Australia’s first secondary fund, SecondQuarter Ventures, has secured its first $51 million, offering another funding option to startups and a way of releasing wealth for early investors and founders.
Headed up by investor Ian Beatty, the fund’s partners also include Aconex co-founder-turned-investor Leigh Jasper, and high-profile investors Andrew Syples and David Tarascio.
A secondary fund invests in a business by purchasing equity from existing investors, whether that’s early backers, early employees or even the founders themselves.
It means some of the liquidity in the business can be released, without the business having to move into the public market, through an ASX listing, for example.
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This isn’t necessarily a new concept in the Australian ecosystem, Beatty tells SmartCompany, as VC funds have previously been known to complete secondary transactions.
But this is the first fund dedicated entirely to this particular form of funding.
Already, SecondQuarter Ventures has invested into 3D mapping and analytics startup Propeller, which saw it purchase a part of Startmate’s early equity investment.
The fund has also backed real estate marketing platform ActivePipe, purchasing equity directly from co-founder Ashley Farrugia, and allowing him to access some of what Beatty calls “paper wealth”, which was previously locked up.
In a statement, Farrugia said the transaction has been “life-changing” and relieved the burden of personal financial stress.
“My family have had a taste of the results from all the dedication and hard work that I put into the business, which honestly has made a huge difference to us,” he said.
Before Aconex listed, this is a route Jasper and his co-founder Rob Phillpott also opted for, releasing some capital for founders, staff and early investors and “making the value of their shareholding tangible”, Jasper tells SmartCompany.
Now, he’s “excited” to be able to offer that option to others, “and to accelerate the development of the sector”.
A very long journey
For Beatty, the fund is about giving businesses and founders another option other than listing on a public market.
There are many reasons for listing, he notes, but one of them is access to liquidity. And not every company that needs liquidity is ready for the ASX.
There are many businesses that would be better served by honing their models and growing quickly in the private markets, then looking to list when they have the scale required to “command more attention” from the variety of investors on the public markets, he explains.
Equally, when secondary funding frees up wealth for founders and early employees, the result can be beneficial for the business, too.
“Private markets can be a very long journey,” Beatty notes, who says that ‘hold time’ is only increasing.
So, even when founders and early team members are building a successful and growing business, their wealth is tied up in the business and personal financial security is by no means guaranteed.
“When founders and staff feel a lot more personally financially secure, they feel armed with the courage and fortitude they need to make the bold decisions they need to make to grow their companies,” Beatty says.
A step forward
The existence of a specialist fund like this one in Australia also represents a maturing of the ecosystem here, Beatty notes.
Having been based in the UK until just a few years ago, he has watched the Australian VC sector evolve from afar. The inflection point came in 2015, he says, when super funds started allocating to this asset class.
Since then, the funds raised by VC firms have increased in size and more startups are securing funding. Now, we’re seeing billion-dollar businesses emerge, and tech companies that hold their own on an international scale.
“Because that scale has increased, the depth of the market is increased as well,” Beatty explains.
It stands to reason that alternative funding models are emerging, too.
Investment companies like OneVentures are focused on debt financing, for example, and earlier this year, Tractor Ventures launched with a revenue-based startup financing model.
Where’s the money going?
SecondQuarter is industry-agnostic, Beatty says. But when it comes to the kind of companies that will pique the investors’ interest, there are a few boxes to tick.
At the moment, companies must be based in Australia or New Zealand, and revenue must be growing fast.
The team likes the businesses to be venture-backed already, so they’ve “already jumped through those hoops”, he adds.
They also want to see “management we admire” and large target markets.
When you put all of that together, it means the fund is typically targeting businesses with a valuation of at least $75 million, Beatty says.