“This quarter, we have noted down a small subset of late-stage companies that have a large impact on our funds’ holding value.
“These markdowns aren’t a reflection of our conviction in the relevant companies. They’re an acknowledgment of movements in public comparables for our material, late-stage positions.”
While AirTree’s accounts have been audited since the fund launched in 2014, it was the first time it had an independent valuation conducted, which was done by big four accounting firm EY.
The move by AirTree follows the country’s other biggest VC funds, Blackbird Ventures and Square Peg Capital, which also marked down Canva by 36 per cent to $US25.6 billion, wiping $US14.4 billion of its value.
It is understood the local funds joined forces to get an independent assessment of Canva’s valuation, with the support of the superannuation funds invested in them, leading to the consistency in their mark-downs.
The decision from the local VCs followed US-based investors Franklin Templeton and T.Rowe Price making moves earlier this year to mark down the value of Canva in some of their funds.
As part of AirTree’s quarterly update to investors, it also shared performance metrics of its funds, stating that to date, it has had 11 full or partial exits, at an average of 2.1 times the value in AirTree’s books.
“This gives us some comfort that we’ve struck the right balance on
holding valuations,” AirTree wrote.
Other later-stage companies owned by AirTree include Employment Hero, Pet Circle, education marketplace Go1 (which recently doubled its valuation and raised another $US100 million) and residential solar power buy now, pay later financier Brighte, which laid off 15 per cent of its workforce in June.
AirTree also revealed in its letter that it had sold part of its core 2014 fund last year, which delivered a 3.3 times return on capital to investors, and realised an internal rate of return of 80 per cent, putting it in the top 5 per cent of funds globally of that vintage.
AirTree managing partner Craig Blair said the fund expected to maintain its historical pace of investment, despite the tech market downturn, and AirTree’s focus would be on backing companies that were still early in their journeys.
“Like any industry, we can make mistakes and get too far over our skis and calling us out and being grounded is important if you’re serious about building a long-term venture fund,” he said.
“Yes, we have companies that may not make it. Failure is a part of our industry. But, at the core, we have very, very smart, talent people choosing careers in entrepreneurship … and we firmly believe tech will solve some of the world’s biggest problems, be it in energy, health or food.”
The VC fund announced in February that it had raised $700 million across three new investment vehicles, including the largest seed fund in the country, and a dedicated fund for Web3 companies.
State of the market
In the first six months of the year AirTree invested more than the fund did at the start of 2021, in contrast to Blackbird and Square Peg.
There has been a substantial contraction in deal values and volumes across the local market, with the latest Cut Through Venture figures indicating $228 million was invested across 35 deals in July. This was almost two thirds less than the prior year, and down $181 million on June this year.
The tough funding market has led start-ups to lay off staff and alter investment plans to extend their capital runways. Some have also already collapsed, including IPO hopeful Metigy which was raising capital at a $1 billion valuation, a property tech start-up founded by an ex-Macquarie Group team called Yabonza, and multiple grocery delivery players.
While the AirTree letter said the next few years hold a “unique opportunity” for companies that can operate efficiently to recruit more easily and take market share, the VC cautioned that capital efficiency would be paramount.
“For those unable to extend runway sufficiently, we’ll lean in to help portfolio companies fundraise,” the letter said. “We anticipate some down rounds, and a higher failure rate than in recent years.”
When asked how long the downturn would last, Mr Blair said trying to pick the market cycle was a “mug’s game”. “The companies we invest in are driven by structural tailwinds, they’re not cyclical,” he said.
“We’re in the business of making eight to 10-year bets and that’s what our investors expect from us.”