Square Peg Investor Letter Half Year Report 30 June 2025

Dear Investor,

The AI investing opportunity set is growing significantly and with speed. We have been investing in AI businesses for many years now. Aidoc was the first truly AI-native business in 2019, and since then, our pace of AI investing has accelerated, as illustrated in the table below.

Proportion of new investments in AI-native companies:

This accelerated pace of AI investing reflects the enormous progress in AI technologies and product and business model innovation. In 2019, only 16% of global venture dollars were invested in AI. Over the last quarter, over one in every two dollars was invested in AI, a trend emerging across the VC landscape. 

At the same time, the opportunity set for AI has exploded. If we look across our regions of Australia & New Zealand, Israel and Southeast Asia, the AI opportunity set in Israel has been exceptional for a number of years and continues to grow, whilst Australia & New Zealand, and Southeast Asia have ramped up enormously over the past few years.

The early exposure we’ve gotten to AI-native businesses in Israel, such as Aidoc, Deci and Qodo, has been especially valuable as we begin to see, assess & invest in outstanding AI opportunities in Australia and Southeast Asia. Over the last 18 month, that has included Cuttable, Lorikeet and NexusMD.

We are constantly absorbing these remarkable technological advances across our markets and applying them to how we assess founders and businesses, and debating how this still nascent market will evolve. 

We are approaching this task with excitement, curiosity and most of all humility. We are operating at peak excitement and nervousness right now. We are cognisant of a gold rush mentality, and a high failure level; however, we need to balance that out with our very clear view that some of the world’s biggest businesses ever created will be founded over the next period. 

Our evolving views on backing founders in the AI era

During a period of peak dynamism like this, it is more important than ever that we share our developing views on which businesses and founders to back in the AI era. These views are held lightly, and inevitably, some will age well and many less so, but these heuristics are helping us to drive our thinking. As an investor, we believe that understanding AI will not only help you understand the part of your portfolio that is exposed to early-stage AI startups but will also help you shine a light on your entire balance sheet. Nothing is going to be the same. 

Here is a summary of our thoughts:

1. A world-class AI-native founder will look 80% the same as a pre-AI native founder, but the 20% difference matters a lot. They need deep AI immersion and expertise combined with an incredible level of strategic thinking and agility, given the dynamic nature of the market. In many cases, these attributes exist in the founding team as a whole rather than in a single individual.
2. Over the last few years, we have seen significant growth in the size of addressable markets as well as a significant demand by both enterprises and consumers to adopt AI technologies. As a consequence, the benchmark for best-in-class growth rates by startups has increased commensurately. The related point, which is both an obvious and important point, is that the addressable market of technology companies is no longer largely defined by the software spend of customers but by the wages bill.
3. Whilst early revenue growth is critical, it is a necessary but insufficient signal of success. Given the high propensity for the enterprise and consumers to trial AI products and the (frequently) low switching costs, we need to look carefully for signals of real product market fit, and this will often be reflected in genuine customer love and repeat buying behaviour for the product.
4. A lot of the focus right now is on extraordinary technology innovation, but a huge amount of value is going to be created in the area of business model innovation as industry by industry gets disrupted. The typical founders who innovate on the business model vector will look different to the typical founders who innovate on the technology vector. We need to understand the vector at play in each case and tweak our founder assessment accordingly.
5. Speed always matters, but it really matters in the AI world. Speed is important across all dimensions, including shipping velocity, strategic agility, go-to-market execution and hiring velocity. Speed alone is not enough; you have to get most of the big calls right, and where you get them wrong, you need to recognise it fast and change course.
6. The jury is still out on how much value accrues to incumbents and how much value accrues to startups, BUT what is clear is that incumbents that don’t embrace AI will disappear. Quickly. The Internet era was an era of both value creation (mostly by startups) and value destruction (for incumbents). The impact of AI will be bigger by an order of magnitude. The extraordinary hiring spree of Meta’s Mark Zuckerberg in the last few weeks illustrates the extent to which AI represents an existential threat to incumbent businesses. If Mark Zuckerberg is scared, then we should all be scared.
7. We haven’t had a new dominant form factor since the launch of the iPhone in 2007, and the way we interact with websites and apps has largely remained unchanged for the same period. Even the “chatbot” paradigm of ChatGPT and other foundational models is very familiar to us.  We don't know how and when this will change, but when a new dominant form factor emerges and new modes of interaction become ubiquitous, then we will see the unleashing of a whole new era of innovation. 
8. We are seeing a fundamental change in the “open internet” of the last 30 years. Much of the growth in traffic to internet sites is coming from chatbots and AI-powered search engines rather than individuals, and over tim,e we will see a reduction in human traffic to websites. This has profound implications for how businesses will drive distribution, monetisation models and control of information. 

We will continue to share our evolving views on an ongoing basis.

Venture capital firms are not immune to the AI evolution

Our comments about incumbent businesses failing if they don’t embrace AI apply to venture capital firms as much as any other business. We believe the business of early-stage investing will look very different five years from now, and we are putting resources to work to position ourselves for success in this new era.

Two philosophies underpin our approach:

1. Those who own the data own the future - for Square Peg, this means utilising our own data and insights from across our multiple products (venture, growth and listed) and our 13 year history, and augmenting it with alternative data sources, to enhance our ability to rapidly find and assess investment opportunities.
2. We won't compromise the human touch that makes Square Peg special - our AI strategy is about using smart, tailored automation to supercharge our team. Our people will remain the front face of our organisation, building deep relationships of trust with exceptional founders, while AI powers them behind the scenes.

We have established an internal team responsible for driving our AI agenda, spearheaded by Square Peg Partner, Dan Krasnostein. This includes our Head of Strategy, Head of Technology and colleagues from across the investment team. We have also recently hired Dr Ali Almasi, a Data Engineer, who will transform our ability to derive insights from our data. 

While we’re still in the early stages of the AI evolution, it has already enabled a material shift in our investment process. By combining AI-powered sourcing agents with our in-house developed ML models, we've increased our capacity to review six times as many investment opportunities at the top of the funnel. 

Impact of US tariffs on markets

In early April, President Trump announced  “Liberation Day” and imposed tariffs on all of America’s trading partners. Public markets responded in their normal fashion and fell ~12% in a few days. Commentators were alarmed, and many individuals and institutions responded by selling positions. Markets did the opposite of what everyone expected and rebounded strongly. It is hard to time markets, and we have a sense of just how difficult it is to outperform public markets as an active manager. This is a good opportunity to call out our colleagues in our listed equities strategy, the Global Tech Fund, who did exactly that and delivered a spectacular return of 49% in FY25 and average annual returns of 25% per annum over the last  three years. 

The illiquid nature and absence of daily mark to markets in venture capital is a feature, not a bug. If we do our job well, your capital will compound at a strong rate over an extended period. In our view, that is obviously a good thing, and the absence of regular liquidity and reduced volatility of private markets makes it much easier for us to focus on the things that really matter. Value creation continues to be our focus.

Emerging winners in our portfolio

In recent reports, we have spoken about our winners - companies such as Canva, Rokt, Airwallex and Kredivo - that have achieved material scale (revenues of $500m-$3b+), have outstanding unit economics and get better as they get bigger.

They are creating significant value for you and becoming material value drivers in earlier vintages, as they continue to compound at a significant rate.

In this report, we wanted to highlight a few other emerging winners in our funds who we expect to become material value drivers. These companies are growing rapidly and starting to achieve material scale with strong unit economics.

• Vi provides AI solutions that help health, wellness, and pharmaceutical enterprises to personalise engagement and improve acquisition and retention at scale. Vi has pivoted its strategy over the journey and is a great example of the resilience shown by our best founders. Today, Vi serves almost 190 million members with annualised revenue of more than $80m, with growth of >80% year-on-year.  
• Talon.One is an AI-driven promotion platform for major brands to scale and personalise their promotions and loyalty programs. Talon.One recently completed a Series D extension round at a valuation uplift, and serves over 260 top-tier brands with revenue growth of >50% year-on-year. 
• Aidoc is revolutionising healthcare through its clinical AI software platform. Since our initial investment, Aidoc has evolved its product from a specialised radiology AI solution into a multi-product platform. Aidoc’s annualised revenue now exceeds $60m with 50% year-on-year growth and recently closed an extension round to its Series D at a valuation uplift.
• Zeller has achieved incredible product-market fit in Australia since its founding in 2020. Its integrated payments and business banking solution now serves over 80,000 SME and mid-market customers. Zeller is increasingly focused on winning new customer segments as well as geographic expansion into new markets.
• Neara has built an AI-powered digital modelling platform for utilities to perform complex analysis on critical infrastructure networks and assets. Last year, Neara completed its Series C raise to fund global expansion plans. Neara’s revenue is growing more than 100% year-on-year, driven by significant customer acquisition and expansion.
• Exodigo combines advanced multi-sensing technology and AI to provide subterranean data intelligence for infrastructure projects. Exodigo has significant commercial traction in the transportation and utilities verticals, driving revenue growth of more than 5x year-on-year. Exodigo also recently raised its Series B at a material valuation uplift.
• Supabase is an open-source database and developer platform that helps software developers build apps faster and more easily. Supabase now has over 1.7 million registered developers on the platform, with ARR growing more than 200% year-on-year off a material base. During the half, Supabase completed an additional funding round at a $2bn valuation.

We are in the latter stages of raising our new 2025 Vintage, Fund 6 and Opportunities Fund 3. The peak years of investing from these funds will be 2026 to 2028. For those of you who are investors in our 2016 and 2018 Vintages, we anticipate that returns of capital from your investments should line up well with drawdowns from our 2025 Vintage. In order to maximise the benefit of long-term compounding, we believe you need continual access to positions over an extended period, and for those of you who haven’t yet committed to our 2025 Vintages, we encourage you to do so.

Thank you for your support

We are grateful to our investors for your continued support over many years. Your support enables us to do the work we love.