Why this VC feels good about the early-stage market

Hello there,

Our last chat with an investor went down really well so I thought we’d do another.

Scroll down for a conversation with 7percent Ventures founding partner Andrew J. Scott about:

• Why the currently depressed early-stage market is good for making investments

• How he judges which deep tech startups are worth investing in

• Which common mistake founders make that VCs also make

• …and why he’s still interested in blockchain now the hype has died

But first, I want to pay tribute to Kirsty Smitten, a founder we profiled on PreSeed Now last year. MetalloBio is developing a solution to the problem of antibiotic resistance - her work was truly impressive.

Sadly, Kirsty died of a rare form of cancer last month. I was at the Great British Entrepreneur Awards earlier this week where she received a warm tribute for her achievements, which were tragically cut short at the age of just 29.

You can read more about Kirsty here.

– Martin

Why Andrew J. Scott feels good about the depressed early-stage market

Andrew J. Scott has been in tech since the original dotcom boom, first as a founder and more recently as an investor.

As a founding partner at 7percent Ventures, his portfolio is closely aligned with the B2B and deep tech focus here at PreSeed Now. Indeed, 7percent have invested in three companies we’ve covered: Untap Health, Space DOTS, and Lúnasa.

I first met Scott when he was founder of location-focused social startup Rummble in 2009.

Rummble was often described as ‘the British Foursquare’, but was actually around before its more famous American rival and Scott had been doing social location products even longer than that.

I caught up with him again at the Web Summit last week and he was full of useful information for PreSeed Now readers, whether you’re an investor or a founder.

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MB: What do you make of the depressed state of the early stage market right now?

AJS: I'm always surprised that people are surprised. I think it's the inevitable ebb and flow of the market. By definition, markets are–partially at least–sentiment driven, and what goes up must come down. 

I'm old enough and ugly enough to have seen the first dotcom boom when I got kicked out of college and started my first company. 

This is a great time to invest. It's good for investors because when it's harder to raise money, you lose a lot of the ‘tourists’ as we call them; tourist founders, and to some degree the tourist venture investors as well. You lose some of the froth from the ecosystem.

You are left with the people who are genuinely extremely passionate and determined, and hopefully also have a really great vision or great product to sell, rather than people who just think ‘I think I'll be a startup founder and find it very easy to raise money, find it very easy to spend that money, and then I can raise more money’. 

So I'm very positive. The European ecosystem is bigger than it's ever been, probably 10 times the size of when I started, so this is just a blip.

MB: Many early-stage investors go for highly measurable bets in areas like B2B SaaS. But your portfolio is more diverse, taking in lots of deep tech. How do you assess startups with the market as it is right now?

AJS: You've touched on the main thing, which is timing. Perhaps not so much timing of capital availability, but more timing for the technology that’s being developed. 

I have a long and patchy career as a founder of developing startups which are too early to market. It took me about 10 years to work out how important it was in the market. 

I did a location-based social network two years before Facebook started. So I was trying to pitch it to people and people were like ‘what's a social network?’ So I'm very conscious of that. 

Now I'm a deep tech investor, or investing in innovation where there's a nascent market. And funds have a 10-year lifecycle or maybe 12 years, so we do see lots of stuff we think is immensely cool, but we can't necessarily back it. 

We have to find a balance between not just ‘is the technology mature enough?’, but ‘is the customer base and the ecosystem you're selling into mature?’

The epitome of that right now is probably the new space economy. We all know it's coming. It's going to be enormous. You've got asteroids floating around which need mining, that have more minerals on them than the entirety of planet Earth. But is it the right time to invest in an asteroid mining startup? I’d probably say not. 

So we do space tech investment, but we focus on the picks and the shovels. We focus on startups solving problems for now, or the very near term, in the next five years.

We do two types of investments. One is deep tech,or frontier technology, as we call it, and that's where the challenge is primarily technical but we know that if you can make that technology work, there is already a massive nascent market for it; something like quantum computing. 

If there was a working, scalable quantum computer, people would use it, there's no question. So customer timing is great. The question is, is the technology sufficiently far ahead that, in the lifecycle of our fund, that company will be able to build a useful volume?

The other bucket we invest in is startups that transform laggard markets; big, old, often boring markets. 

That's a known technical solution, applied to create a product or service for that market. It might be an app or a SaaS platform, so there's no real technical challenge other than you've got to build the right products, for the right customer, at the right price point. 

But there's a lot more market risk there, because you’ve got to be sure that the market is ready for that solution. 

I think often we focus on how much of a step-change it is. Because the step-change really relates to value. So if you can make something that notional 10x better or 10x cheaper, or even 100x better or cheaper, then provided the solution is of high quality, customers are going to buy. 

Then it just comes back to that question: is the market big enough? I think founders often underestimate the size the market needs to be for their vision. They need a vision that ultimately solves a problem for a big market, even if their initial market is smaller. And that’s the VC game. 

I don’t have a ​​pithy single answer on how you judge timing, other than, ‘if in doubt, talk to customers’ And we do go out to the customers and ask ‘if you have this product or service, would you use it?’ And you get a pretty honest answer.

MB: What are you looking for right now?

AJS: That’s the million dollar question! 50% of the answer is ‘I probably don't know’, because there might be stuff out there that I don't know about. 

The 50% I do know about is areas such as future compute, solving the challenge of demand for A.I. processing. And other macro areas, such as some of the fundamental A.I. models or A.I. applied to very specific areas where OpenAI or somebody else won't become a solution. 

Are you solving a fundamentally difficult problem or making something fundamentally 100 times better? We're interested in all the coming trends in aerospace, and dual use technology; I think defense is a very interesting area, especially given the current geopolitical climate.

The VR and AR market is finally starting to get larger and we'll obviously soon have the Apple headset come online, so we'll see what that does to the number of users in the market. 

I also think about some of the technologies which are no longer fashionable, but actually still have great applications, such as blockchain. We're still interested in the companies that are solving a real problem in blockchain, or trying to solve a real problem today using blockchain.

MB: I was never convinced by blockchain, as the hype was way beyond the near-term capabilities of the tech.

But now the hype has faded away and we’ve had the FTX scandal etc, it feels like it’s more like another deep tech field to build on in the long term, rather than the next big thing.

AJS: Crypto coins and NFTs gave web3 and blockchain a bad name. I think also, most startups saying they're building on the blockchain probably don't need to. 99% of founders I talk to and ask ‘why are you building on the blockchain?’ don't have a compelling answer. 

Because ultimately, the customer doesn't care. So if you're saying ‘people are going to use this service, which replaces this old service, because it's on the blockchain’. That's always the wrong answer. Because the person using that service probably doesn't give a shit.

You might be passionate about blockchain, and transparency, and DeFi, and DAOs, but most users of the services are not. 

But there are some areas where it really can add value. We invested in a company a couple of years ago called Vosbor which is a commodities exchange for basic foods. That's an example where actually, the blockchain is providing real transparency and pricing efficiency to buyers and sellers of foodstuffs that can have a really big impact. 

So there's a good example of new technology disrupting a very boring, old market.

MB: We’re meeting at the Web Summit. Many founders I’ve spoken to are disappointed investors aren’t browsing the startup stands. Do you come to meet startups at big events like this? 

AJS: Sometimes. The smaller, specialist events that focus on a single topic tend to be when we're in that mode. 

Very honestly, at something as big as this event, it's more about meeting later-stage investors who are going to invest in our portfolio companies. It's about meeting potential LPs for our fund. And then probably journalists or podcasters. And maybe one or two meetings to catch up with portfolio founders who perhaps aren't based in the same place.

The best thing founders can do is better understand the venture industry, and how venture teams work; everything from how venture people are paid, the principals, the associates, the partners, all the way through to how internally they do deals. 

I would go find a VC who likes you, who maybe hasn't invested, go buy him or her dinner and drill them for information, because it really helps founders then not waste their time doing the wrong thing. 

And the same is true for VCs, by the way. There's a big summit in Berlin called SuperReturn. A lot of VCs go there because they want to meet all the LPs. The truth is, at SuperVenture [the LP/VC strand of SuperReturn], all the LPs that might invest in my fund are distracted talking to the private equity guys to try to get them to invest in their funds. 

So it's not just a mistake the founders make, VCs make it as well.

Back on Tuesday

We’ve got some great startups lined up for you in coming editions. Make sure you check your inbox on Tuesday for the next one.