January 2021
Adding the prevalence of SPACs and secondaries to the more traditional M&A or IPO, venture funds have a plentiful array of channels through which to create liquidity. How these channels play into a venture fund’s portfolio monetization strategy is often a topic of conversation amongst current and prospective LPs. However, a topic often overlooked is how a fund’s realizations can impact the management of remaining portfolio assets specifically as it pertains to the decisions on when and what to sell. Over the last 12 months, we at Janvest have been fortunate enough to deliver significant realizations to our investors – creating a net multiple on some legacy funds while heavily de-risking others. At the same time, we have seen several of our early bets start to mature into high growth businesses with material revenue, multi-national teams, and a vision to transform their respective industries. These aspects to our business are driving the evolution of how we think about future monetization and distributions, some of which we wanted to share in this month’s update.
Seed Investing – Early in Buys Optionality
As a seed fund, our job is to get to conviction quickly on pre-product businesses with dynamic teams capable of building on their vision. For this enhanced risk we get the benefit of early and outsized influence, ongoing access to the business in heavily impacted follow-on financing rounds, the ability to create tremendous multiples at the lowest cost basis of any of the investors on the cap table, and optionality surrounding how we generate those multiples. One key aspect to our strategy is always competing on value, never on price. In addition to mitigating some of the risk between the seed and Series A (a topic for another discussion), this strategy also maximizes the monetization options that could become available to us down the road. In just looking at the two most recent realizations, the first transaction was from a smaller price point M&A while the second transaction stemmed from a secondary opportunity out of a growth stage portfolio company of ours. Those events together returned 233% of Fund I, nearly 100% to Fund II, and provided Fund III investors with just about half their principal by year four. Both the M&A and the secondary opportunities were only meaningful for our investors because of our commitment to both buy in early and remain modest from an AUM perspective, which in our view are critical to consistent success in Israel’s venture market. What these two realizations also achieved for Janvest are the following:
Ø Establishing our track record and validating our investment thesis, while at the same time producing top decile net cash returns from two transactions that large venture funds might see as sub-optimal given their AUM. Because of leading indicators of success in some of our remaining portfolio assets, we were able to uniquely capitalize on the opportunity to create some meaningful liquidity for our investors.
Ø Instilled some confidence in our investors that we know how to identify great businesses, support their commercialization, and translate paper mark-ups into actual cash returns, something which many venture funds struggle with in the current environment.
Ø Relieved the General Partnership of some pressure to produce cash returns while also, to a great degree, de-risking our legacy funds. With our investors indicating a new level of patience for future returns, we are provided with the ability to focus on the long term multiples and extracting maximum value out of the remaining portfolio assets.
Adjusted Risk and Future Distributions
While these realizations are just the start of what we expect to be a series of new cash realizations in the coming years, the fact remains that with the distributions over the last 12 months, the risk profile for each of our legacy funds has changed. This has catalyzed conversations within the Janvest GP as to how we should approach monetization opportunities in the future. While each of us in the General Partnership has our respective views and varying opinions, the common belief is that now is the time to exercise patience and optimize on our high flying portfolio positions. Using Fund II as an example – the partnership’s investors have just about 100% of principal back in pocket from both the Presenso and BioCatch transactions and have yet to see any realization from the partnership’s core position and largest investment, Coralogix. For some background, Fund II led Coralogix’s seed round in 2014 and saw the company stagnate for a few years with difficulty nailing product-market fit. During this time we bought up through a few interim rounds – remaining one of Coralogix’s largest shareholders. In 2018, the company exploded with more than 1,000% revenue growth. As a result, Coralogix received an LOI to be acquired for $25MM – an offer the Board thought would sell the company entirely too short of its potential and thus was rejected. This ultimately turned out to be a good decision as Coralogix’s growth continued through 2019 when they raised a $10MM Series A to fuel their ongoing momentum. Less than a year later, they closed a $25MM Series B and ended 2020 with significant annually recurring revenues. Today the company is seen as one of the most promising start-ups in Israel and is considered by many to be setting the technology standard in the red hot Logging and Observability space. With their team and growth, Coralogix has a number of realistic exit options in the not too distant future, which could include an IPO. Before that point though, we expect that Coralogix will raise an additional two or three rounds of financing – each at an exponentially higher price that could value the business in the hundreds of millions if not billions. What we at Janvest will be faced with is the option to monetize our shares at each step of the way through the inevitable secondaries that will be offered prior to an M&A or public offering.
While we as a firm have always favored long term value creation over short term distributions, there is the discussion surrounding what role we as a seed fund play in the lifecycle of an emerging technology business and whether it is responsible to continue to hold a position where we have a material gain on paper but no influence in that company given how far up the growth ladder it has moved. We also must ask ourselves as to whether a given fund has any business being in a company that is going public and how that offering impacts our ability to liquidate our position at a price that makes the wait worthwhile.
That aside, at this point in our maturation, we are not as eager nor feel the pressure to generate liquidity in the secondary markets or through smaller price point M&As especially as we have positions that should drive significant results thus realizing the full upside of the asset class. The ability to exercise patience with some of our remaining portfolio investments is affirmation of our strategy to drive meaningful liquidity from a diversity of results. Remaining early and modestly sized will continue to offer tremendous advantages in this regard.
