Venture secondaries have exploded in recent years. While some firms have used the increased activity to expand their positions in their most promising portfolio companies, Airtree Ventures is using the momentum in a slightly different way.
Founded in 2014, the Sydney-based venture firm uses company-led secondary sales to reduce its equity holdings and extract cash from some of its most promising businesses. The company’s portfolio consists of Australian unicorns including Canva, most recently valued at $40 billion, Immutable at $2.4 billion and LinkTree at $1.3 billion.
Airtree co-founder and partner Craig Blair told TechCrunch that, unlike other venture capital firms, Airtree aims to provide maximum returns to its investors. But unlike many other companies, Airtree generates returns over the entire life cycle of an investment, not just when the company exists.
“Right from the start, we want to put as much energy and thought into the exit process as we do into the financing process,” Blair said. “We look at the life cycles of the fund, we look at the companies themselves and consider when might be a good time to exit this business.”
Airtree supports companies in the pre-seed and seed stages; Because companies stay private longer, they don’t return money as often during the traditional fund lifecycle. That’s why in 2021, Airtree began looking for alternative ways to obtain liquidity for some of its earliest holdings, Blair said.
One of them was Canva. Airtree originally invested in Canva’s $6 million Series A round in 2015. Blair said the company reduced its stake in the startup in 2021, when the company was valued at $39 billion. Airtree achieved a 1.4x return on Fund I from this transaction alone and was able to retain most of its original stake.
“There is no hard and fast rule,” Blair said of how the company decides when to reduce its holdings. “We look at the position of the fund and the role of this company in this fund [and think]“If we were to sell at this price today, what future value are we giving up that we could keep?” [What is] the value of liquidity compared to long-term TVPI and the impact on the fund?’”
Each time Airtree did this, it intentionally retained a majority of its shares, Blair said. He said the company still wants to make that big profit at the end, but doesn’t want to “put all its eggs in the last basket.”
This strategy makes a lot of sense considering how much some of the valuations for late-stage startups have fallen in recent years. While some companies are working to reach their final valuation, many still have a long way to go and may still exit at a lower price than they raised in the last pre-election round.
But Airtree’s strategy isn’t foolproof, and many investors would likely argue that reducing those holdings takes money off the table. They’re not wrong, and Blair admits that this strategy means Airtree makes less money when a company eventually exits. However, it is also not guaranteed that this final exit will be strong, he said.
Blair said Airtree wouldn’t rule out setting up a continuation fund – the venture capital industry’s current preferred liquidity vehicle – and said it could make sense if the company wants to start selling a bunch of its shares immediately. But the current sub-strategy of raising your hand when companies want to do secondary tenders has worked for them so far.
“I would say our responsibility as investors is to return money to our LPs at the right time,” Blair said. “Selling too early can certainly be damaging. There is no one answer, but rather a process that involves making active rather than passive decisions [about liquidity]. Don’t just sit back and wait [exits] happen to you.”