Canva valuation cut by Franklin Templeton amid tech rout

One fund manager just cut its Canva valuation by a third. Does this reflect a sector bloodbath, or rare opportunity in private equity?

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

Melanie Perkins, co-founder of Australian graphics empire Canva – Australia’s best known unlisted company – has potentially seen her wealth drop by 33 per cent overnight if a call from one of her institutional investors proves to be right.

Fund manager Franklin Templeton cut the value of its Canva shares by a third in recent weeks: The “revaluation” reflects the severe sell-off in tech stocks on the sharemarket.

While most investors have heard of the phrases “angel investors” and “venture capital funds”, few have actually taken the plunge and invested into the glamorous world of private equity and venture capital.

The question now: is the Canva experience reflective of a bloodbath in private company investment space, or is it a rare window for investors to get into the cycle at discounted valuations? 

Last September when Canva raised $280m in its fifth venture capital round, the valuation was $54.5bn. This is staggering when you compare the valuation on household names such as Telstra ($46.4bn) and Woolworths ($46bn) .

Conditions have been supportive for early and emerging stage private companies up until recently with rising sharemarkets and a low interest rate environment providing an abundance of cash looking for a home. As shares in global tech giants such as Amazon and Meta Platforms (Facebook) hit all-time highs, valuation multiples for their smaller unlisted cousins such as Canva soared.

However, with recent global events such as US inflation and the Ukrainian/Russia conflict derailing sharemarket returns, the trickle effect has been felt in the unlisted shares space.

Daniel Pi, managing director of Sydney corporate advisory and investment management firm Coterie Capital, says: “As public market valuations have started to decline, and in particular in the technology sector, we are seeing some early signs of easing in valuations of companies backed by venture capital funds. That said, the impact is more likely to be felt in later stage companies (as public markets are a closer proxy).”

A major issue when investing in the private equity space is that if you invest in the earlier stages of a company’s life cycle, the revenue is likely to be low or non-existent, as significant costs are being incurred in developing the product or service.

There is an industry term coined to describe how fast a company is depleting its cash reserves, known as the “burn rate”, which gives investors an indication of how many months their cash investment will keep the company going before they run out of funds.

Sounds risky? Well, yes, it is but the rewards can be very strong – the initial investment can be returned many times over.

But if the company runs out of money and cannot find more investors to inject more capital, it simply shuts down in most cases.

Take Australian start-up Fast Ltd, which earlier this month announced it will cease operation only 12 months after it raised over $130m for its digital payments app in a series B round. It burned through millions of dollars per month and although valued recently at $777m by data firm Pitchbook, waning investor appetite and underwhelming revenue numbers led to Fast shutting its doors as the investor money dried up.

So why would anyone invest in something so risky? It comes down to risk and return. A 2007 study by Robert Wiltbank and Warren Boeker reviewed the returns from 538 people who invest in start-ups, coined as “angel investors”, across 3097 investments. They found the angels made an average return of 2.6 times their money in 3½ years. And returns of 10 times the initial investment is not uncommon for angel and early stage investors hence the attraction to this risky type of investing.

Although this loss-making approach to building a company may seem peculiar to some, it has become the 21st century recipe for corporate success. It starts with the company raising capital based on an idea, burning through cash developing the product and then raise more cash, eventually launching the product, losing money for years as they grow market share, stay afloat from investor cash injections and if they are lucky rising to the top of the sector and outlasting the competition, eventually – though not always – making a profit. Afterpay is a pretty good example. 

Although we have seen recent drops in private company valuations, Pi at Coterie Capital notes there is a silver lining for the sector: “On the positive side, there is a mountain of dry powder to deploy in Australia. Venture capital firm AirTree Ventures recently raised $700m and BlackBird Ventures is reportedly targeting a $1bn new fund. So funding for the best growth companies can still be competitive and will act as a floor for valuations.”

James Gerrard is principal and director of Sydney planning firm www.financialadvisor.com.au