Tell us a bit about Telstra Ventures and your background and role?
Ten years ago, we saw an opportunity to build an institutional-grade venture capital firm with a revenue value-add that would differentiate us from top management teams. 90%+ of venture firms can’t generate revenue for their portfolio companies.
Over the years we have grown this Revenue Bearing RelationshipsTM capabilities from under $1M in 2011 to over $60M in 2021 and we expect to generate $1B cumulatively by 2026. We have always had sector specialist investors who are well networked in their spaces. Since 2017, we have complemented these investors with data scientists to collect, analyze and augment their investment decisions. This strategy has resulted in nine IPOs (BigCommerce, Box, Cloopen, CrowdStrike, DocuSign, GitLab, Skillz, Snap, and Whispir), eleven strategic M&As (Auth0, CloudKnox, Elastica, Elemental, Kony, Nexmo, Nginx, Ooyala, Rancher, TeleSign, and VeloCloud), and seven additional Unicorns (Asapp, Blockdaemon, FTX, MPL, Qiniu, UBtech, and Xtransfer).
Matthew Koertge and Mark Sherman, Managing Partners, both have 20+ years of VC investing experience. Matthew having worked at Fujitsu as a software and hardware design engineer, VC investor at Macquarie Bank, and VC / PE investor at Deutsche Bank. Mark having built the software practice at the tech investment bank, Robertson Stephens, and as a software GP at Battery Ventures.
How would you describe the opportunities in the technology space today?
We see the best opportunities in software and digital companies that are in the early commercialization phase of their products. On average, our portfolio companies investment have $4M in revenue / ARR in the year prior to us investing and $14M in revenue/ARR in the current year when we are investing. Identifying these winners early - provides attractive MMs and IRRs, aligns to our Revenue Bearing RelationshipsTM value-add, and positions us well relative to competing sectors of VC. We like being earlier than the billion-dollar growth funds, where capital is a commodity and often the opportunities for attractive returns are muted. At the same time, we like investing later than the competitive 100’s of pre-seed / seed / pre-revenue Series A firms, which often have high loss/mortality rates.
Can you tell us more about your “Strategic Growth Investment” approach?
Our first priority is to find the best next-generation software and digital companies. By “best” we mean differentiated product-market fit, high-quality executive teams, constructive market trends, and emerging, positive financial models. When we get this right, almost all the other “pieces” fall into place. The other pieces include identifying these companies early and building a relationship with them. Having a strong differentiated value-add proposition. This is the “strategic” in Strategic Growth Investment, which we have with Telstra, Australia’s largest and one of the world’s most important communications operators as an LP and partner. We generate revenue for our portfolio companies by selling to Telstra and through Telstra to its customers. In VC, returns are driven by identifying market leaders early that take off in a timely manner. Our strategy is that making returns for investors first is our top priority and then driving strategic value gives us a difference that adds value to our portfolio as well as provides differentiation that enables us to get access to the best companies.
How would you say your market position sets you apart? What types of opportunities do you like to focus on, and how do you originate them?
There are two choices that we have made that set us apart: what type of investments we focus on and how we interact with the ecosystem. We start with leading businesses that use a variety of software and digital technologies to disrupt or transform an industry and customer base. Leading businesses typically have top-rated products, management teams, favorable industry trends, and high growth financial performance. We narrow our aperture to focus on companies that are post-product and post-revenue, but still relatively small (50% between $1M and $10M revenue, 30% between $11M and $20M revenue, and 20% with $21M+ revenue). We like this stage because the companies are less risky than the pre-seed and seed-stage investing world while at the same time we can generate better money multiples than late-stage growth investing. We only work in a few geographies the USA, China, Australia, and other parts of Asia. Lastly, we are different in how we operate. We source our investments with data science and sector specialist investors. Data science enables us to screen and benchmark 100,000+ companies to identify, evaluate and compare winning emerging companies. Moreover, we win competitive investments because we can generate revenue for our portfolio companies by having them sell to Telstra. While 90%+ of venture firms do not have the ability to generate revenue for their portfolio, we have generated $360M so far in revenue for ours.
How do you see the VC industry evolving?
We see capital continuing to flow significantly into VC for a few reasons. LP investors are shifting more allocation from lower interest rate fixed income positions (10-year Treasuries from 2.5% to 1.5% over the last 5 years) to public equity and private equity seeking better returns. Traditional enterprises are being disrupted by software and digital-enabled challengers. In order to understand better the trillions of dollars of public equity value, LP investors will need to understand the venture ecosystem better to understand the longer-term impact on their public positions. Within the industry, VC firms will need to continue to differentiate across two primary axes: sourcing and value-add. On deal sourcing, we believe that VC will be 50% human and 50% data science-driven over the next 10 years as more data about emerging companies is digitized. We have invested significant time, headcount, and capital in data science to source new investments earlier, aggregate more information to our decisions and shorten our time to decision. On value-add, early commercialization companies will seek investors that can help them scale their revenue, teams, geographies, and business processes, which is why we have built our Revenue Bearing RelationshipsTM capabilities. Early-stage companies will seek input from industry sector specialist investors with deep product-market fit domain. Later-stage companies will seek capital at attractive terms quickly from more return commoditized late-stage investors.
What opportunities and threats do you see for private market investors as we head into a new year?
Opportunities for private market investors will be derived from GPs having a differentiated competitive advantage in deal sourcing and value-add at the firm level for the portfolio. Compelling investment returns will be generated by company and sector investment selection. We believe that some established software and digital sectors will continue to drive outsized returns: cloud will be driven based on shifts to Kubernetes (see Upbound); cybersecurity will continue to drive new company formation as new trends such as API / microservices agile development will drive the needs to protect and manage these developments (see Cequence), and networks will be pushed to new frontiers with 6G and edge computing (see Cohere). At the same time, we are always looking at emerging themes and spaces, such as crypto/blockchain which are likely to be a significant investment theme for VC (see FTX a crypto derivatives exchange, and Blockdaemon a blockchain infrastructure software platform). SaaS-ification of external functions has been productive for us (Forage for recruiting and Enable for rebates in B2B channels). AI-ification of health care will drive billions in market cap. (see Lively for HSA for SMBs and ClosedLoop.ai for outcomes analytics).
Any parting thoughts?
Reimagining the digital consumer has also been a fruitful investment area for us. Competitive mobile gaming has created two unicorns in our portfolio (Skillz and MPL). Messaging-based commerce has driven younger adults to purchase travel and basic e-commerce items over WhatsApp, FB Messenger, and SMS (see SnapCommerce). Lastly, the digitization of sports is an enormous macro trend with esports in gaming (see TSM), daily fantasy sports reimagined on mobile (see Sleeper), and the proliferation of sports-related gaming requiring API driven wagering algorithms (Swish).
We are incredibly optimistic about the future given the magnitude of the opportunities before us as well as the quality of the firm that we have built. We should close by saying that we have 21 quality people on the team, which we feel privileged to work with every day and have worked hard to build a culture that is open, flat, and performance-driven, which we believe will scale for decades to come.