Why Saul Klein wants to continue investing in UK tech

Entrepreneurship runs through Saul Klein’s DNA. The English literature graduate may not have known it when he first entered the world of employment, but he would go on to build a successful career in business and venture capital investment.

Klein’s CV speaks for itself. It boasts stints at some of the world’s biggest and most well-known technology companies including Skype (where he was part of the original executive team) and Microsoft.

Klein was also one of the co-founders of Lovefilm, set up in 2002 and bought by Amazon in 2011.

Like many entrepreneurs before him, Klein eventually transitioned into venture capital investment, working his way up at Index Ventures – one of Europe’s most prominent funds – where he spent eight years backing the likes of AlertMet, Songkick and GlassesDirect.

A little over a decade ago, he founded Seedcamp, an organisation tasked with helping European tech founders build successful businesses.

But his career history doesn’t stop there. He’s also a partner at LocalGlobe, a VC fund he co-founded with his father Robin Klein. Set up in 1999, LocalGlobe has made a mark in early-stage investment, backing UK tech companies including Improbable, Transferwise and Zoopla.

A risky business

An experienced entrepreneur and investor, Klein was quick to point out that investing is, by its very nature, a risky business.

“You do have to feel that gut instinct with any entrepreneur you end up working with or investing in, but you also have to accept you are going to be wrong 60 or 70% of the time,” Klein told UKTN.

“We also know, not just based on our numbers, but also on data on the venture industry going back to the mid-80s, that 62% of capital you invest in typically returns 1x or below – effectively meaning that at least 60% of the investments you make will not materialise.

“However, every investment decision you make, you make with the filter of ‘could this single investment return our fund? In order to generate outsize returns, you have to generate risks.”

While Silicon Valley investors are notoriously keen to accept this kind of risk, it’s evident that very few VCs in the world are happy to embrace it to the same extent.

Klein doesn’t dispute the UK’s or Europe’s prominent position in the international tech arena, but argues that while they’re both significant contenders, much needs to be done to change the mindset of both investors and founders in the ecosystem.“A lot has changed in the 15 or 20 years I’ve been doing this, but it’s still a long way.”

Change does need to happen, but the transformation needs to be three dimensional.

“The core ingredient is talent. When it comes to the founders, we’re particularly talking about the level of ambition. Are they happy to build a $50m to $100m exit or are they looking for a $1bn exit?,” commented Klein.

Europe’s technology ecosystem is thriving, but he believes there are very few entrepreneurs who share the same level of ambition as, for example, Spotify’s Daniel Ek or Zalando’s co-founders Robert Gentz and David Schneider.

Ambition is undoubtedly a key ingredient in the recipe for success, but Klein is also aware that entrepreneurs need to be able to recruit and retain the necessary talent to scale their businesses.

Access to capital is crucial, too. “I actually think there’s a lot of capital in the UK and a lot of international capital that likes the UK, but I think it’s much more about sophisticated value-added capital.”

Nationwide strategy

There’s no denying Klein and his colleagues are inundated with requests from founders looking for cash. LocalGlobe’s main filters, however, are around stage and geography.

The firm is focused on early-stage investment, looking to back UK tech companies which are either pre-Seed or Seed.

“The big macro bet we’ve made is the UK. So, 85% of our capital is invested here. Historically, 90% of that has been spent in London, but we have made a couple of investments in Edinburgh (FreeAgent) and Glasgow (Swipii).”

Along with many London-based investors, Klein has quickly woken up to the fact that innovation is now a national industry – with reputable technology clusters emerging all over the country.

“We are very committed over the next two or three years to get to know other key clusters in the UK. We’ve invested in a lot of Cambridge founders. We are excited to see how we can do more in Cambridge over the next year or two. We’ve also backed companies in Manchester and Oxford.

“We are pretty convinced that over a 20 year period, there’ll be at least one, maybe two, very interesting ecosystems outside of London,” Klein added.

Areas of interest

Klein said he is interested in “investing in practical science-fiction”, essentially meaning he’s looking for disruptive businesses, working on innovative solutions, which may seem far-fetched now but will be the ‘norm’ in years to come.

“We like to back surfers, not waves,” he added, noting the latter referenced the size of the operating market.

“The wave has to be so big that it’s going to impact $100bn or more of enterprise value, either taking way from incumbents or creating new enterprise value, which didn’t exist before.

“If the wave is big enough, it’ll attract lots of surfers. We are looking for people who are on big waves at the right time and have the vision and the entrepreneurial capabilities that make them look like they could still be around in seven to 10 years time,” he noted.

Creativity and tenacity are obvious skills that Klein looks for in entrepreneurs, but he’s also keen to highlight the need for good storytelling as founders will inevitably be tasked with sharing their story with media, investors, talent and perhaps most crucially, customers.

“One of the best founders we’ve worked with in the past wrote a Wikipedia entry for 2020 explaining what his business would look like then. This really helped us understand his vision and where he wanted to take things.”

Klein is as humble as he is successful and having sat down with him to discuss the state of the UK’s tech industry, it’s not hard to see why his pragmatic business approach has so far paid off.