April 2, 2024

Bringing our venture DNA to the public markets: Square Peg’s Global Tech Fund

Ben Hensman

April 1, 2024

Bringing our venture DNA to the public markets: Square Peg’s Global Tech Fund

Ben Hensman

Many of you reading this would best know Square Peg as a leading venture fund, operating in Australia, Southeast Asia and Israel - and may have heard of our venture investments into companies such as Canva, Fiverr, Airwallex, Rokt, Kredivo and Aidoc. In recent years, we have also built a fund focused on long-term opportunities in listed markets - the Square Peg Global Tech Fund (or "GTF" as we call it).

Our mandate is to invest in founder-led businesses that are early in their listed journey and are capable of sustained high growth over the long term. We focus on Square Peg’s core thematics of fintech, SaaS and AI.

GTF brings Square Peg's venture DNA - a deep understanding of the importance of founder-led teams, disruptive technology, and durable moats - to public markets.

Ben Hensman

Portfolio Manager

Our lightbulb moment

After it was founded in 2006 by Tobi Lutke, Daniel Weinand and Scott Lake, Shopify went public in May 2015 at a US$1.3bn valuation. Nine years in, this was really just day one for the most important company to emerge in ecommerce outside of Amazon.

From 2013, Square Peg had been investing in NZ company Vend, a provider of cloud-based point-of-sale software for retailers. While it was early days for ecommerce, Shopify was the most important player in the online retail ecosystem and a critical partner for Vend in enabling its customers to seamlessly sell offline and online.

In 2015, Square Peg was just three years into our journey as venture investors and at that time, we did not have a strategy capable of investing in an early stage public company. But in forming views on Shopify’s execution as a partner and a competitor to Vend, we had the original lightbulb moment that would lead us to launch GTF years later - that our early-stage investing might help us think differently to most listed market investors, particularly when it came to assessing the potential and longevity of growth in listed tech businesses that are still early in their long term journey. Shopify was the first of many examples that built the ambition to start GTF.

In the year prior to its IPO, Shopify generated US$105m in revenue. The business was still early. Two things were becoming clear at the time through our work on Vend:

  • firstly, payments embedded in the platform were a vastly better experience for Shopify merchants and their customers, which could help payments become a much clearer path to scale than selling software, and
  • second, the momentum in the app ecosystem around the platform was gaining steam and building real gravity around Shopify as the leader in the space.

In addition to a very strong team led by Tobi, these building blocks gave Shopify the chance to build a very large and important company.

The Shopify team has now made this potential its reality, driving an extraordinary 46% annual return in the public markets to become a $100b business.

While Shopify is just one company, the bulk of the dollar value of compounding in the best tech businesses often occurs in public markets, and often after exceptional venture returns. The difference is that far less capital gets put to work in venture. It is also a great reminder that while an IPO can be an exit event for a venture firm, it is just a milestone in the journey for the best companies on their way to reaching their ultimate potential.

The accelerating impact of technology on our economy and markets is paving the way for successful tech companies to create significant long-term value and disrupt incumbents, making the global public markets an increasingly attractive opportunity.

In launching GTF in 2021, we introduced the ability for Square Peg and our investors to partner with founder-led businesses from the earliest stages in our venture funds through to the listed markets.

Why the Square Peg team?

An important part of this story is our team, whose combined experience gave us a compelling starting point from which to build GTF.

  • Experience in public markets: I spent the initial years of my career at Fidelity, learning about investing in different types of public companies. This was combined with the DNA of my first five years at Square Peg, which I spent working closely with founders on our VC investment team. Tony Holt spent 20+ years working globally with public companies across telco, media and tech in investment banking, then built Square Peg. Luke Stevens was previously the CFO at Caledonia, one of Australia’s most successful public equities funds. Amanda Hjorring and Leila Lee brought critical experience in legal and distribution.
  • Building a large scale public company: Before building Square Peg, one of our co-founders, Paul Bassat, previously co-founded Seek in 1997 with Andrew Bassat and Matt Rockman, going public in 2005 and building it to multi-billion dollar scale.
  • Track record of successful investing from the earliest stages: Through partnering with our incredible founders, Square Peg has delivered over A$1 billion in exits with top quartile returns over 12 years of venture investing from seed stage through to IPO.

Since we launched, we’ve built out the team to complement what we learn from our VC investors with interesting thinkers like Sam Eden and David Maher.

From here, we talk about:

  • What is GTF?
  • Where does GTF fit into an investor’s portfolio?
  • Our edge in identifying longevity and defensibility of growth
  • Our belief that founders and the teams they build are the ultimate advantage over time
  • We focus on fintech, software and the foundations of AI
  • We are looking for the traits of generational companies

What is the Square Peg Global Tech Fund?

GTF seeks to compound capital in tech businesses globally that are early in their journey in terms of size and stage, sustainably high growth and quality.

It is an absolute return strategy, meaning we don’t focus on a benchmark (like the MSCI World Index, for example). Instead, we focus on investing in great businesses that can grow well ahead of our net target.

Defining our sweet spot

To illustrate the type of business that we focus on when we’re researching new opportunities, let’s look at the attributes of Monday.com, which is one of GTF’s earliest investments. Monday is a software platform for teams and businesses to manage, automate and orchestrate work.

Where does GTF fit into an investor’s portfolio?

Square Peg invests across the company lifecycle, sharing learnings as we go. Square Peg’s venture funds invest from the earliest stages of the company lifecycle through our venture funds, typically focusing from seed through to the point of scaling product-market fit. We then continue to back these businesses repeatedly as they scale and become larger, firstly through our core venture funds, and then through our Opportunities Funds at a later stage. GTF then allows us to back companies once they reach the public markets.

We believe investors should think about tech holistically and invest across asset classes - venture capital, earlier stage listed tech and large cap tech. Substantial value is being created through venture capital in the early stages, all the way through to the household names we all know atop the NASDAQ 100 (such as Amazon, Microsoft, Meta, and NVIDIA). If you look back on the last decade or so, those large companies and many others have dramatically increased the weight of tech companies to major global equity indices and driven returns. This is more extreme again when you look at the US markets.

These companies are also very large and much more mature in terms of growth profile. While these businesses will continue to grow materially and be an important part of an investor’s portfolio, earlier stage businesses can add a much higher growth profile.

GTF provides dedicated focus to earlier stage listed tech businesses. The purpose of GTF and the insights we provide as a team is to identify listed tech businesses that can substantially increase in value over the long term and potentially become generational companies.

While every investor will allocate capital differently, the table below shows one approach that favours technology above other areas of the economy, while also distilling some of the key attributes of each form of equity investing:

We have an edge in identifying longevity and defensibility of growth

Our sustainable edge in listed markets investing is comprised of four elements:

(1) We have front-line exposure to change: The rapid degree of change from shifts in technology will create significant dispersion in performance for listed tech businesses. We believe that investing across the tech company lifecycle gives us the insight needed to pick the businesses that can succeed in such a dynamic environment. A practical example of that edge is our depth of knowledge and investment in payments infrastructure and software from the earliest stages, which is key to our conviction in Adyen, Dlocal and Block in the GTF portfolio.

(2) We run a concentrated portfolio, rather than seeking broad exposure. We think the degree of change in tech means broad exposure will lead to poor investing outcomes. We seek to own 10-20 businesses and back them with conviction as we do in our venture funds.

(3) We are long-term investors with a focus on what can go right. We believe a long-term approach is essential for compounding of capital. Many public investors are distracted by the volatility of public markets. However, our venture DNA enables us to ignore short-term noise and maintain a focus on the long-term. While we thoroughly assess risks to our capital, we focus on what can go right. We partner with investors who share our approach.

(4) We spend material time thinking about founders and the teams they build. Focusing deeply on organisations and the culture within them is a limited area of focus for many public market investors, but we think it is critical for continued success and growth at scale. Our exposure to founder-led businesses at all stages gives us a differentiated perspective.

We believe founders and the teams they build are the ultimate advantage over time.

Our emphasis on founders is driven by our conviction in their pivotal role in spearheading transformative technology shifts. Building large and influential companies that disrupt the status quo is not a straightforward journey, especially amidst the volatility of public markets.

We believe the best founders have a unique ability to stay focused, remain resilient, and attract the right talent, forming teams that are dedicated to achieving their mission.

Here are three incredible founder management teams of businesses in the GTF portfolio:

Our funnel is focused on fintech, software and the foundations of AI.

The long-term tailwinds that Square Peg is most focused on across our venture capital and listed equities strategies are fintech, software and AI. Square Peg has built depth in these areas over time because they are the largest existing global pools of value, cost and incumbent profit for early-stage businesses to target and can be addressed with capital efficient models.

When we look for businesses, we focus on those who are driving the change in these markets, rather than passively benefitting from it. This maximises their chances of growing rapidly within a market that is also growing quickly.

We are looking for the traits of generational companies.

In addition to focusing on businesses that are driving change in large markets and exceptional founder-led teams, we are looking for specific traits that we see in today’s generational tech businesses - companies like ServiceNow, Salesforce and many others. We think these traits are critical to successful growth investing over long periods.

These traits are:

  • Quality and persistence of growth: We look for global businesses that have the ability to continually scale growth of new customers, as well as continue to solve more problems for customers over time and expand their scope of monetisation. Implicit in this is the right to solve those problems and a strong affinity between customer and product.
  • Scalability and profitability of the business model: We also focus on the highest quality and most scalable business models. We love businesses that have multiple levers of revenue growth and can grow them with limited incremental cost and capital investment, enabling strong free cash flow generation and returns on capital over time.We also look for models that are fundamentally aligned with the success of customers and help ensure longevity of growth through solving more problems for them, as opposed to relying only on extracting higher prices. We think this has particular potency when incumbent models lack that same alignment.
  • Increasing defensibility over time: Being “sticky” is not enough. One of the most important traits we look for in businesses is the trajectory of competitive position and how that can enable longevity of growth.This underpins our expectations for all the businesses in our portfolio and is becoming more important as the pace of change quickens in the early stages of tech, which our venture team give us constant exposure to. This is going to continually lift the bar on defensibility, depth of customer relationships and product, and the need for efficient, scalable distribution.

More to come on Square Peg’s Global Tech Fund

In the months ahead, we’ll be sharing more thinking across the areas discussed in this article, including digging into some of the themes, founders and businesses we are most focused on.

If you’re interested in learning more about investing in GTF now, please reach out to our team. Investors can contact us here. For any general enquiries, please contact us here.