“The general provision for future write-downs that we established in June across a number of funds has not materially changed, given ongoing macroeconomic uncertainty,” the Square Peg investor report stated.
“The impact of poor markets was most pronounced in public markets. However, early-stage markets were not immune either, and we have observed significant declines in valuations over the past year.
“Private markets are less volatile than public markets by design, but they also lag public markets. This latter variable means that we are likely to see early-stage valuations fall further throughout 2023.”
The report did not reveal valuations of specific companies.
The Australian Financial Review revealed last year that Square Peg, AirTree Ventures and Blackbird Ventures had joined forces to have an independent assessment conducted of design software company Canva’s valuation, leading them all to mark down the local tech darling by 36 per cent to $US25.6 billion.
Across Square Peg’s funds, it has returned $US583 million ($833.5 million) to investors, representing a gross internal rate of return (IRR) of 42 percent.
It pinpointed Canva, Rokt, online freelance marketplace Fiverr, fintechs Airwallex, Zeller and FinAccel, AI healthcare company Aidoc and weather analytics company Tomorow.io as key contributors to the value of its funds.
Investment rate slows
Across Square Peg’s funds, its first fund (dubbed fund zero) has a net IRR of 32 percent and total value to paid-in capital (investment multiple) of 6.7 times. From this fund, it has realized $US416 million out of a total value of $US908 million.
It has realized returns from two fund zero companies, which have repaid its entire fund, and said in the investor update that it expected one or two other portfolio companies from this vintage to also “return the fund” on their own.
Across all its funds, Square Peg now has eight portfolio companies with more than $100 million in annualized revenue.
Over the past year, the VC has slowed its rate of investment, with a 30 percent decline in the amount of invested capital year-on-year to $310 million, across 27 deals.
This drop-off in the amount invested was mirrored across most other local VC funds.
“We have slowed the cadence of investment activity, but are still very much open to investing in new portfolio companies that meet our threshold of excitement,” Square Peg wrote in its investor report.
“A lower valuation environment is clearly a negative for our current portfolio, while it is a positive in the context of our new investing activity.
“Our job is to be cognizant of the market environment and respond accordingly, but not be obsessed by it.”
The fund highlighted artificial intelligence and climate tech as the fields it was most excited about this year.
“After decades in the wilderness, we have seen enormous progress in AI in the past 10 to 15 years, with 2022 being a real breakout year,” the fund wrote.
“Over the coming years, you will see us backing more and more businesses that are focused on AI, as well as businesses solving the challenge of climate change.
“We are convinced that the next decade will be a more exciting period for innovation than the past decade.”