Month: August 2022

“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 revalued, 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.”

The founders who were honest with themselves and are genuine business people, must have realized that at some point, they’ve got to be able to produce a profit.

— Paul Wilson, Dancer.

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 the 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, his 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 entire 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 realization 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 deployed because 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 made 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 (ie 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 realized 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.”

Canvas’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.”

The Australian Petroleum Production & Exploration Association (APPEA) acting chief executive Damian Dwyer said the industry was already acting to cover supply next year. “There has never been an actual shortfall and there will not be one next year,” he said.

But the move by the Albanese government puts gas producers on notice that export controls could be in place by the start of 2023 for LNG shipments from Gladstone – one of China’s biggest LNG supply sources – unless the industry can guarantee enough uncontracted gas will be diverted to avoid a domestic shortfall.

Electricity futures fell after Ms King’s announcement, sending benchmark prices in NSW for the June quarter of 2023 down towards $200 a megawatt-hour, from about $230/MWh.

Also known as the gas trigger, the ADGSM starts with the issuance of a “notice of intent”, which Ms King indicated could occur at the end of August.

If the minister carries out her threat, exporters would then be subject to government intervention next year to prevent uncontracted gas being shipped to customers in Asia.

Once the notice of intent is issued in coming weeks, gas producers will have the opportunity to provide information on gas production, plant export volumes and the market outlook.

“This is their opportunity to demonstrate that there won’t be a domestic shortfall next year,” Ms King said in Canberra.

Her move follows the release on Monday by Treasurer Jim Chalmers of a damning ACCC report that warned next year could see a 10 per cent gas shortfall if all the industry’s uncontracted gas is shipped offshore instead.

‘Safeguard supplies’

Other changes announced by Ms King in response to the report include extending the ADGSM trigger from January next year to 2030, and renegotiating a heads of agreement with the industry that is due to expire at the start of 2023. Among changes the government will consider is the potential for the trigger to be price-based rather than volumetric.

“These measures announced today will safeguard Australia’s energy supplies,” she said.

“The Albanese government will do whatever is needed to make sure Australians have ongoing access to the gas and energy sources that belong to the people of Australia.”

Opposition resources spokeswoman Susan McDonald said Ms King’s hands were “tied behind her back” and that the crisis was driven by a lack of new supply.

”She knows the answer is more supply, but she’s not supported by her cabinet colleagues. The Labor government must put aside their politics and support projects like the Beetaloo Strategic Basin Plan introduced by the Coalition,” Ms McDonald said, referring to the undeveloped Beetaloo Basin in the Northern Territory.

“Short-sighted bans on developing unconventional onshore gas are coming home to roost.”

The step towards triggering the ADGSM was welcomed by large energy users, manufacturers and trade unions.

“Australia cannot allow our economy to be hollowed out, our manufacturing sector to be savaged, our transition to cleaner energy stalled and our household energy bills to skyrocket because of the planning and market failures of Australia’s gas export industry,” said Ben Eade, chief Executive of Manufacturing Australia.

“Intervention is now urgent and necessary.”

However, one of the nation’s biggest manufacturing bodies, the Australian Industry Group, cautioned the government against holding back gas from international markets, saying that “it will increase global economic pain and worsen the perils facing our allies”.

“Australia must safeguard our energy security but the less we need to rely on export cuts, the better,” said AiG chief executive Innes Willox.

“Prices are likely to be high despite these policy responses, and gas demand reduction will take time and be unevenly distributed. In the short term especially, vulnerable business and household energy users will need financial help.”

windfall tax

Australian Workers Union national secretary Daniel Walton urged the Albanese government to look at a UK-style windfall tax “to capture some of the extraordinary profit gouging that the gas exporters are enjoying as a result of Putin’s aggression in Ukraine”. Prime Minister Anthony Albanese has ruled out such a tax.

The government seized on the ACCC’s report, which it said had set out patterns of behavior that were unacceptable.

Industry Minister Ed Husic slammed the gas giants, effectively accusing them of appropriating unearned profits after spot prices jumped from $8 per gigajoule to $44.

“That is a huge increase and the reality is we have multinational companies extracting an Australian resource to sell to international clients at a price that is squeezing Australian industry and jobs. Something has to be done.”

Ms King urged state and territory governments to step up and “look at what is available to them” to boost supply.

She added that Australia would not have the gas industry were it not for international partners that built the industry with foreign capital and on the basis of long-term supply guarantees.

“We have to respect the investment they have made, the commitment they have made to our country, the jobs they have created in this country,” she said. “By the same token, we have to be assured that Australians will have access to gas.”

Gas industry sources said they expected a revised voluntary agreement to be finalized within the next several weeks that would involve a renewed commitment by Queensland’s three LNG exporters to keep the domestic market supplied.

Ms King outlined seven key principles that would drive the ADGSM changes, including sufficient supply for domestic manufacturers, downward pressure on domestic prices, supporting the energy transition and, maintaining Australia’s position as a “leading contributor to global energy security”.

“Australia needs to be very mindful of any signals sent by any policy changes to our longstanding trade and investment partners around the world who have invested in the Australian economy because of our stability,” said the APPEA’S Mr Dwyer.

“It is even more important to demonstrate consistency, certainty and market stability for the cleaner energy future given these same trading partners are those Australia will work with to build our future hydrogen export industry.”

Damage reputation

Concerns are growing that any move to cap LNG exports would damage Australia’s reputation as a destination for foreign investment, given the reliance on Australian LNG by significant investors and customers in the Gladstone LNG projects from China, South Korea and Malaysia.

That would overshadow the individual financial hit to Queensland LNG players such as Santos and Origin Energy, said MST Marquee analyst Mark Samter.

“As a country the downside risks of haphazard intervention are almost unlimited, but from a corporate perspective, whilst not ideal, they are relatively immaterial in my view,” he said in a note.

A spokeswoman for Australia Pacific LNG, one of the three Queensland exporters which is partly owned by Origin Energy, said that broader actions are needed to solve the east coast’s energy crisis.

“We need to look beyond LNG producers, who invested billions of dollars to develop the LNG industry underpinned by long-term LNG offtake commitments to overseas buyers,” she said.

“To solve energy challenges on the east coast of Australia, it remains important to take steps to encourage investment in new supplies near southern markets closer to demand centres.”

Credit Suisse energy analyst Saul Kavonic pointed to “a noticeable deterioration in the objective quality of the ACCC report” which he also said “appears to be written with more of an attempt to provide ammunition for greater regulatory intervention, rather than to inform market participants” .