August 02, 2022

AFR: interview with Paul Wilson on tech valuations

Via afr.com


Canva downgrade sparks valuation rethink for local tech

The fallout from the tumbling value of Australian tech darling Canva has begun to spread across the local industry, as more superannuation-backed and listed venture capital funds re-evaluate their start-up portfolios and set more realistic valuations.

Square Peg Capital moved first in downgrading the valuations across its portfolio of local start-ups, including Canva, earlier this month, and Blackbird Ventures took the razor to its own valuations last week, with the design software company marked down by 36 per cent by both funds from $US40 billion to $US25.6 billion.

Australia’s biggest venture fund manager AirTree Ventures will write to its investors this week, having re-evaluated its own portfolio, which includes Canva and a raft of Australia’s prominent start-ups including Milkrun and Eucalyptus. A number of other funds spoken to by The Australian Financial Review have also marked down valuations due to the so-called tech wreck. The challenging funding market conditions have already triggered some companies to collapse, including property tech player Yabonza and IPO hopeful Metigy, who went into voluntary administration last week.

Leigh Jasper, who made his fortune as a co-founder of construction software company Aconex, said his secondary fund SecondQuarter Ventures had brought out the red pen following Canva’s downgrade. SecondQuarter, which buys parts of existing stakes in start-ups and venture capital funds from other VC funds and employees with large shareholdings, owns a stake in some of Blackbird’s funds.

Mr Jasper said the fund had bought these positions primarily to get exposure to Canva.

“We were taking a synthetic position to get exposure to Canva and the best way to do it was through multiple Blackbird funds,” he said.

“When a fund is re-valued, we’ll reflect that value.

“So the returns we’ve shown to date will reduce, but our internal rate of return was near triple digits. While it’ll have settled back now [after Blackbird marking down its funds], it’ll have only gone back 5 per cent to 10 per cent... we’re comfortably up in a short amount of time.”

As well as marking down Canva by 36 per cent, Blackbird cut the value of some of their funds by 30 per cent compared to the prior quarter.

But, Mr Jasper said the position in Blackbird was an exception, and SecondQuarter was comfortable with the valuations of its other investments. SecondQuarter’s portfolio includes Edrolo and Go1, both of which have raised new rounds in the last two months, but also Culture Amp and SafetyCulture - two unicorns whose valuations have yet to be tested in the current climate.

“We’re investing in high-growth companies. In most cases... we understate the values because if a round was done a year or two ago, the companies are then far bigger than when we invested,” he said.

“We’re not paying crazy multiples, and even if there is some multiple compression, the growth has outweighed it.”

AirTree Ventures co-founder and managing partner Craig Blair would not comment on the fund’s revaluation intentions ahead of sending its investor letter this week.

However, he said there’s no argument that the tech market “got too hot for a couple of years”.

“It’s just a statement of fact,” he said. “It’s a healthy reset and a reset that we had to have. Valuations got too high, investors underpriced risk, and in some ways it’s a return to what venture was like for 20 years before the peak.

“But, it changes nothing for companies. And what matters for most investors is what happens in the next five to 10 years, not now, except for super funds.”

The revaluation of start-ups has relevance outside the VC funds themselves, as the biggest local players are backed by superannuation funds including Hostplus, AustralianSuper, Sunsuper, TelstraSuper and Statewide Super.

Hostplus in particular has come under pressure to provide more clarity about the valuations of its unlisted assets.

Dean Dorrell, co-founder and partner at Sydney-based VC fund Carthona Capital, which counts Hostplus among its backers, said his fund conducts valuations of its portfolio companies on a monthly basis, using International Private Equity and Venture Capital Valuation (IPEV) guidelines.

These guidelines are endorsed by the Australian Investment Council, and were last amended in March 2020 to account for impacts from COVID-19 on the market. Revised guidelines are expected by the end of this year.

Carthona has digital debt collector Indebted, payments firm Paytron, New York-based property tech firm Cherre, car financing fintech Driva and carbon accounting and reporting start-up Pathzero among its portfolio companies. Mr Dorrell said its most recent valuation had declined.

“It’s inevitable that the technology industry will have ups and downs. Lower valuations will happen from time to time, but this is a very long-term game and most funds have 10-year lifetimes,” Mr Dorrell said.

Not all doom and gloom

“We have seen some down rounds in our portfolio, but equally there are companies that are raising at higher valuations. It’s not all doom and gloom out there - especially for companies dealing with ESG and especially carbon - and there are companies that have made significant progress but are getting reduced multiples which equates to flat rounds.”

Mr Dorrell said it was important to note that VC firms like Carthona usually hold preference shares that protect their investment.

This means that a $1 reduction in company valuation does not necessarily lead to a proportionate reduction in the value of a fund’s holding.

“Listed companies aren’t allowed to have different preferences, so this makes a comparison between listed and unlisted companies not ‘apples for apples’,” he said.

Citing a report into “megatrends” released by the CSIRO last week, which predicted the next wave of digital innovation would generate between $10-15 trillion globally, Mr Dorrell said he remained convinced that Australian investments in tech start-ups would pay off.

“Australia is in a unique position to invest for the long term through our superannuation system. The industry super funds are really leading the way on this – especially Hostplus,” he said.

Unlike many of the large VC funds, seed-stage investor Rampsersand does not have any superannuation fund LPs, meaning it has less pressure to regularly disclose valuations.

However, its co-founder Paul Naphtali said the fund still does quarterly revaluations to be transparent with its high net worth backers.

The fund also follows AIC standards. It has reviewed its whole portfolio in the last few months and identified companies that are more vulnerable.

“It doesn’t necessarily result in a formal mark down, but we’re honest with investors about where we’re vulnerable, and we’re glad there aren’t many,” Mr Naphtali said.

Bailador Technology Investment is unique in Australia as a publicly listed venture capital fund and its listed status gives it more obligations than other funds to disclose its portfolio valuations.

Bailador had a strong 2021 with a $14.6 million realisation in the initial public offering of travel tech firm Siteminder, while retaining a significant stake; a $118.4 million exit from the sale of Instaclustr; and $19.9 million for the sale of its holding in Standard Media Index.

In its most recent review of its portfolio, completed at the end of June, it wrote down the value of e-commerce platform Nosto and Access Telehealth by 20 per cent and 24 per cent respectively, while leaving the valuations of InstantScripts, Mosh, Brosa and Rezdy untouched.

Last week it invested another $5 million in InstantScripts, an online digital healthcare platform, in a deal that raised the company’s valuation by 10 per cent.

Bailador co-founder and managing partner Paul Wilson said his fund had kept its foot off the gas in terms of private company investments in the two years before June 30, with only $48.3 million deployedbecause valuations were over-cooked.

The recent market downturn, he said, was providing a “necessary correction” in the private tech company market, which presented opportunities for better deals on the horizon.

“Last year our reaction to the market was to say ‘let’s see what we can sell and get cash for at these valuations,’ and we realised some investments at good prices,” Mr Wilson said.

“We’ve currently got more than 50 per cent of our NTA (net tangible assets) in cash, and we couldn’t be happier with that because we are seeing more reasonable valuation expectations in the private rounds.”

Bucking the trend

While most venture capital firms are making some valuation markdowns, OneVentures stands out against the pack. Managing partner Dr Michelle Deaker said the fund had no intention of writing down any investments.

“OneVentures took a pretty cautious approach to tech valuations last year. Our auditors saw no reason to bring in external valuers as our portfolio was already conservatively held. We’ve had no write-downs as a result,” she said.

“The auditors said if we wanted to bring in an external valuer for two companies we could do so to potentially write them up (i.e. too conservatively held) but we felt this was unnecessary.

“Most of our companies are [profitable], or have a path to profitability, and decent cash runways, so there is also limited risk on funding with us also having reserved capital available to support future rounds.”

But with profitability still a long way off for most start-ups, Bailador’s Paul Wilson said founders needed to shift their focus to operating in a “new normal” for a potentially lengthy period of time.

He said quality companies - like Canva - would be able to grow back into their previous valuations by demonstrating performance and continuing to grow sustainably.

“Previously the market was rewarding founders for just trying to grow as fast as they could, and I think it was always going to happen that we would have this correction and an adjustment back towards good unit economics,” Mr Wilson said.

“The founders who were honest with themselves and are genuine business people, must have realised that at some point, they’ve got to be able to produce a profit. And if they weren’t thinking that way, then it probably was not going to end that well.”

Canva’s response

After its valuation was written down last week, Canva said it was confident that it would work its way back to its higher price, and saw opportunities to grow due to its large cash reserves.

When asked to elaborate on how it intended to grow, and how staff were handling the changing value of their stock options, a Canva spokesman said attitudes remained overwhelmingly positive.

“We’re using this period to continue to double down on efforts like internationalisation, new product offerings and the incredible opportunities ahead as we accelerate our efforts in teams and workplaces,” the spokesman said.

“We’re also seeing more interest than ever before from candidates, and in the last six months, received more than 200,000 job applications and have added over 700 people to our team with plans to continue growing throughout the year.

“Ultimately, we’re not distracted by short-term changes in the market. Instead, our team is hyperfocused on continuing to deliver new products and category expansion opportunities that will grow and strengthen our long-term value. Companies with strong fundamentals will emerge from this period stronger than before.”