Private Equity and Venture Capital technology investments key for investors
Chief Executive Officer of Crestone Wealth Management Michael Chisholm says investor access to the quickly growing technology sector is an important investment and social consideration in the current market cycle.
Mr Chisholm said access to private equity or venture capital funds, which are uncorrelated to traditional asset classes, can help cushion portolios against any equity market downturn.
Crestone recently invited a group of Australia’s leading venture capital (VC) investors to provide their views on technology. The panel included Paul Bassat, Co-Founder and Partner from Square Peg Capital, Daniel Petre, Co-Founder and Partner from AirTree Ventures, Niki Scevak, Managing Director and Founder from Blackbird Ventures, Emma Weston, Co-Founder and CEO from AgriDigital.
The panel concluded that VC investors should target technology businesses with a sustainable differentiation over a long period, which can help to build wealth over time and protect portfolios against an equities market downturn.
“Such investments not only present opportunity to high net worth (HNW) and ultra high net worth (UHNW) investors to access a growing arena of high growth assets, but also provide investment opportunities that are uncorrelated to traditional assets and asset classes,” said Mr Chisholm.
“Crestone’s mission is to help investors explore the many private equity or venture capital funds that are investable and investment grade. The challenge for investors is to find opportunities that tick the right boxes as investable assets, plus have the bonus of helping to solve some of the bigger problems in the world today,” said Mr Chisholm.
“VC programmes have been a phenomenal motivator to push capital into the market.”
Square Peg Capital’s Bassat said the starting point for investors should be to ask, “is this an amazing company and is it solving important problems?” Valuations are a secondary consideration.
“We’re no longer living in a world where you can be the best in your suburb. You’ve got to be the best in the world to have a sustainable business in most areas,” said Bassat.
The best time to invest is typically before a business gets to an Initial Public Offering (IPO), as much of the money and growth has already been achieved.
Blackbird Ventures’s Scevak describes how the ‘private life’ of a company has extended from five or six years to an average of about 11 years. That means technology companies are often no longer ‘pre-revenue’ when they IPO, but bona fide businesses where significant valuation uplift may have already occurred. However, subsequent VC funding rounds, before IPO, still present an opportunity for investors to participate in any valuation uplift, says Scevak.
The panel agreed that artificial intelligence (AI) will have the most significant impact on technological advancement over the next decade. Successful investors will select businesses that can apply AI well and demonstrate expertise in areas where competition is less.
“You need to ask the question of whether a company can disrupt a market place,” says AirTree Ventures’s Petre. It is important to ensure that the company has created a differentiated offer in ‘white space’ where nobody else is. One area Petre finds interesting is the application of machine learning in medical science, where image recognition will dramatically change the delivery of medical diagnoses. An example of this is how software can now diagnose melanoma with greater accuracy than humans—and at a fraction of the cost.
Bassat feels most of the important technology disruption today is driven by software-enabled business models. “There are lots of exciting things happening—everything’s moving to the cloud, which is a really important theme, and we’re ten years into that theme.” The defining theme in the next 20 to 30 years will be AI “which will change the world in ways we can’t imagine,” says Basset.
But while a lot of things are going well for Australia, the country needs to be more innovative and competitive. Additionally, Bassat believes that we need to be smarter about the way we harness the capital available in our superannuation industry. This is an important source of funding that should allow us to create value “not just for tomorrow, but also for future generations,” he says.
Federal government VC programmes such as Early Stage Venture Capital Limited Partnerships and Venture Capital Limited Partnerships are positive for the industry and for VC investors. The taxation benefits for registered early-stage and VC limited partnerships include an exemption to investors from capital gains tax on eligible investments. “This has been a phenomenal motivator to push capital into the market,” Petre claims.