aggressive) growth trajectory, which allows you to build a sustainable company in terms of product, customers, culture and people. We’re happy to invest in a company that grows 80% at $5 million of revenue if we have conviction that the opportunity is truly the right one in the long term and that we can maintain a high growth rate regardless if that is 100%+ or not. The compounding nature is a massive attraction of the SaaS business model, but that also works the other way around.
If you have been growing like crazy, but underinvested in product and customer success, that will come back to bite you through churn — which if too high, wrecks any SaaS company. We therefore aim for low churn and strong net revenue retention so that you can fairly safely predict that a customer generating $X of revenue will generate 1.2X next year, 1.4X the year after and so on.
Can you give us any example of a SaaS company mistakenly pursuing growth “at-all-cost,” rather than fixing underlying issues and growing more slowly as a result? If you are unwilling to name names, perhaps paint a picture of what this type of fast-growing startup looks like so that founders can recognize if their strategy has gone out of kilter.
RA: Let’s look at a high-profile example from another sector: WeWork. Enough said!
MJ: One classic mistake we see over and over is companies aggressively expanding their sales efforts by brute force before building a solid platform for sustainable growth. This strategy generally requires access to almost unlimited amounts of capital. What we instead advise companies who we partner with is to really invest in the precursors of sales scalability before throwing expensive sales resources at the problem. This means addressing areas like positioning, product differentiation, demand generation, sales organization specialization and segmentation first — and only then invest aggressively in sales resources.
You’ve said it’s a great time to be a SaaS company in Europe, which is why you think a dedicated SaaS fund like Oxx is needed. What are the macro trends that make SaaS a good fit for the region, and how is Europe more (or less) competitive that Silicon Valley or other ecosystems? In what areas are we punching above our weight and where do we still need to catch up?
RA: The SaaS model has leveled the international playing field, as geographic proximity to customers is no longer a “must” in enterprise software. Much more important is access to top employee talent, and Europe scores well here. Some opportunities are especially well understood in Europe, a notable example being fintech in the U.K.
MJ: The availability of cloud services, open-source frameworks and online distribution models have significantly lowered the barriers to taking a new B2B SaaS company to a position of product/market fit. What used to cost $10 million-plus can now be achieved on $1 million or less. This “democratization” means there is a much larger number of companies being created, and they are not exclusively being created around the Silicon Valley hot spot where access to capital is awash.
At the same time, once companies start to scale and need significant investment, the European VC scene has shown they can step up to the plate. There is now much more capital available for the best European companies that want to make it on the global stage. This means European SaaS companies now have a chance to equal the growth of their U.S. brethren and we have seen an increasing number of European SaaS companies go all the way to the public markets (although still listing in the U.S.).
Lastly, if you had to name three common mistakes SaaS startups make pre-Series A, what are they and how can they be remedied to hopefully ease the path to Series A and beyond?
RA: 1) Scaling up the sales function ahead of the product function; better instead to prioritize understanding customer needs really well in tandem with a few collaborative customers whose needs are reasonably aligned with one another.
2) Optimizing hiring for timing — “we need an X person now” — over hiring for the long term — “we need the best X person we can possibly ever hope to get.”
3) Overly optimistic budgeting based on hope that new sales will come in according to plan. It’s good to live in hope, but it’s much better to manage expenses very tightly indeed so that you don’t have to rely on it!
MJ: 1) Lack of vision and focus — too many entrepreneurs are nervous about being laser-focused. But you can do just one thing and truly do it better than anyone else. Many companies “dabble” a bit here and there, diluting their ability to truly stand out in a global market.
2) Not understanding competitive dynamics and their own long-term differentiation well enough. There’s too many teams saying “we really don’t have any competition.”
3) Under-investing in product (not necessarily just tech and dev) and marketing (demand generation and product marketing) while over-investing in sales.