Australia's Most Powerful VCs Join the Pod

23:03And a company like Holter that's doing super well at the moment and worth a couple of billion dollars. We can claim that one. Close enough. Yeah. Yeah. Close enough. So there are a bunch. And maybe give it two or three years and you will have heard of a whole load more of them. So CESPocalypse has massively impacted public company valuations in the past six months. REA. And these are the bluest of blue chip tech businesses. REA down 60%, Figma 75 % or 76%, Salesforce 50%. You guys obviously don't trade in public companies. Have you guys though marked your businesses down in any way as public company comps have dropped?

23:43Yep. So we, our large businesses, the material to our funds get valued by an external valuer and mark to market. They look at a whole load of different things. They look at the market comps. They look at transactions, obviously, and funding rounds. And so we have seen markdowns in the larger SaaS companies across our portfolio, just along with these markets. So, yeah, absolutely. But also remember that we don't mark up when public markets go up. So these companies are coming off what was really until the beginning of this year, 26, super high valuations. SaaS companies were back up in the 20s revenue multiples and more, 30s, 40s, et cetera.

24:29And we were never marking up to that level. So Figma coming off 75%, that's off that ridiculously high and crazy valuation. And so our values are probably not off as strongly, but we never marked them up with the markets quite as strongly as well either. We had the same. And we all agreed, the three big funds agreed to this independent process that Rick's alluding to really for our superannuation investors whose members are trading in and out. And so this is, as Rick says, it's a quarterly process run by a third-party investor. They look at a whole range of inputs for that. And there has been marked downs.

25:09I would say that's unique to Australia. Yeah. You look at globally, that doesn't happen. So globally, the rule set is I've marked the last round, unless there's some obvious material around is why you mark it down. So what you find as you look at Australian comps, we actually, on the way down, we actually tend to go down quicker than our US counterparts, and then we come back up earlier. So yes, I think we are seeing market downs, but I think there's marked downs you'll see the global investment come follow us in six or four months. And that can be frustrating because you go and talk to overseas investors, and they're like, oh, well, look at the top quarter I'll mark here.

25:46And we know that none of those have been marked down or marked to mark. Yeah. And marked to mark.

25:58How much for your, I don't know if this is public, but your LPs, how much has come from overseas in recent? These massive funds, you guys both raise billion dollar plus funds. Is there enough money in Australia super to cover these? Or do you look offshore to the big endowments as well? So I think the journey that we've been on is, you know, we all started with founders and high net worth individuals and family officers who took a bet before it was obvious and good on them. And then C4A duration came in around 15, 16 and we all became institutional great and they're a wonderful source. And I think more recently we've seen your half hour last round came in from sort of, you know, top tier institutional investors like Harvard and Van Dauwet Fund and LGT and Adam Street.

26:41And I think that's really great. that's great for this whole room because we get they've noticed what's going on in australia we've seen all the hallmarks of you know that we're talking about before high education capital efficient reproducers of annuity quality rates um and and they've taken a bet on australia as they did on israel israel or london and i think that will flow out to other funds so that's something we're we're we're proud of but also i think it's going to flow to the system it's also worth pointing out that there's a lot more overseas interest into australian founders i mean even at the conference this week, we've got 20, roughly, of the 160 are overseas investors.

27:18So Singapore, US, New Zealand, for sure. Is that a trend that you, we've obviously seen that increase over the years, but it feels that there's an acceleration in that. I think it ebbs and flows, really. In 2021, we saw the US firms here in droves. No one's setting up on the ground. That's true. many actually not even stepping foot on the ground but doing a whole load of deals from Zoom. But the competition here went up significantly. And then that boom ended and beginning of 2022, markets got a lot tougher. And suddenly they all retreated back and we hardly saw anyone for a few years here. In fact, we were struggling to get the attention.

28:06So it's pretty cyclical. I'd say at the moment it's pretty good. I think we're seeing, maybe we're in a sort of a bit of a mid cycle in terms of the USVCs taking interest here. I think actually the challenge we have here is a whole load of young, ambitious Aussies just heading over to Silicon Valley. There is such a pull to Silicon Valley right now. And, you know, we can talk about tax situations. Get to that. It's Vetera. Yeah. But I think the main pull now is just this center of gravity for where AI is being created and executed in the world. And so our challenge now is these Aussies going over to YC, et cetera.

28:46I feel our biggest competition in the early stages is YC. It's that young founder heading off there and then getting sucked into the ecosystem there. And that's the thing that we as a nation, as an industry, need to think about. I mean, it does feel that the climate is improving. I mean, it still feels kind of wintry out there, but there's breaths of warm air. And, you know, I sometimes talk about tailwinds and headwinds and the headwinds are real. Like there's a war in the Middle East and, you know, global policy is the challenge and the economy is not in super robust shape. But the tailwinds, I think, are real.

29:18And that is really the massive adoption of AI and the infrastructure spend that's coming from that. I mean, are you feeling the tailwinds outweighing the headwinds? I think this is an incredible time to be alive, to be an investor, to build a company. I think I can't, you know, I think many times in my career, it hasn't been a better time. I mean, yes, there's big disparity between winners and losers, but I think, um, yeah, I think we haven't seen a better, better, better time to invest. The best team in the years is the best time to venture. It doesn't mean it's going to be a straight line from here up.

29:49I think there's a, you know, there's still foster dues and losers that follow and all the obvious things that happen, happen with platform shares. Yeah, and Elon Musk says money has no value in 10 years, so. Yeah, yeah. So, like, I guess, you know, if there's, you've got a bit of timing, but I think it's, I think there's a ton of tailwinds. And, I mean, there are some structural issues we need to talk about, which is this, you know, Australia's moving to Silicon Valley, which I think is a thing we need to contend with. In the past, that's been a good thing. Like, we shouldn't stop that. That brain drain is great.

30:24We get them back, you know, two, three years later with 10 times, you know, the compound interest. But in the short term, you are seeing a lot of people going out there. But in terms of the global market, what a time do we have found? You look at global markets and you guys sound really bullish, but there's a real argument to say that there's some pretty significant bubbles inflating in various parts of the market. You can look at one sense that maybe it's not super bubbly, but in another sense, you've got NVIDIA doing all these circular deals and very Ponzi-like in many ways. And me and I often talk about, is it 97?

30:54Is it 99? Is it 95? Who knows where we are exactly on the spectrum? Where do you guys think we are? And if it is 99 and 2000 is coming in six months, is that a good or bad thing for you guys? So we are definitely in a boom. Maybe I don't use the word bubble, but it's definitely a boom. It's an amazing boom. And I think what's quite amazing about it, and it does stem from the US and the huge amounts of capital there is that we've seen this time and time again when there's a new technology or a new business model. It just gets flooded with capital and there is always overinvestment. But interestingly, it's kind of that overinvestment that makes the new technology work.

31:37And so you get this over-exuberance, you get too much capital, you get an overbuild of whatever infrastructure it is, whether it's fiber optic cables or data centers or whatever, and you know or internet infrastructure um and then you have a crash and everyone sort of licks their wounds and and goes away but what emerges out of that is the is really the the second act and we have the infrastructure then to go and build the applications on top of it and so i think we'll see that with ai as well um i think we'll we'll see that there will be a big correction i don't know i'm not not smart enough to uh suggest i know when it'll happen but i think it's coming towards us but i think it'll like always it's this kind of constructive you know deconstruction that that then you know we all lick our wounds and continue on i think i struggle with bubble because it's sort of it first you gotta you're gonna you're sort of picking the market you know coming into the market and sort of trader mentality but you know we're all taking 10 15 year bets and you've got to play the game in front of you and and surface capital you know daily overinflated deals and there'll be deals that don't work that's how the capital works but if you if you if you take it i don't know where we are either whether it's 97 99 but like i think i can be pretty sure in 10 to 15 years where i have some for hard to be confidence will be way above where we are now um and so i think with that view it doesn't really matter is there an argument that you guys have a lot of money to deploy a crash wouldn't be a bad situation for if you obviously you're trying to exit some stuff and maybe that takes some of your big holdings in the world public side holdings take a bit longer exit, but if you can deploy a billion dollars into 60, 70%, 80 % off wholesale pricing, isn't that a good thing?

33:17That's not how it works, Stanley. I mean, I think we're probably seeing thousands of deals we invest in, 10, 20, 30 deals a year, and they're the best founders. Those prices won't come down. The best founders and the best opportunities will attract a lot of capital, a lot of interest, and you have to pay market price for that. So I don't think there's any value investing in venture. So everything gets harder during the difficult period. Like it does. So I think there's definitely a trade-off between paying lower prices, but then the growth and the uptick in valuation to raise new capital for new rounds is slower and harder.

33:53As Scott Galloway says, employers are cheaper, rent's cheaper. A lot of stuff gets a lot cheaper. Yeah, it does. And that's great. But raising the capital and getting the next valuation gets harder. You guys have got$800 million in capital sitting burning oil in your pockets. Arguably, it's helpful for your LPs to buy in at a lower price than sort of bubble. It feels like you guys both have been, or three of you guys have been pretty conservative in making bets over this bubble period because of this valuation concern. I wouldn't say that. I think we're deploying capital as fast as we ever have.

34:28And I think it's like, of course, we're value sensitive on growth. We have three practices. We have a growth investment practice, which price matters there for sure. But like in the early stage in the venture, verticals, you know, it's about bigger opportunity, great founders, et cetera. That hasn't changed. But I think your crash scenario is interesting. I don't see it so much as like, is it a great time to buy in or out? I think in some ways it just makes, when that happens, and it will happen, it will feel bad. Like we will, but the future will be much clearer. Like we'll be through the crop and then the fishery clearer.

35:02And then with these second generation business models and the infrastructure is set, there will be an explosion of value created in that. And some of the companies in this first iteration will emerge from that rubble and there'll be some followers to come. And in many ways, if you can be there when that happens, that's when the real value happens. Yeah, Lee, the best companies will still raise for whatever the climate is like. So I mean, I could talk a little bit maybe to the angel investment market because we have a group that does that. I don't think the group did any deals or maybe one deal in 24.

35:33very few in 23 uh 25 this calendar year uh they did about seven deals and this year they've done six already so it's definitely you're seeing money come and these are sophisticated a lot of them are exited founders uh you know smart money going to work but they're they're investing off their own balance sheet rather than through a fund so it's a slightly different scenario but you know maybe the that is a very positive sign i think you know yes they are backing good companies and companies that in many ways they're aligned with because they understand the founders because they were one. Yeah, and you probably see the trend quite nicely there.

36:09Whereas for us, for example, we are on a rhythm of doing sort of 15 to 20 new investments in a year. An angel bussy boots to invest. And we are just, we're in that rhythm. And that's... Yeah, so I think an angel is probably a bit more of that angel market. Yeah, they can go in and out of the market. They're going to invest and times are good. And I think you also see the best founders now thinking it's a better time to be raising, because you're going to get better outcome, better valuations, leaning into it a bit more than they were. A few months ago, we had, I think it was described as a shock federal budget, which especially hit, I think, my view, tech founders.

36:49And really, in many cases, raising capital gains tax to 47 % because of the low cost base that founders have. Craig, your co-founder, Daniel, was quite outspoken on this issue. I think you took a different stance as, as, as many, as many co-founders and founders do. How did, how are you guys speaking to founders and, and CEOs every day? How has, how have you found they've reacted to the news? Is there real right hot anger that has been on our pod or have we overstated the real reaction out there? I think like, like all of these issues, you've got to be, there's nuances in here. I think there's probably some over, there was some hyperbolic reactions where, you know, we're going to leave tomorrow because you're like, that was never going to happen and did not happen.

37:33But we are in the world of power law and outliers. You only need four or five people to move and that can change the direction of the whole sector. And yes, there are dozens of examples, simple examples in our portfolio, which are affecting on the ground now. I'll give you two examples. One is a multi-billion dollar company with 60 % of its workforce in the US and 40 % in Australia. They are shifting their hiring because the ESOP's worth more than the US, right? That's just not moving. People are moving. It's just like future roles going to the US. Another example, which is a remote first company worth$3 billion, they've got a program helping their employees move offshore.

38:13So we were trying to bring a CEO back, actually hire a CEO to help sit alongside a founder. And that CEO said no because the option package you're offering wasn't. I think there's three very different examples that's happening around the edge. Now, if those three examples are the company's the care of the future, that's going to matter a huge amount. So this is a disproportionate impact on a few areas. But I think - They've got stories like that. If you extrapolate those small number to the sample size, it's a big number. You know, it's just not good. I mean, it is. I think there is anger right there.

38:46And like a lot of us, you know, we have an advocacy group and it's been quite hot with frustration, I guess, with the way it was handled and the process. And it just felt incredibly clumsy and disappointing. I think there's absolutely the talent issue. And certainly had we been sort of 10 years behind in our journey and we could have moved to Singapore, there's a high chance we would have. And that's where I think the taxpayer loses. And maybe our valuation was low back then, but we could see it ramping up and we just dart off before and get a low valve ramp up. The area I'm most worried about is that really young founder right at the beginning of their journey.

39:30And so, you know, as I said, there is already a pull over there for the reasons that AI is happening so strongly in San Francisco. And unfortunately, this is another push. I think it is really happening right now. So to give you a, and I know he'll, he's okay with me saying this, but I was sitting down with Mitch from NextGen. They're a fund that is basically a group of university students that funds other university students. It's a really cool, super early model, has made 14 investments. 10 of them are moving to San Francisco in the next six months. Would they have moved but for changes, do you think?

40:12I cannot categorically say that it is because of a tax change, but the combination of things that we have happening at the moment, this is happening. And my view is that we should be doing as a nation here everything we can to keep those founders here in the country and to be creating the climate that helps them thrive here in Australia. Now, that's not only taxes way more than that, but the tax situation doesn't help, unfortunately. Ian, probably more so at your state, I think, obviously, because these guys get a lot of super money, which isn't taxed in the same way, but a lot of your LPs are individuals.

40:53Have you seen individuals change their investment? Because obviously, if you look at it, you're investing in a safer, high dividend paying business. You're not impacted by the tax like you are. These high risk, high return businesses, you're going to absolutely smash with low cost base. have you particularly seen in your community more so than the bigger parts yeah there was a lot of frustration within our angel group as well and you know even within lps um you know and a lot of it's just around the uncertainty i mean there was i think there was expectation that it was going to be walked back in some form but uncertainty is it's like a cancer it's just destructive so people hate uncertainty so you know and you also it's negative energy like we've spent as a industry we spent a ridiculously disproportionate amount of our last few months arguing about 47 is not a good number it should be 23 it should be no 23 is a bad number it should be 10 i mean that's kind of the where we we should be going with it you know so it's you know in another case that i've got one of those lps uh and investors that we've got is he's a talented founder as well you know his third time founder i won't tell you his name but he had you know successful business in London and then Hong Kong, moved to Australia.

42:07He's about to launch a new business. And he's looking at these tax changes and going, I am not going to launch in Australia. It's not hard for me to re-domicile or maybe even move. It doesn't have to move, but domicile the business in New Zealand or Singapore. And he's likely to do that because of these changes. And that's, you know, this is a talented person who's going to put multiple millions of his own money to start the company up and then raise money. That's probably going to go overseas. It feels like it's not merely, we're not simply redistributing the pie. We're actually actively shrinking it, what you guys are saying, which is everybody's going to grow the pie.

42:39And we saw Hortkeating governments and Turnbull tried it, how do we incentivize risk-taking? And this is literally doing, it feels like it's doing the opposite. Here's a cultural thing. And one of the things that, it feels frustrating is that we seem to be heading towards a culture of less risk-taking than one of more risk-taking innovation, creating really, you know, the jobs that we need to create, the new jobs that we need to create, because AI is going to come and take a whole bunch of jobs. And so, you know, we can do that here in Australia or we can let US, you know, big corporates come and just sort of, you know, do it anyway here.

43:18And I think it's that cultural thing that is so frustrating. We need to, we need to kind of change that here. And that's what's frustrating about this kind of changes and, you know, the way it's being spoken about. I think also the journey was, there was a time when people said, what does the government need to do to help? And there was a time when there were genuine structural things we needed to fix. The ESOP programs weren't working. The ESOP program wasn't, you said the RFR, RTDI program wasn't in place. And the government put in some very sensible measures to try and encourage both investment and talent to take risks, to your point.

43:52And that was working. And I think for 10 years when asked, and I get asked a lot, and I'm sure you do as well, what you need to do to help. It's like nothing. Just like we don't need to, just don't screw it up and celebrate successes. And I think this is, just at a time where we're just already struggling with this pull towards the valley. I think it's just an unhelpful base plan. I should ask you as well. I mean, I know you and Adair have talked about this. I mean, the intention behind making housing more affordable and that seemed to be the initial premises behind it, but it was like this clumsy sledgehammer to crack a nut kind of approach.

44:30I mean, like, what are you thinking? Yeah, very much the same. It felt like Treasury just flipped in the last two weeks, didn't consult anyone, and saw an opportunity to have, with the Greens, have complete authority to get whatever they want through. And it just felt like they rammed as much through as they could. Now we're seeing, I've been calling for negative gearing to be slashed for 20 years. Probably, I didn't realize, I didn't realize we'd tank the property market 20%. Yeah, which looks like it's going to happen. that's probably a bit extreme uh that probably has some flow on effects and our economy is now so dependent on property like it wasn't into 1997 so that's a concern but my biggest concern is the founder that hits product market fit and then moves because you sort of have moving i think there's probably a degree that a second or third time founder might just like like your founder would move before i start but i think most founders don't expect to succeed and then when you hit that quote, quote, 20 million in revenue, or you see that product market fit, you're trying to build competitive advantage.

45:25That's the time to move now. Cause you're getting a low, a low enough that you'd be able to get someone to give you a low enough valuation. Then you leave to New Zealand or Dubai or Singapore or potentially US, but there's some pretty low taxing rate regimes, pretty close to home. New Zealand being the biggest one and they're actively encouraging Australians to go over as they should be. One, before we go, one final one for you guys, favorite ever investment. And you guys can't say Canberra. That's an impossible question. It's like a choice. Yeah. I mean, I'm going to choose an obvious one because it's easy for me to say.

45:55And we're on the Gold Coast, Gilmore Space. It's a rocket company. Like childhood dream to be involved in a rocket company. And, you know, I can tell you when those rockets fire, it is the whole world shakes. The rumble is insane. You know, it has been a long journey. We've been talking about deep tech in the conference today and, you know, how we get better at doing deep tech here. It is still tough to do deep tech here. It's tough to build something like a rocket company. But, you know, Adam and the team have stuck by it. And, you know, we're going to get to space soon. And it's going to be amazing.

46:30Australia and New Zealand have come up with two rocket companies. Yeah. How good. I mean, New Zealand beat us to it. But, you know, that, I mean, Rocket Lab is a wonderful inspiration. And, you know, that's what we want to do with Gilmore Space. So I've got to go with that one. My old friend Ash Hasforth, who's working there, He's been, he's a great job. And done a great job. Yeah, absolutely. Well, I'm happy to piggyback on the Gold Coast theme. And we actually met him for the first time in person yesterday. We invested during COVID. A company called WageTap. Amazing founder, Mitchell Stevens.

47:02Ex-BCG. A lot of the big four consulting would make good founders. But I won't go into his metrics, but it's a lending company. And his metrics are unbelievable. Highly profitable. Growing fast. just incredibly good operator and strategically smart. He just does everything right. And, you know, you just love seeing those founders. And I think he's going to get a great outcome. And that's going to be good for him. It's going to be life-changing for him and great for us as investors. So you love companies like that. I was going to dodge that and say something like my favorite investors are my friends.

47:37But you guys are going to try and have, I know, I'll try and step up. this is not one I led actually, my partner James said, I think there's a company called GridSite, which is, you know, three sort of PhDs out of Wollongong and these are Aussie and they've just done a very big round at a high valuation and there's a little bit of secondaries and one of the founders is a Wollongong guy, you know, and he came up to me and said, you know what I did? I thought, he's a country kid, I'm a country kid, so I took my money, I hired a Camaro and I just took these things for like just a U-turns and I do donuts around.

48:12and he's hot running around California. I thought you'd like that. And I love seeing Aussies express the Aussiness whilst doing amazing stuff in technology. Very amazing stories from three amazing venture capitalists. It's such an honor to have you guys come on the pod. Hopefully, I'm sure our listeners got a huge amount out of it and can't wait to get you back. We should get some feedback. We never get feedback in podcasts, but did three of us equal one a dear? That's what I want to know. I reckon you are. Steve Icef Steve Icef. I actually wonder if we deal with this I didn't ever listen to the pilots I actually wonder if we listen to this oh yeah well there's your podcast for we'll find out soon yeah no great thanks for having us Adam so it was great fun hey guys and we'll see everybody on Tuesday for our regular episode thanks for listening in