Editor’s note: Based in London, Hillel Zidel is a Managing Director at Kennet, a growth equity fund focused on bootstrapped and capital-efficient technology companies in Europe and the United States. His experience includes investing both as an equity and debt provider, management consulting, and serving in operational roles in high-growth technology companies. 

Can you tell us about your career path and how you came to Kennet?

Sure. After studying economics, I started my career working at two different dot-com startups. Those were formative experiences because they gave me my first taste of entrepreneurship, technology, and what it’s like scaling companies. After that, I went into management consulting, working with much bigger businesses like banks and asset managers, before moving into the tech lending world at ETV Capital. I enjoyed that work a lot, but ultimately decided to pursue a career on the growth equity side. After getting introduced to the folks at Kennet, I joined in 2008 and have loved working here ever since.

What is Kennet’s investment thesis and what differentiates it from other funds?

We’re a growth equity fund that invests exclusively in growth-stage B2B enterprise software companies. We also focus on bootstrapped businesses that haven’t raised much, if any, capital before. That means we’re usually the first institutional investor in the business. Our focus on bootstrapped companies is very unique in Europe and not something you commonly find elsewhere, so that’s an important differentiator. In terms of our geographic focus, 70 percent of our investments are in Europe while the other 30 percent are in the United States. In both cases, many of our investments are outside of major markets like London or the Bay Area.

Another differentiator is our value-add services. We help our portfolio companies in three main ways: expanding internationally, building world-class management teams, and shifting their strategy from being focused on current cash flow to building long-term strategic assets. 

What is it about bootstrapped companies that Kennet finds so attractive?

They generally have three attributes that we like. First, bootstrapped entrepreneurs are very frugal when it comes to how they’ve built their businesses. They tend to have allocated their own limited capital resources very efficiently, and are usually just as thoughtful about how they deploy any capital we provide. That’s a very different mentality than most venture-backed founders have. 

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…Bootstrapped entrepreneurs are very frugal when it comes to how they’ve built their businesses.

Hillel Zidel

Second, bootstrapped companies are massively customer-centric. Prior to our investment, their customers have been their only source of cash. That means that they’re very focused on serving these customers and developing great products. 

Finally, we like the simplicity of their cap structures. It’s not uncommon for the founder or co-founders to own 100 percent of the company, meaning there’s only one class of shares. From an investment perspective, avoiding large preference stacks and complex waterfalls means that our hurdle rates on return are typically lower than they would be if we had to satisfy a lot of A, B, and C round investors.

Can you tell us about the tech trends you’re most interested in and any investments Kennet has made in support of those trends? 

Absolutely. We like businesses that sell mission-critical software to enterprise customers. As we go through market waves, we want to be invested in the products that people can’t turn off, even when times get tough. So we think about retention a lot and generally pass on anything that’s too experimental. 

One area we’re focused on is technology to support the Office of the CFO. There are currently thousands of processes that finance departments have to complete on a regular basis, such as monthly reconciliations. In many cases, these processes are time-consuming and highly repeatable, which makes having people do them inefficient. 

We’re interested in AI-powered tools that automate these processes so that finance professionals can focus their time on higher value tasks. Some of our investments include Dext, an automation platform for accounting and bookkeeping firms (acquired by Hg Capital), Rimilia, a cash allocation and credit forecasting (acquired by Blackline inc.), and Crossborder Solutions, a transfer pricing software company.

While finance has been an early adopter of technologies like these to help automate its work and drive greater ROI, the same thing is happening across the entire enterprise. We’re also making investments in human capital management software that changes the way that workforces operate. That includes companies like eloomi, a learning workforce management platform that caters to the modern workforce, and a financial wellbeing platform Nudge. We like compliance too, and have also made a number of investments in that category. 

Given your interest in automating tasks, as you look at future investment opportunities, how does the rise of tools like ChatGPT influence your thinking?

I think it presents both opportunities and threats. B2B SaaS businesses can really leverage generative AI to provide better and more efficient tools. But, to be defensible, they need some other angle or competitive edge. We’ve already started seeing pure generative AI businesses pop up in the last few months. Our question is really around barriers to entry. If you can develop something in two days and start selling it, where’s the unique value? We think combining generative AI with proprietary data is where the real value creation is going to be.

Fundamentally, generative AI like ChapGPT represents another wave of technology that will ultimately be great for customers. And I don’t buy into the view that it will replace jobs. Instead, I think it will just lead to greater output.

Kennet is very focused on capital efficiency. In your view, what does it actually mean to be capital efficient in this environment? 

Over the last few years, there’s been a growth-at-all-costs mindset. Truthfully, when we used to speak about capital efficiency, it was pretty unfashionable. In the current environment, of course, that’s all changed. 

Ultimately, from a business development and growth perspective, companies have to be asking themselves what their metrics really look like. They need to assess how sustainable their businesses are over the long term. Obviously, if you’re paying more to get a customer than you’ll ever get back in revenue, that’s not going to work.

One of the reasons we invest in bootstrapped companies is because they’re capital efficient by definition. The reality is that they often don’t know what their metrics are because they’re just focused on managing cash. When we come in, we help them figure out things like their LTV to CAC ratio or the ratio between their net new ARR and burn so that they can decide exactly where and how to allocate capital most efficiently. Doing so not only leads to better financial outcomes for us, but also for the founders we back. We get a greater multiple and they avoid excess dilution. 

But aren’t all companies, even VC-backed ones, embracing capital efficiency these days?

Sure, people are more capital efficient today than they were 18 months ago, but you can’t just move from one strategy to the next. If you’ve already consumed $100 million in venture capital, the bar on exit is going to be high. You can’t unscramble that egg, you just have to manage your way through it.

Fair enough. We’re also curious about your observations as an investor spanning both Europe and the United States. Are there any insights you can share about the relationship between these markets?

In many areas of technology, the trends emerge in the US first. For us, having a presence there has been really helpful because we can see what’s coming down the pike. I’d also say that scaling in the US is easier than scaling across Europe since it’s effectively a single global market. What we find is that because we’re investing directly in the US, we can leverage a lot of our learnings there to help our European portfolio companies. 

In terms of market cycles, I think markets tend to go higher when things are good in the US and lower when things are bad. In Europe, markets are more constrained within a tighter range. Ultimately though, the majority of European software companies aspire to expand into the US market. If you’re a European investor, having a presence there is critical to help enable that.

What’s the hardest part about being an effective investor in the current environment?

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Fortunes are built in down markets and collected in up markets. Now isn’t the time to be dialing things back. It’s the time to double down…

Hillel Zidel

A lot of entrepreneurs are skeptical about raising capital in this market. The biggest challenge right now is trying to convince them that if they have a good use case for the capital, waiting 18 months to get it probably isn’t the right call. Sure, they may get a higher valuation down the road, but they’ll have lost 18 months that they could have spent growing the business more quickly. 

Fortunes are built in down markets and collected in up markets. Now isn’t the time to be dialing things back. It’s the time to double down, provided you have real conviction about what you’re building. It’s also a great time to be an investor. Over the past few years, there was so much noise in the market with so many different investors crowding each other out. Now the only active investors are the ones with strong track records who have been doing this a long time. We’re happy to be among them.

Thanks for sharing your insights, Hillel!