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Dear Investor,
We commence the new year with a high level of anticipation for the year ahead. We are thrilled with the performance of our portfolio companies, especially our largest holdings (Canva, Rokt, Airwallex, and Kredivo), which are all performing very strongly. Looking ahead, we are excited about the opportunity set across our core geographies of Australia, Southeast Asia and Israel and our core themes of AI, Fintech and SaaS.
In 2024, we saw a healthy level of investing activity, with several new companies now forming part of our portfolio alongside a number of follow-on investments in existing portfolio companies. The aggregate of new and follow-on investments made in 2024 was $146m. We also completed five exits (a combination of partial and full exits) in 2024, returning $220m of capital to investors across our first three vintages. We were pleased with the level of value creation in our portfolio, and the aggregate value of our funds increased from $2.7bn on 31 December 2023 to $3.25bn on 31 December 2024. If we exclude the impact of capital drawdowns and capital returns, the underlying value of our portfolio compounded by 21% in 2024.
The power of compounding
We have spoken previously about hold periods, our follow-on investing philosophy, and our approach to returning capital back to investors. The most important point is that relatively long hold periods and continuing to back our best-performing companies are a feature of early-stage VC investing. If we have great investments in our portfolio that are creating significant value, we will want to invest further capital in these companies and hold them for an extended period of time. These are businesses that we know extremely well and have gone through a significant amount of de-risking. As a result, the upside case for holding existing positions and making additional follow-on investments is very attractive.
An indicative scenario illustrates the point. Let’s assume we invest $10m in a company, and the company becomes very successful with the value of the investment compounding at a rate of 40% over the next six years (for simplicity, we will assume that we don’t make any follow-on investments in the company over the period). After six years, that investment is worth $75m, representing a gain of $65m. Let’s further assume that there is an opportunity to sell the investment after six years, however we choose to continue to hold the investment. If we assume that the value of an investment compounds at a slower but still very healthy rate of 30% for the next three years, then the value of the investment will grow to $165m after nine years. In other words, in this example, we will have created more profit in the last three years of the hold period ($90m) than in the first six years ($65m).
This simple example illustrates the power of compounding over an extended period and that the best investments we make will typically involve a combination of very fast compounding and an extended hold period. In venture capital, the most expensive form of failure is selling your best portfolio companies too early. Of course, things don't always go to plan; in some cases, business performance can be below expectations and in other cases markets can perform poorly. The important point is that there is a balance between letting our winners continue to compound for an extended period and returning capital to you. For the most part we think we have got the balance right over the past few years.
Returning capital to investors
Our investors should and do have an expectation that your capital will be returned to you with strong returns. Our philosophy on returning capital is to facilitate exit opportunities when two conditions are present: 1) the company needs to be appropriately mature, and 2) markets need to be accommodative. Both of those conditions were in place for a number of portfolio companies in 2020 and 2021, and again in 2024, which enabled us to return significant capital at substantial multiples of invested capital.
An example of attempting to find the right balance has recently occurred for one of our highest conviction portfolio companies, Rokt. Last week, Rokt announced a secondary round that values the company at $3.5bn.
We first invested in Rokt in 2013 from our 2012 Vintage and then again from our 2016 Vintage Fund. We have also subsequently made a number of investments from our Opportunities Funds. Prior to this round, we had not sold any shares in Rokt. The business has just completed an outstanding year and we are as excited as we have ever been about the prospects of the company. Given the company’s strong performance, we agonised over the decision and ultimately landed on a partial sell-down of our holding from the 2012 and 2016 Vintages (selling up to 30% of some of our early positions). However, we made the decision to hold the majority of our holding as well as make an additional investment from our current Opportunities Funds. Prior to reaching these decisions, there was a lot of work and debate, and time will tell if we got these judgments right.
We have said previously that we are at a phase of our evolution where, in most years, we expect to return more capital than we invest, and that was the case in 2024. There will of course, be exceptions to this rule, which will most likely be due to poor market conditions (as occurred in 2022 and 2023).
Our hope is that for each fund, there will be roughly a 6-8 year lag between peak years of investing and peak years of returning capital and that for each fun,d we return a strong multiple of invested capital.
When we look at the data comparing the total amount of capital we’ve invested and the total amount of capital we’ve returned in aggregate across all of our funds by year, a few key points emerge from the data:
- The 2012 Vintage shows exactly the pattern we would expect. Our peak years of investing were in 2013, 2014 and especially 2015. We returned significant capital in 2020 and 2021, and again in 2024. We expect to return the vast bulk of our remaining holdings between 2025 and 2027. Our initial returns of capital were accelerated by buoyant market conditions during 2020 and 2021, and delayed by the weak markets during 2022 and 2023. However, on average, there has been a 6-8 year lag between investing capital and returning multiples of that capital.
- The 2016 Vintage saw peak investing through 2017 and 2018 with meaningful capital returned in 2020 (again accelerated by buoyant market conditions) and effectively no further capital returned until 2024. As noted above, we will shortly be returning further capital as a result of our sell down of our position in Rokt, and we expect the period between 2025 to 2027 to be peak years of exits for this vintage.
- For our 2018 Vintage, the peak years of investing activity were 2020 and 2021. We made our first significant return of capital in 2024 and expect the period between 2026 to 2029 to be the peak years of exits for this vintage.
Overall, the total dollar value of investments has trended upwards since 2012, reflecting a growing opportunity set in our geographies and a larger investment team, as well as the emergence of our follow-on funds in 2020. The two outlier years for investment activity during 2020 and 2021 reflect, to some extent, an exuberant mindset influenced by market conditions.
As noted previously, we had sufficient insight into market conditions that enabled us to aggressively exit positions during that period, and we hope that we have learnt from our over-enthusiasm on the investing side during that period.
We are currently in the process 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, other things being equal, 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.
2024 Founder Summit
In November, we held our biennial Founder Summit in the Bay Area. We brought together 87 founders from various parts of the world and a group of world-class presenters. Our Founder Summit is a special event on our calendar, and we are in awe of the drive, talent, and dedication of our portfolio founders.
Some highlights included a session on building a culture of feedback from the best-selling author of Radical Candor, Kim Scott, and a session with Duolingo co-founder Luis von Ahn, who shared his story of democratising learning and building customer love for the Duolingo product.
We also heard from some of the founders in the Square Peg portfolio, including Airwallex's Jack Zhang and Cuttable's Sam Kroonenburg, who shared their views on "founder mode" and scaling businesses.
The real magic at these events happens in the informal interactions that occur between our founders at the Summit and subsequently thereafter. Our portfolio founders are both very curious and very generous with sharing their knowledge, and they have an enormous overlap of challenges and opportunities. We love the deep connections that are forged across our portfolio at these events.
2024 Portfolio Highlights
- Our four largest positions (Canva, Rokt, Airwallex, Kredivo) are performing incredibly well and accelerated growth in the last 6-12 months. The scale of their annualised revenue and rate of growth are all outliers by global venture capital standards.
- A broader group of our portfolio companies have also grown into meaningful businesses and continue to grow strongly. CAIS, Deputy, Vi, Doctor Anywhere, Aidoc, UpGuard, Zeller, Talon.One and Tomorrow.io are all fast approaching annualised revenue of $100m. We invested in most of these companies when revenue was close to zero.
- Over the past 12 months, we have also seen strong portfolio performance flow through to company valuations, with upward movements across all five vintages driving a 21% increase in portfolio value.
- Our exit activity accelerated in 2024, returning more than $220m to investors across our first three vintages via a combination of M&A (Deci.AI, PropertyGuru) and secondary activity (Canva, Talon.One, Bugcrowd). The exits were all completed alongside valuation uplifts and took the portfolio’s total realisations to more than $800m at a gross multiple of 6x.
We are also excited about the progress of our AI, SaaS and Fintech investments from our more recent vintages. We are excited to be partnering with each of them on their journey ahead. Some notable highlights during the year include:
- Constantinople has built an all-in-one software and operational platform that simplifies and radically transforms how banks run and operate, dubbed “banking-in-a-box”. The team is a great Australian example of experienced executives who are shifting their careers away from traditional industries, such as banking, towards technology startups. Constantinople raised its Series A round in 2024 and has recently made significant progress with new customers across retail banking and embedded finance services.
- Exodigo is building the global standard of underground mapping, using multi-sensor fusion, 3D imaging, and advanced AI to revolutionise the way industries interact with the underground in a cost-effective and non-intrusive way. The team is an amazing example of technical founders building world-class AI companies out of Israel. Exodigo raised its Series A round earlier in 2024 and has significant commercial traction, growing revenue and bookings by 5x over the past year.
- Cuttable is a first-of-its-kind automated content agency that combines the craft of advertising with the precision and speed of AI. Cuttable is right in the sweet spot of our AI investing, focused on vertical applications. We led Cuttable’s Seed round in 2H24 and they have already had strong traction with a number of major Australian brands. The founding team is extraordinary and includes Sam Kroonenberg. Sam is a repeat founder (A Cloud Guru; $2bn exit) and is a great example of the strength and maturity of the Australian tech ecosystem that it is now producing serial founders.
- Supabase is an open-source database and developer platform that makes it simple for front-end developers to get started on an application or project without needing to manage any backend infrastructure. Supabase is a great example of global SaaS companies emerging out of Southeast Asia. The team successfully raised its Series C round at a valuation uplift and is growing by more than 200% year-on-year.
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.
*The above letter is an abridged version of the December 2024 Half Year letter sent to investors.
