But should you find the future Mariah Carey of the Australian tech scene, you’ve bankrolled the next decade of returns plus you’ll have starlets clamouring to join you. The thing about a hits-based business is you only need one. And instead of being judged by your last performance, in VC-land you might get truly lucky, and stay on top because of your very first.
For VC firms, their Mariah Carey is Canva, the design business founded in 2012 by Melanie Perkins and Cliff Obrecht that raised $US60 million in June on a $US6 billion valuation.
The big three of Australia’s VC industry – AirTree, Blackbird Ventures and Square Peg – all bought slices of Canva early. As its valuation gets ever higher, it plumps up the value of all of their funds.
And that growth has in turn helped those VCs to pull in record amounts of fresh capital to deploy. Five years ago the Australian venture capital industry was on “life support”, according to Yasser El-Ansary at industry body Australian Investment Council.
This year it will have smashed through the record for new capital raised, thanks to a $340 million fund announced by Square Peg in June and a $500 million fund announced by Blackbird two months later. If it was turbocharged before COVID-19, the combination of low interest rates and the acceleration of tech has set the sector on fire.
Setting the tempo is the 57 per cent annualised internal rate of return, net of fees, that 97 investors are sitting on since they bravely tipped $29 million into Blackbird’s first fund back in 2013.
Niki Scevak, a prolific tweeter who co-founded Blackbird, agrees that Canva counts for much of that performance; the $3 million invested in Canva in 2013 is now worth $270 million. But that’s the venture capital model, the 41-year-old says.
It’s a business driven by outliers; one investment is likely to deliver the majority of your returns, another investment will deliver the majority of what’s left, a third investment will deliver the remaining.
For a man at the centre of an industry in rapid expansion mode, Scevak is disarming when asked if Australian VC has proven itself. “The proof is not conclusive as yet. The gains are largely on paper, and the conclusive proof is to hand back money.” He quickly adds in the same breath: “The industry could do that now. But that would actually be a self-defeating moment.”
Which is why Canva will stay privately owned, possibly for quite a while. “In the original dotcom boom, VC funds invested in great companies like Seek and then sold out when Seek was worth hundreds of millions of dollars. Not six or seven billion.” Canva, says Scevak, could one day be worth more than Atlassian and given Blackbird owns 14 per cent, there’s a lot more upside to come. With another $500 million to deploy, Blackbird can keep financing Canva’s capital needs well beyond the typical timeframe of a VC firm.
“You invest in great companies and you build great relationships with those companies, such that you get way more information about that company than anybody else. It’s like an unfair advantage. I don’t want Blackbird to just be the best Australian venture capital firm. I would like it to be Australia’s best investment firm, and even one of the world’s best investment firms.”
If that seems hyper-ambitious, it’s also very on-brand. Each of Australia’s big three VC firms has a distinct persona, and Blackbird is moonshot. “We’re about having great ambition,” says Scevak. “We’re for the hungry and unproven.”
When he co-founded it in 2013 with Richard Baker, neither had any investment track record. Scevak’s most notable achievement was starting a business with Mike Cannon-Brookes, a friend from uni. “It was Mike’s other business, not Atlassian,” he says. Cannon-Brookes was one of Blackbird’s initial investors and this year he became its chairman. The entire fund basks in his aura.
The persona of AirTree, says Blair, is “feet on the ground, no-bullshit investors who are backing ambition.” Its investments include Pet Circle, which began with “two people in a room and a ferret eating the dog food” and now generates $300 million in annual revenue, right through to fast-growing Cloud Guru, which trains engineers in cloud computing and whose founders are so revered in their niche that they’re asked to pose for selfies.
AirTree reflects the glow of Daniel Petre, who was one of Bill Gates’ key executives at Microsoft. “We aren’t afraid of ambition,” says Blair, 52. “Some of our best companies are doing things like lasers in space. But I think authenticity counts. People like feet on the ground, practical support.”
Square Peg makes investments locally and in Israel, Asia and the USA. Its trophy founder is Paul Bassat, co-creator of online jobs network Seek, and it’s self-consciously and emphatically focused on its entrepreneurs. “Where we are today is a real founder mindset,” says co-founder Tony Holt.
Thinking this way means locating your headquarters in Surry Hills, the heart of Sydney’s start-up scene. Nearby successes include Canva, Deputy and Rokt, all of which Square Peg has backed. “Do a 500-metre radius around here and there’ll be $1 billion of new revenue that didn’t exist when we started,” says Holt, aged 52 and wearing Square Peg’s own version of the branded start-up T-shirt. On the boardroom table there’s a container of colourful pencils, each with an inspirational catchphrase: Unleash Curiosity, Anchor to Optimism, Be Yourself.
If the sector is enjoying a purple patch, Holt says it’s earned it. “To a degree we’ve been selling a promise. Now, we’re not selling a promise, we’re delivering returns to investors,” he says. “I’ve always had the confidence, today I’ve got the data as well.”
In the past nine months Square Peg has paid out $250 million to investors – a “really significant return”, he says. But he won’t say what the return is for each dollar invested. Why not? Well, the oldest fund is only eight years into an expected 10-year life cycle. Also, Square Peg doesn’t want to attract the wrong sort of investors. Basically, it likes to keep things tight.
And it can. Because right now, the big three established firms are all turning money away as new investors, including superannuation funds, flock to the sector. Hostplus and First State (now Aware Super) were the first to dive in, in 2015. Since then HESTA, Sunsuper, Statewide Super, TelstraSuper and NGS Super have gotten on board. The wall of redemptions due to COVID-19 has tested Hostplus’ enthusiasm for the high-risk, highly illiquid asset class. But AustralianSuper has stepped into its place; in the past six months AustralianSuper’s Terry Charalambous says he’s committed more than $200 million to Square Peg and Blackbird.
Should you want to get your own exposure, but you lack the deep pockets of big super, or the connections of a family office (the original backers of the current wave of VC), then there’s one other way you can get your foot in the door – be a successful start-up founder yourself and make the time for mentoring as well as networking events.
“Founders want to be involved with investors who can bring something and who’ve had a degree of success,” says Holt. “There’s an element of repeatability in VC.” This reinvestment of capital and expertise, from proven entrepreneurs to the unproven, is what Scevak calls “the magical circle of life”. It’s a welcome shift from the first tech boom in the 2000s when founders took the money and moved to Byron Bay.
I think the only variation in history is progressively uncovering those who are underestimated, investing in so-called nerds …
— Niki Scevak, Blackbird Ventures
This all serves to give the VC industry a clubby feel, an asset class where to get a ticket you’ve got to be rich and you’ve got to believe. The big three are far from the only venture firms in the ecosystem, but they get most of the attention because they bagged Canva. (AirTree points out that without Canva, its first fund would still be in the top-quartile performance.) Of the other firms out there, some are niche, some are corporate-backed and second-tiers. Following quickly behind them is a new generation of smaller funds – but they’ll need to find their Beyonce to eclipse Mariah.
Blair, like his peers, recoils when he’s asked how to get into the VC club. “I don’t like to call it a club. It’s more of an ecosystem,” he says when asked how to get your money into a fund. “It’s hanging around incubators, it’s helping out at accelerators, it’s mentoring uni students, it’s projects on diversity, it’s sitting on boards.”
So, right space, right time, right direction. What could possibly go wrong? “Everyone wants to be in VC. We can get stuck up our own bums if we’re not careful,” says Blair. Displayed prominently on his laptop is a Do The Right Thing bumper sticker from the 1980s anti-litter campaign. It’s a visible aide de memoire that reputation matters, and that a typical VC firm has to handle the fallout from a lot of failing businesses; starlets who fizzled. “It’s surprising how few people act like a human being through all the ups and downs of a start-up,” says Scevak.
That goes to branding. But the existential threat is when the valuation of a hyped-up company crumbles as the outside world probes whether it will ever turn a profit. In September 2019, SoftBank Vision – the world’s largest tech-focused VC fund – pulled the float of WeWork which had been valued as much as $US47 billion and is now valued at just $US2.9 billion. The shadow of WeWork still looms large. And there’s a touch of that story in Zoox, the driverless-car company that was one of Blackbird’s first investments. In mid-2018 it was valued at $US3.2 billion. Two years later it was reportedly sold to Amazon for $US1.3 billion.
Having failed to jump on board Atlassian before it floated in 2015, local VC firms then missed Afterpay as well as Zip. The short answer as to why they missed the latter, is that a tax break designed to boost funding for start-ups specifically excludes those that lend money. (That tax break was capped at funds of up to $200 million. It’s noteworthy that all three VC firms have, since late 2019, raised funds bigger than that, such is their confidence in the returns they can deliver.)
Still, the sector hasn’t really passed the ultimate acid test – spawning companies into successful ASX listings, or ones that are taken over by a multinational. Prospa, backed by Square Peg and AirTree, hit the ASX in June 2019 but the shares are trading at a quarter of the issue price.
Square Peg has had one standout float – Fiverr, although that’s an Israeli business floated on the New York Stock Exchange. The exception is RedBubble – backed by Blackbird – which floated in 2016. Its shares have hovered around the issue price until this year when they’ve increased eightfold.
There are a host of other Australian start-ups backed by local venture capital with billion-dollar valuations, including SafetyCulture, Airwallex, Culture Amp and Deputy, but none are being readied to float. Instead of hard exits, be it via an IPO or a takeover offer, investors are being handed back some of their returns through deals known as “secondaries”. That’s where a VC firm slices off part of its best companies and sells them to new investors at the higher valuation.
But if there’s a willing buyer, then who’s to quibble with the valuation? Indeed, what’s the point of valuations when your business is about finding that one megastar? “Are there overhyped companies out there? Absolutely,” says Holt. “But the truth is we spend really little time thinking about the value that we invest in … We spend a lot of time thinking about the founders and their attributes.”
Hence VC’s current obsession: figuring out what the next step change in technology will be. Blockchain? Artificial intelligence? Space? Then comes finding the company that’s in the prime spot to profit. And then finally the really tricky part – avoiding the groupthink that means you arrive at the same conclusion as your competitors. If everyone thinks the same, you don’t end up making much money. “We are all contrarian,” says Blair, pausing for emphasis, before finishing up the sentence: “together.”
But get all three right, and you’re looking at a once-in-a-generation kind of return, says Scevak. And so for Blackbird’s next investments he’s looking further afield. “Nearly all our investments are before revenue, before the product, so we’re investing in idea-stage companies. I think the only variation in history is progressively uncovering those who are underestimated, investing in so-called nerds with no business experience. That was controversial 10 years ago. That’s not controversial now.”