Q&A: Blackbird Ventures’ Rick Baker

Q: There was a drop-off in growth-stage activity last year as overseas investors backed away from Australia. Any sign of them coming back?

A: Not yet. Before the boom years of 2020 and 2021, overseas firms tended to join later-stage rounds, usually Series C and beyond. Then they started coming way earlier. A lot of late-stage funds were doing everything from seed to Series A, and then when the market turned in 2022, there was a quick retreat from everything. We are almost back to that pre-boom time, with sporadic activity from the global players. However, there is still a recognition that the Australian ecosystem is creating global companies that can deliver venture and growth-like returns.

Q: How did you respond to global players moving earlier?

A: We have always tried as hard as we can to be the first investor – we are happy to write a AUD 500,000 (USD 337,000) cheque for a pre-product company if we like the founder and the area they are operating in. In 2021, we saw prices increasing significantly in some cases, and we had to act quickly to match term sheets from overseas. Prices are now coming down in the later stages, but there is still a lag effect. Founders are still anchoring to those 2021 raises and a lot of them are waiting to grow into their valuations. They don’t want to do down rounds. Prices haven’t gone down as much in the earlier stages; they have normalised at a long-term average.

Q: Most founders won’t have experienced these conditions before…

A: Not many have been through a down round situation – they’ve enjoyed more than a decade of very strong tech company valuation growth – but that is also the global trend. There is a growing realisation that prices go up and down and it doesn’t necessarily reflect poorly on your company if the price today is lower than what it was at the peak of 2021.

Q: Is there a playbook for helping companies through these challenges?

A: We have tried hard not to create a standard playbook that we roll out across our portfolio. It is company specific; what’s right for one could be a bad plan for another. We are not in a situation of no fundraising and companies eking out their existing cash. There is dry powder in the market, people are investing. Good companies that are still able to grow, have their burn under control, and have good unit economics can still raise capital, but pricing must be reasonable.

Q: How widespread are down rounds?

A: We are not seeing a lot, it’s every now and again. Most of the time it’s priced externally. Existing investors tend to do convertible notes or some sort of structuring that doesn’t force a down round. Companies in danger of having down rounds are still extending their runway, so it will be interesting to see what happens in the second half of the year. Some of these companies are growing, so they might grow into their valuation or just do a small down round.

Q: Do unicorns like Canva, Safety Culture, and Culture Amp have enough critical mass that they don’t need to raise more capital?

A: Those three especially have control of their own destiny. They have strong balance sheets and financial metrics. It’s a great position to be in. Will they choose to fundraise at some point to grow the business in a new way? Maybe. There is a lot of talk about how you set yourself up to cement your place as a market leader when it is more difficult for competitors.

Q: Does that mean they will embark on M&A sprees?

A: It’s more a case of looking for opportunities to grow the product base by potentially acquiring one or two companies. All of them have done some acquisitions and understand how these can help. We will see more of that over the next 12 months as they turn into platforms with real product synergies.

Q: Blackbird closed its most recent set of funds on AUD 1bn (USD 673m) in November 2022. Was the process longer or more difficult than expected?

A: We launched at the end of 2021 and had a series of rolling closes. We wanted to wait until we hit AUD 1bn before making an announcement. We are lucky that most of our capital comes from Australian superannuation funds, which are an amazing, resilient source of capital. They put a lot of effort into the due diligence and have consultants working on it as well. The big step up was ESG [environment, social, governance] due diligence in addition to commercial and operational due diligence.

Q: Canva’s valuation volatility attracted a lot of attention last year, with the Australian Prudential Regulation Authority questioning several industry superannuation funds on their approach to valuing the asset. How did this impact your relationship with those LPs?

A: The fundamental need came from the superfunds themselves. They price their funds daily, so it’s important they can place a fair value on their assets. Several of them have large positions in Canva. We came into this from more than a decade of growing asset prices. In that context, our policy of holding at the prior round valuation is conservative. It tends to be lower than the mark-to-market because the market is rising. However, when the market comes down, those valuations get stale very quickly, and this was the problem the superfunds highlighted. We agreed to put our material growth companies into a separate bucket and get them valued independently based on the last round, secondary transactions, and public market comparables. We are one of view PE or VC firms globally doing this. 

Q: What is a material growth company?

A: It must be big enough that we can find some good public market comparables. If it’s a SaaS [software-as-service] company it must have enough revenue for you to build a basket of companies that are listed – usually in the US – and are similar in terms of size, cash flow, growth, and efficiency of growth. We have a small number of material growth companies that make up a large portion of our portfolio.

Q: How many different valuations do LPs receive and are you reporting them more frequently?

A: It’s a single valuation, instructed by those different methods. The most instructive so far has been mark-to-market because there haven’t been a lot of secondary transactions and market movements mean last-round valuations are stale. Reporting is still quarterly. What we are trying to do is ascribe a fair market valuation to an illiquid private company that doesn’t have frequent trading in its shares. If we did that more frequently than quarterly, everyone would be chasing their tails.

Q: In 2019, Blackbird carved out a portion of each Fund I investment into a fund backed by secondary investors. In 2021, you tried to do a single-asset continuation fund involving Canva, but it failed to transact. Any plans to try again?

A: When your fund gets to a certain multiple it’s prudent to take some capital off the table and return it to LPs. We tried to do it with the Canva holding, which had got very big, but the timing wasn’t quite right. Although the secondary market is challenging right now, we want to continue using it as a tool to create liquidity. It gives us some control over when we create liquidity rather than being in a timeline for companies listing or getting acquired.

Q: What do you find interesting from an investment perspective at present?

A: The most obvious one is all the incredible progress around AI [artificial intelligence]. It’s a crowded space, so we are wary, and often these companies are features of other platforms rather than actual platforms. Having said that, we see how AI can unlock new applications that couldn’t be unlocked before or only in very large companies. Healthcare and the digitisation of healthcare is also a strong theme, and we are making investments in that space. It’s very much a matter of being broad and looking for pockets of excellence.

Q: When you say AI applications that plug into other platforms do you mean ChatGPT?

A: Yes. Every day we see a new one popping up and we must be careful not to get carried away with the hype. I think most SaaS products will find ways to build on top of these models, mixing in their own data for specific applications. It will be very interesting.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Australasia
• Early-stage
• Expansion
• Technology
• Healthcare
• GPs
• Australia
• Blackbird Ventures
• TMT
• enterprise software