We had the pleasure to interview Mikael Johnsson, Co-Founder and General Partner of Oxx, a specialist venture capital firm focused on investing in business-to-business (B2B) software as a service (SaaS) companies from Europe and Israel. Mikael has been actively involved in the venture capital industry for over two decades, mentoring over 100 tech companies and witnessing the peaks and troughs of the market.
In this interview, we will explore Mikael’s background and journey, delve into the inception and evolution of Oxx, discuss the current state of the venture capital landscape, and gain insights into the core company fundamentals that contribute to long-term startup success. Additionally, we will explore the impact of the market correction on VC-funded startups and the importance of patience in investment strategies. Join us as we uncover valuable perspectives from Mikael Johnsson.
Can you provide us with an overview of your background and journey, as well as the inception of Oxx? How has Oxx evolved over time?
My journey with venture capital (VC) began when I was at university and took a course in Management Information Systems and I became fascinated by the potential of software to transform businesses. At the time, I thought I would one day start my own software business and to learn more about the industry I worked as an analyst at a venture capital firm. I never launched that business and two decades later, I’m still in venture capital, as an investor who specialises in growth-stage software businesses. However, my dream to build my own business has come true with Oxx, which I launched with my co-founder Richard Anton in 2018.
Before launching Oxx, I was a venture partner at Amadeus Capital Partners, and during that time I worked closely with Richard, who was a partner there, for four years. We decided to start Oxx; a specialist venture capital firm that focuses on investing in business-to-business (B2B) software as a service (SaaS) businesses from Europe and Israel. Both Richard and I have been investing in SaaS companies and believed in their potential long before ‘SaaS’ was a thing. Some might call us SaaS geeks – which we take as a compliment.
Throughout my career, I have had the privilege of mentoring over 100 tech companies, and just like Richard, we have witnessed the highs and lows of the market. Our commitment to investing in the fundamentals has remained steadfast, even as the external environment has undergone significant changes since the establishment of Oxx. These changes have put our values to the test, allowing us to demonstrate our resilience in challenging times. One key aspect of our investment philosophy has been the belief in exiting companies in line with long-term median valuations, not at the highs of the market. While this required us to exercise restraint at times, it has proven to be a worthwhile approach. As a firm, we have evolved, and even our less experienced team members now recognize the value of the restraint we demonstrated during the exuberant period from late 2020 to early 2022.
Given the current situation, we have been experiencing fewer VC deployments in recent years, what key factors do you believe have contributed to this decline, and how do you foresee the landscape evolving in the near future? Is there potential for a quick market recovery?
The global macro environment has turned, and we are now experiencing the consequences of a market that became accustomed to cheap capital. Many venture firms over-invested in companies that were chasing growth and high valuations, at all costs, and were not built on solid foundations.
The prospects for initial public offerings (IPOs) have dried up and in this high-interest rate environment, other lower-risk asset classes – when compared to venture capital – are looking more attractive to the so-called Limited Partners who invest capital into VC funds.
There is significantly less money available now and I think we’ll see a 50% to 70% reduction in the money that is being raised by VC firms. Deployments at all growth stages are down, apart from at the seed level. The later the stage and closer to the public market you get, the more dramatic the reduction.
There has been talk that the market will bounce back because of the ‘dry powder’ – funds that are held in reserve that can still be deployed – but I don’t think that’s the case. Those investors aren’t as safe as you might think, and many firms have holes to fill in their portfolios. Many VC firms will now have to make their funds last a lot longer and reduce the speed of deployment. We will see a harsh culling of start-ups as well as VC firms – some just won’t survive. Some may be acquired but I expect to see plenty go under or fade away.
I don’t see a quick market bounce back to the levels and activity of 2021 on the horizon. Instead, what I foresee is an era of smart money, which will see more measured investments at sensible valuations. There will still be money available for the right companies. The market is resetting to the position that Oxx has always taken – to focus on the longer term and not play the momentum game trying to catch the peaks and troughs of the market.
Can you explain the concept of “smart money” and how it applies to the current economic climate?
There is a lot of doom and gloom in discussions about the current economic climate, but the good news is that deals are getting smarter. As the legendary investor Warren Buffet is credited as saying, “When the tide goes out you can see who has been swimming naked”. Now all the foolish decisions of the past are there for all to see, and the smart money is with those who have had their swimwear firmly on.
Cheap capital meant that many companies raised funds too easily and they were chasing the wrong metrics. Now the focus – even at the seed stage – is on capital efficiency and a route to profitability. In the era of smart money, there will be a focus on optimising for a great product with a great product-market fit.
In your opinion, what are the core company fundamentals that VCs should prioritize when making investment decisions? How do these fundamentals contribute to the long-term success of startups?
Great founders, building great products that stand out for solving big problems and are loved by customers is still the general recipe for success. If all those fundamentals aren’t in place, you might still be able to build a decent company, but not the type of success story that VCs are looking to back.
What are some warning signs or red flags that VCs should look for when evaluating potential startup investments?
One of the first things is to look at the character and the motivation of the founder. Some things can be taught, but the grit and determination to see their vision through – and the personality to bring their people along with them – are crucial to the eventual success of a company.
Warning signs would be a product that doesn’t have a clear target market; a lack of differentiation; and a product and business model that cannot scale. In the current environment, I’d also look at the capital efficiency – i.e., how much it cost to grow, the burn rate, the long-term plans and whether there is a focus on the long-term sustainability of the company.
What are some key indicators or factors that signal a company has been built solely to achieve high valuations rather than developing a great product? How does this affect their likelihood of failure?
Some of the indicators would be the metrics they use to demonstrate success. They might be focusing on growth in terms of the number of employees, or in data processing, for example, and not the proportion of customers renewing their subscriptions. Another example is competing on the amount of funding they have raised. These metrics are like looking at the shiny exterior of a car while under the bonnet is an engine that turns the hazard lights on.
Are there specific sectors or industries that you believe will be more resilient during these turbulent economic times?
There has been a massive contraction in SaaS investing, but that’s not because the market doesn’t still have potential; it’s because it got caught up in over-valuations. We still see great potential for large companies to be purchasing software solutions at the enterprise level. In fact, Morgan Stanley recently predicted that overall software spending in the enterprise will grow by 3% in 2023 and Gartner expects the SaaS part of that market to grow at 18% this year. The highest priority areas, offering the best near-term opportunity for startups, include cloud infrastructure, data warehousing and analytics, and cyber security.
We are also seeing a lot of potential for B2B SaaS that uses artificial intelligence to create efficiencies and enable insight-driven decision-making in the workplace. And of course, even if it is still very early days, we are very excited by the promise of generative AI and how that can push innovation forward in most parts of the software ecosystem.
What traits do you think successful startups share in common? Which ones do you personally value the most while choosing an investment?
I think you must start with the people, especially the founders. Excellent and exceptional people can cure most ills, while mediocre people can kill the best of business plans.
Getting the right talent, at the right time, and at the right price – and retaining them – is also important. It’s not really about what they should do, but how the founders and the company can stay aligned and work together in the same direction. As a VC firm, this means we have to establish trust, and alignment, and build great partnerships with entrepreneurs and their teams.
The company also needs to have a proven product, with an exciting vision, unique differentiation and strong product-market fit. However, they also need what we at Oxx refer to as go-to-market fit. This go-to-market fit (more information here) can make the difference between a good company and a great company.
Achieving go-to-market fit involves many different tasks and milestones but it all starts with great positioning and that is something I don’t think enough companies pay enough attention to. Most companies would do well to give more thought to how they can stand out in a competitive market and how they can create a sustainable competitive advantage.
How do you think the current market correction will impact the longevity of VC-funded startups and their ability to survive?
There will be a day of reckoning for some and the current market correction will sort the real companies from the pretenders. Some startups and VC firms won’t survive, but the correction is forcing the market to focus on the fundamentals and go back to investing at sensible valuations. This will be a good thing in the long run, and we can expect to see many great companies emerge from this period.
Can you discuss the role of patience in the investment strategy of VCs, particularly during market downturns? How does this mindset contribute to sustainable growth and success for portfolio companies?
I learnt in the aftermath of the dot-com bubble that investing in companies is only a small part of being a venture capital investor. The hard work lies in developing companies and getting them to a successful exit. This takes time and a lot of grit and patience. Many companies go through different phases of their development, and they will hit tough times. At Oxx we understand this, companies will need different kinds of support to steer through tough times, and investors must stand by them in both good and bad times.