Over the past few years, Australia’s largest venture capital funds have used eye-popping returns to entice superannuation funds and wealthy families to sink hundreds of millions into their funds. But those returns are in large measure the result of a bet on one mega-successful startup. And now the lofty valuation of that startup, Canva, is being questioned amid an unfolding tech stock rout.
Canva founders Cameron Adams, Melanie Perkins and Cliff Obrecht. Credit:Peter Rae
Canva, which makes graphic design software, is undoubtedly Australia’s premier startup success story, with over $1 billion in annualised revenue and 85 million users. It last announced funding at a stratospheric valuation of $US40 billion ($55 billion). But in late April, one of its US backers, investment fund Franklin Templeton, slashed the carrying value of Canva in its funds by 58.5 per cent.
Confidential investment decks from the country’s three leading venture capital funds — Blackbird Ventures, Square Peg Capital and AirTree Ventures — obtained by The Sydney Morning Herald and The Age show how dependent their portfolios and returns are on the success of Canva.
Rough arithmetic on the figures seen by The Sydney Morning Herald and The Age suggest that late last year Blackbird’s 15 per cent stake in Canva accounted for more than 75 per cent of the value of all its investments, which across funds raised between 2012 and 2020 had a net asset value of about $7 billion.
Square Peg’s Canva stake around that time was worth $US800 million. Canva is a significant proportion of AirTree’s holdings too, as well as playing a key intangible role for all three funds, with its story prominently included in their latest pitches to investors.
If the same kind of valuation markdowns applied by Franklin Templeton to Canva were replicated across the portfolios of Blackbird, Square Peg and AirTree — a scenario unlikely in such simple terms — billions would be wiped from their funds’ value on paper.
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Franklin Templeton’s move to slash the value of Canva on its books comes amid a dramatic reappraisal of publicly listed and privately held tech businesses. Brand name stocks such as Netflix (down 67 per cent) and Meta (down 41 per cent) have been hit hard this year amid concerns about inflation and higher interest rates, while prominent private start-up businesses have been forced to raise money at lower valuations, or in some cases, such as buzzy newsletter service Substack, abandon attempts to raise fresh finding altogether.
Blackbird did not directly answer questions about its valuation of investments or how much of its portfolio value is tied up in Canva but stood by the company’s long-term prospects.
Square Peg said it will update its valuations next quarter, beginning June 30, with the worth of companies deemed “material” determined by an independent valuer. AirTree will update its valuations on its usual quarterly cycle, also on June 30.
Each of the funds stressed that even without Canva, their performance is strong compared to competitors in Australia and abroad. And it is typical in venture capital for one or a few great bets to carry many other investment decisions, given high failure rates are expected among startups. At a lower valuation, Canva would still be an impressive pick for the funds that have invested in it, especially Blackbird, which got into Canva early and repeatedly backed it over many years. Even with a steep markdown, Blackbird’s investment in Canva is poised to deliver its investors an enormous return.
Yet as important as Canva is to the Australian tech sector alone, it is also a marker of how far the sector has dropped from its recent highs.
Blackbird advertises its funds under the banner of seeking the “wild hearts with the wildest of ideas” even as messianic founders such as WeWork’s Adam Neumann are being pilloried in popular culture. Credit:Blackbird
AirTree’s co-founder Craig Blair acknowledged in an interview that the price paid for startup investments over the last year had soared, but disputed that AirTree had done too many deals at too high prices.
“I think it’s true to say that any investor who invested in growth stage companies in the last 12 months has... certainly paid valuations we’ve never seen before, and may never see again,” Blair said.
He said AirTree was disciplined in its investments, had accounted for valuations returning to long-term averages, and had paid the right price to reflect markets at the time deals were done. Paul Bassat, who co-founded jobs site Seek in 1997 and then Square Peg in 2012, told The Sydney Morning Herald and The Age he was broadly confident in the decisions made while the market was very hot, pointing to stakes in companies that had good internal economics and reserves of money, but also conceded times would be harder.
“In the current environment, we probably expect over the next six or 12 months, some write-downs, we’re going to see more failures in venture capital portfolios for the next year or two than we’ve seen the last year or two,” Bassat said. “But I wouldn’t necessarily be thinking that as at June 30, there’ll be significant write-downs.”
How does venture capital work?
Venture capital funds sign up investors, such as superannuation funds or wealthy individuals, who are willing to risk money on high-risk, high-reward bets on start-ups.
The start-ups they invest in are almost always unprofitable, and by design because they are only just beginning. But as a general rule, venture funds expect between two thirds and three quarters of the investments they make to fail, with all the returns of a fund generated by a handful of massive successes.
- In an exchange for an influx of cash, often contributed through multiple funding rounds as the business grows, the company grants the fund equity, or shares, and often a board seat.
When everything goes well (which is the exception, not the rule), the start-up grows and eventually achieves an “exit” - either through an initial public offering on a sharemarket, or through a sale to a bigger company. The venture funds and their investors usually book a significant return on their initial investment.
In an emailed response to questions, Blackbird co-founder Niki Scevak projected a bullish outlook.
“Whilst multiples have contracted, we aren’t seeing anything to suggest that the quality of companies being formed in Australia and New Zealand is diminished,” Scevak said.
A spokesman for Canva pointed to the company’s positive metrics and noted there was variance in valuations, including some investors who had not changed their valuation and others who had reduced their assessments by 10 or 20 per cent. ”Valuations with institutional investors are being heavily influenced by public ‘peer comparisons’ which are turbulent primarily due to the broader macroeconomic environment,” the spokesman said.
AirTree’s Craig Blair, Blackbird’s Niki Scevak and Square Peg’s Paul Bassat.Credit:Dominic Lorrimer / Oscar Colman / Arsineh Houspian
Blair stressed that venture capital funds are ultimately judged on the cash they return to investors.
But the valuation plunge will still reverberate across the sector. It will hurt startups trying to raise funding by forcing them to hand over more equity in return for the cash they need to survive — or face going under. Others will have to spend less cash, hire fewer people and reduce marketing as they try to make existing money last as long as possible and show investors they have a path to turning a profit. Those startups that raise at lower valuations also face the prospect of demoralised staff, who had been expecting their shares would keep rising in value.
Square Peg, Blackbird and AirTree all said they would not start introducing harsh non-standard clauses into deals to protect their investments, despite the downturn, with each emphasising that they had funds to deploy and were seeking good companies. Some of the strongest startups will likely benefit from a diminished war for talent if the sector cools.
On the other hand, the VC funds will be hit indirectly because investors, such as the nation’s retirement funds, will not see nearly as rosy a picture when considering tipping in money into their next funds. In a deck dated 2021, Square Peg is seeking $US550 million across its fifth generation of funds, targeting an initial close in February this year and final close in the second quarter.
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“We’re not raising and we won’t be raising until well into the back end of next year,” said Blair of AirTree. Square Peg’s Bassat said it was “essentially done” raising its latest round of funds, though they had not closed.
In the 2022 Blackbird funds deck seen by The Sydney Morning Herald and The Age, it is asking for $1 billion, split across two Australian funds and one in New Zealand.
“We’re currently raising our fund and it’s coming together well so far,” Scevak said when asked if the funds had closed.
Blackbird is advertising its funds under the banner of investing in “wild hearts with the wildest ideas” — highfalutin language at a time when messianic founders such as WeWork’s Adam Neumann are being pilloried in popular culture, but Scevak is adamant the phrase stands.
“Even more so!” he replied when asked if it was right for the times. “As markets and economic conditions get more difficult, those businesses offering only incremental benefits suffer, and it’s those with big ambitions that are looking to create real change and solve the biggest problems that succeed.”
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