Blackbird Ventures details new valuation process for tech firms

Funded largely by super funds, Australia’s largest venture capital firm has written down its portfolio by $3bn but says there’s still reason for optimism.

Blackbird Ventures co-founders Rick Baker and Niki Scevak. Picture: Supplied.

Australia’s largest venture capital outfit Blackbird has detailed its shift in valuation methodology, as it revealed its total portfolio valuation has fallen by nearly one third in six months, in what’s fast becoming a sector-wide bloodbath.

Blackbird, which last week slashed its valuation of start-up darling Canva by 36 per cent – about $20.7bn – on Wednesday said it had overhauled the valuation processes for its technology companies, which has resulted in the total valuation of its portfolio drop from $10bn at the end of 2021 to $7.2bn at the end of June 2022.

“It’s been brutal for technology companies out there in the public markets,” Blackbird partner Rick Baker said in a company blog post on Wednesday.

“After a decade of strong support for technology companies, culminating in a huge surge of valuation increases in 2021, the last six months have seen this unwind.

“The Bessemer Cloud Index is down 54 per cent from its peak and we’re starting to see the effects of this ripple through the venture capital ecosystem.”

That index tracks the performance of emerging public cloud computing companies like Salesforce, Atlassian, Zoom, Shopify and DocuSign.

“The majority of the capital we manage comes from Australian superannuation funds, which use our valuations as an input to set their unit prices. Unit prices are calculated daily and affect the contributions of millions of their members who buy into a superannuation fund each time they receive their pay. So the super funds and APRA (the financial system regulator) are rightly focused on ensuring that valuations reflect a fair market value,” Mr Baker said.

With its change in valuation policy Blackbird is effectively splitting its portfolio in two – later-stage technology companies like Canva whose progress can be compared against listed peers, and earlier-stage companies that are difficult to compare to public markets.

“For the later stage companies, we will no longer just use the ‘last round’ methodology. Instead we’ll mark them to listed markets using market comparables. To check our working, we’ll also have them independently valued by an external valuer at each end of each financial year,” Mr Baker said.

“For the rest of the portfolio, the early stage companies that aren’t easily compared to the public markets, we still think the ‘last round’ valuation method is best. But as a one-off, for the June 2022 quarter, we took an additional step. In light of the extreme market conditions, we have created a provision against this part of the portfolio. This was a more blunt instrument: we looked at those valuations at risk of being too high and took a provision against them based on the decline of public markets over the last nine months.

“Both of these actions have now been completed for our 30 June valuations, which were released to our investors over the period of 21st-29th July and have now flowed through the superannuation funds’ unit pricing systems. We feel our portfolio valuations now reflect the decline in listed technology company multiples in a fair and transparent way and our new policy sets us up to better deal with volatility in the listed markets.”

Canva founders Melanie Perkins and Cliff Obrecht in Sydney. Picture: Max Doyle

The Sydney-based Canva became Australia’s fastest-growing company in September 2021, with co-founders Melanie Perkins, Cliff Obrecht and Cameron Adams growing their start-up to be more valuable than the likes of Telstra and Woolworths in a $US200m capital raise. A June 2020 raising put its value at $US6bn. By April 2021, another raising saw it hit $US15bn. In September, Canva hit a record $US40bn.

Mr Baker added that Blackbird executives are ‘sanguine’ about the overall valuation decline and that the reduction in holding values reflects the market’s change in valuation metrics, not a reduction in the company’s enthusiasm for the future of its portfolio companies.

He said in aggregate, a dollar invested in all of Blackbird‘s funds has earned an internal rate of return of 56 per cent and a net multiple of invested capital (TVPI) of 4.4-times.

“It’s not time to pat ourselves on the back – the vast majority of this is still unrealised, so it’s a progress mark at this point in time rather than the end result for our funds.,” he said.

“Given the growth forecasts of our top companies we don’t have to look too far into the future to see that total valuation climbing back above the $10bn mark and beyond.

“Whilst a lot has changed in the last 12 months, we‘re still investing in generational companies from the very beginning and earning the right to support the best founders for decades. Market conditions will change, prices will go up and down but a generational company last year is still a generational company today and we won’t stop searching for those companies.”