Sifted - When to sell?

Good morning there,

As a VC, backing a startup early on is one thing, but seeing your investment through and knowing when to sell your stake is something else entirely. Cash in your chips too soon and you might have to sit by as the value of a stake you once held goes up and to the right. Leave it too late and you could risk losing out on hefty returns for your LPs. So how do get it right? Is there actually a formula? Amy Lewin digs into that below.

Elsewhere today, Amsterdam welcomes a new unicorn to its flock, the UK government is set to reverse controversial changes to angel investment rules and there’s $42m for a startup taking its medical device for swallowing disorders over to the US.

— Sadia Nowshin, editorial assistant 

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When to sell?

Venture capital isn’t just about picking the right horses. It’s also about helping them jump over dozens of hurdles, watching them win a bunch of races — and knowing when to stop betting on them and cash in the winnings.

How exactly to do that last part is a matter of some debate among Europe’s seed funds these days. 

Oliver Holle, managing partner of Vienna-based seed investor Speedinvest, told me earlier this year he wished his firm had “sold more” when up rounds were bountiful. (His portfolio includes unicorns like wefox and GoStudent.)

“We’d settle on selling 20 or 30% of our shares, or say ‘Let’s make sure we at least have our money back’. In hindsight, that’s not good enough,” Holle said.

Last week, London-based seed VC Hussein Kanji agreed that more formula and less FOMO is needed.

“To do this well, I think you have to be a little bit prescriptive,” Kanji, managing partner at Hoxton Ventures, told me on the Sifted podcast. 

Some firms have a blueprint, he says: “When you have an IPO, as soon as you can, you sell a third of it; six months or a year after that, you sell another third; six months or a year after that you sell another third. You don't take a view on the long-term.” 

There was no formula in place when three of Hoxton’s horses — Deliveroo, Darktrace and Babylon — went public in 2021, or when the firm acquired shares in video game giant Epic Games via the sale of portfolio company SuperAwesome in 2020. 

Hoxton held onto its shares in Darktrace post-IPO, saw them climb from £2.50 per share all the way up to £10 per share, and drop down to around £3.50 today. “At peak our holding in Darktrace was worth about $400m,” Kanji says — a pretty awesome return for a $28m fund. 

But Hoxton couldn’t get out at the peak — it was still in the 180-day ‘lock-up period’ post-IPO (when “insiders” like VCs and employees can’t sell their shares) — and the price had dropped to around £6 by the time that ended. 

“We probably could’ve sold or distributed at £6, but I was like, ‘It’s undervalued at £6.’ It’s today somewhere between £3.50 and £4,” he says. “I’m still a big Darktrace bull; I think it’s a fundamentally undervalued company.” 

Deliveroo was a different story — Hoxton sold all of its stock as soon as the lock-up period ended when shares were around £3 (25% lower than on listing). 

Over time, the fund had put about $2m into the food delivery giant — and got around $60m back. 

Hoxton’s first fund will make its investors a very healthy return — it’s currently “multiples of the first fund,” Kanji told me — but it could’ve been even heartier.

“We have a really good fund — but we could’ve been a super exceptional fund if we’d been a little bit more disciplined about selling.” 

Read highlights of my conversation with Kanji here, or listen to the full thing on the Sifted podcast.

And VCs, let me know how your firm approaches this: do you have a formula? Do you take things company by company? Or is your fund too new to have figured this out yet? Hit that reply button.

— Amy Lewin, editor

😇 The UK government is set to reverse controversial changes to angel investment threshold. Last month, changes to the wealth threshold required to qualify as a high-net-worth angel investor sparked backlash across the tech ecosystem after concerns around its impact on diversity. In tomorrow’s Spring Budget, chancellor Jeremy Hunt is expected to announce that these changes will be reversed, reducing the threshold from £170k in annual income back down to the original £100k. 

💷 The UK Treasury announced a £360m funding package for R&D and manufacturing, which will go towards expanding capabilities in the life sciences, automotive and aerospace industries. 

• £92m will be set aside for medicine and diagnostic tech manufacturing facilities and around £73m will go to R&D projects focused on electric vehicles. An investment of £200m will go towards zero-carbon aviation tech.

🤖 Quantum software startup Multiverse Computing has raised €25m as it turns its attention to the AI sector. 

• The Spanish company — which has already developed a quantum software tool that’s been used by major banks — will use the money to develop and launch new applications for large language models (LLMs), including one to make these systems forget. It will also use some of the capital to expand to the US and double down on its existing products, Singularity and CompactifAI.
• Multiverse Computing’s CEO, Enrique Lizaso, tells Sifted that the round, which he says is the biggest raised by a quantum software startup in the EU, triples the company’s valuation to around €100m. Spanish VC Columbus Venture Partners led the round and was joined by Quantonation Ventures, European Innovation Council and Redstone QAI Quantum Fund.

🚑 Phagenesis raises $42m to take its medical device for swallowing disorders to the US. The UK-based medtech has developed a novel treatment — invented by the company — called pharyngeal electrical stimulation (PES), which involves stimulating the back of the throat using electrical currents. Randomised controlled studies (RCTs) have shown that the startup’s treatment can reduce hospital stays by more than 10 days, according to CEO Reinhard Krickl. 

• The startup’s medical device is available for use in 100 hospitals, with most of those in the UK and DACH region. It is also in “one or two” hospitals in the US — where Phagenesis gained FDA approval in 2022 — but Krickl tells Sifted it hopes to expand into a “low double-digit number of hospitals” there by the end of 2024.
• The Series D round was co-led by Netherlands-based EQT Life Sciences and Canada-based Sectoral Asset Management. British Patient Capital, Northern Gritstone and Aphelion also participated. 

🦄 Amsterdam has a new unicorn. Hospitality cloud software startup Mews has raised €101m in funding at a $1.2bn valuation, making it the latest European startup to join the unicorn stable. Sweden’s Kinnevik led the round and was joined by investors including Revaia, Goldman Sachs Asset Management, Notion Capital and LGVP. Last year, the startup appeared in Sifted’s list of fintech soonicorns to watch.

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Our new Sifted Guide is here to help your startup better understand the challenge of growing your sales function — from what tech tools to invest in to how to keep salespeople happy and motivated.

🤔 Why — and how — economic uncertainty can benefit bold leaders. (Sponsored by Founders Intelligence)

Paris-based Catalog, which is a multichannel sales tool for B2B companies, raised $3.2m in seed funding. LocalGlobe led the round and was joined by investors including Helloworld, KIMA Ventures and Motier Ventures.

Stockholm-based eComID, a startup that helps the fashion industry reduce the volume of online returns, raised €2.75m in pre-seed funding. CapitalT led the round and was joined by investors including H&M Group Ventures.

Paris-based FoodFlow, which is a startup helping restaurants manage their delivery orders, raised €2m in funding from Jeriko.

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