“After twenty years this ecosystem has arrived at the starting line,” says Saul Klein, co-founder of Phoenix Court Group. “Now things are about to get interesting.”
I’m talking to Klein to discuss today’s news that venture capital Investor, Phoenix Court Group has secured a further $500 million to support what he describes as “values-based innovation” in the U.K. and beyond. It quickly becomes clear, however, that it’s not simply the sum of money raised that excites him. As a veteran investor, he sees exciting times ahead for a tech ecosystem that he considers – even today – somewhat underserved by global and local investors. Equally important, the launch of the new fund will see Phoenix Court potentially providing support for companies at all points along the road that runs from Seed and Pre-Seed to a market listing or trade sale.
Klein is perhaps best known for investments made through the Seed-stage specialist, LocalGlobe and it sister breakout fund, Latitude. But as he explains, Phoenix Court Group activities will now formally encompass four separate funds, namely the aforementioned LocalGlobe and Latitude, plus Solar and Basecamp.
So what does that mean in practice? Well, Solar and Basecamp are not entirely new developments. Previously they have been financed internally within the LocalGlobe and Latitude operation. Under the new arrangement, they will begin to be institutionally funded. Solar will focus on supporting businesses on their way to the public or private markets while Basecamp is intended as a network of early-stage investors.
You could see this simply as a piece of internal housekeeping on the part of a well-established investor, but Klein says it is more than that. By establishing four separate but linked funds, Phoenix is better positioned to build relationships with founders who come in at the seed stage with the option of supporting at least some of them, through a longer journey. As such it is morphing into a lifestage investor, with a focus on impact.
So why is this important? Stepping back to look at the bigger picture, Klein says that while Seed investment is popular with the LPs who invest in funds, the U.K. and European markets are still falling short when it comes to investment at the breakout and scaleup phases of development. This is despite the growing number of unicorns in the region.
Phoenix Court is keen to play a role in plugging that funding gap, while also – it has to be said – looking after its own strategic interests. For instance, Localglobe has thus far committed Seed capital to 14 companies that went on to become unicorns. The new Phoenix Court structure means it can now provide further funding to potential unicorns and, indeed, other fast-growth companies through Latitude and then Solar. “With Solar, we expect 80 per cent of the companies it invests in to have come through LocalGlobe and Latitude,” he says.
A Changing Tech Profile
It’s a strategy that, to some extent, reflects the changing profile of tech investment. Fintech still looms large in London, of course, but investors are increasingly looking for opportunities in areas such as Deeptech, Biotech, Climatetech and Agritech. Founders working in these sectors often take longer to build viable businesses. Thus, patience is required.
“ When you look at the technologies required to address climate, food and energy transition, there is a lot of science,” says Klein. “We have always said that science companies should think in terms of at least 24 months of revenue-free runway.”
Phoenix Court has been seeking to attract LPs who will think long-term. “Money is coming from institutional investors – pension funds and insurance companies,” says Klein and they are here to stay.
Klein says Phoenix Court is also having more success in attracting local investors. “In 2015 we had one U.K. LP,” says Klein. “On our last count, 20 per cent of LPs came from the U.K.. More U.K. investors are investing in this asset class.”
Good Or Bad Timing?
But is this a good time to attract more investors? After several years of growth, there is increasing evidence that factors such as the war in Ukraine, high inflation and the prospect of recession are hitting investor confidence. It may also be that after several years of record investment, sentiment is cooling off. Certainly, valuations are falling. “The next few years could be challenging for companies seeking to raise capital,” says Klein. “The pace of investment will slow.”
But as he sees it, the fundamentals are in place for the longer-term success of the ecosystem. The big problems facing the world – climate, food, digital transformation – are not going away and new solutions will be required. “This is an amazing time to come into the market,” Klein asserts.
The New Palo Alto?
Throughout my conversation with Klein, a term that crops up repeatedly is “The New Palo Alto.” As highlighted in a recent report by anslyst, Dealroom this region is defined as anywhere within a four-and-a half-hour train journey from the Kings Cross/St Pancras district of London where Phoenix Court and a host of tech companies are based. By that definition, we are talking not only about most of the UK mainland but also cities such as Amsterdam, Berlin and Paris. It is an area that now has enormous scaleup and breakout opportunities. From its Somers Town, the Phoenix Court Group team are in the epicenter of this notional territory.
According to Klein, this was once regarded as a Frontier Market by US investors. That is no longer quite the case, but investor support has yet to fully match that of the Bay Area or Beijing, despite being rich in tech companies. Phoenix Court hopes its structure will fill some of the funding gaps.