How has the Venture Capital market been holding up in 2022? Damian Fox | Carthona Capital

Candice: [00:00:10] Hello and welcome to Talk Money To Me. Thank you so much for joining and tuning into the episode today. I'm Candice Bourke. 

Felicity: [00:00:17] And I'm Felicity Thomas. And if you're a regular on our show, you'll know that we're financial advisors, bringing you the latest market insights and financial strategies to consider. 

Candice: [00:00:26] And in today's episode, we have a special guest joining us. We had the pleasure of sitting down early on with Damian Fox from Corona Capital, which is an Australian venture capital firm, to chat about all things in the private markets. And as you know, Felicity, you know, it's been a really tough place to be in so far for 2022, being the listed space, the market's off drastically. So it was really interesting to hear Damian's updates and thoughts on what the heck is actually going on in the private market and how it's been faring up this year so far. 

Felicity: [00:00:58] And before we bring you the conversation with Damian, a bit more background for you on Catherine of Capital and our special guest. So essentially it's an Australian early stage focussed venture capital fund and it's been around since early 2014. Now Damian has actually been with the company since the very beginning and was made partner in early 2022. As you'll hear in our conversation with him. He's been involved in the fund from such an early stage. He's actually been instrumental in developing Cathorna, his investment approach and processes and has had deep involvement across each of Cathorna's portfolio investments and across all stages of their business lifecycle. Notable investments that Damian has actually led at Cathorna includes investments in particular Audience Cascade, CRM, salad technologies and Safe Stack. And Damian holds a number of non-executive directorships at Cathorna, a portfolio companies. 

Candice: [00:01:48] Yeah, he's got a very impressive résumé. If in fact you look them up, they've really interesting business models and I can see why he's very excited about those particular investments. In our chat today, you'll also hear Damian talk about the evolution of the business. So Cathorna, a capital, has shifted away to more of a traditional venture capital fund structure, and now it's actually in its third fund and has deployed approximately 400 million. And currently that is their funds under management. And what was interesting to hear in this particular chat is to date, they've now given back to investors 70 million. So that's great to hear. Typical investors within the VC market, like this particular fund, are institutional investors. He mentions Hostplus, for example, which is an Australian superannuation from family offices and high net worth individuals. Cathorna, a capital, is really known for investing really in the very early start up stages. So typically businesses that Damian explains to us, these are in the Pre-Seed seed or series stages, so definitely pre-revenue and not afraid to look at that. 

Felicity: [00:02:54] They're really highly thematic in the opportunities they look to invest in and are extremely hands on with their portfolio companies. Hence why Damian holds a few non-executive roles in their investments. Now a little reminder today our chat is not considered personal advice, even though we're registered advisors at Shaw and Partners. Please note that this podcast and the content discussed does not constitute financial advice, nor is it a financial product. Welcome Damian, to talk money to me. We're so excited to be speaking with you today about the VC market. 

Damian: [00:03:26] Hi Candice. Hi, Felicity. Thank you very much for having me. [00:03:28][1.9]

Felicity: [00:03:29] Pleasure. All right. So let's start by explaining exactly what V.C. means. I mean, what is venture capital? [00:03:35][6.0]

Damian: [00:03:35] Yeah, so venture capital is private capital that's invested in early stage, extremely high growth businesses. It's a form of private equity. So typically investors go out and raise pools of committed capital in the form of funds, which they then deploy over a period of time. Pretty standard terms, a five year period or a five year measure period. But unlike late stage private equity, we don't own a controlling stake in the business, and so we hold minority equity positions. And so to compensate for that, we usually have rights to help protect propositions in the business. And we usually have a board seat because we're looking to invest into incredibly fast growing businesses. These businesses are usually in sectors that can support that type of growth. And so traditionally, the two big areas that have been synonymous with venture capital, technology and biotech and so us a couple that we're very much focussed on the technology part of the equation. 

Felicity: [00:04:30] Okay, great. That's really interesting. So a minority stake, what kind of percentage would that be then? 

Damian: [00:04:36] So anything under 50%. But you know, traditionally venture funds hold anywhere from 5% up to up to 30%. 

Candice: [00:04:43] Okay. And I guess to go back a step or two, can you give us a bit of background on your investment experience and the history that you've had in the VC space? And I guess why, Katherine? You know, I'm sure the business has evolved over the years. Just run us through what's. Been going on? [00:04:59][16.2]

Damian: [00:05:00] Yeah, sure. So we set up a firm back in late 2015, early 2014. So we're just coming up to about nine years of this thing. Now, as a group, we're an iPhone fund. Prior to the office fund, which is this is deal by deal basis. So you pull out a fund zero in total. Now we've backed 42 portfolio companies over over 100 separate of this around it for just over 70 million of cash to our investors. You know, if we think back to the days when we were setting up the fund, if you think about if you look at the price at the moment, given how much venture capital and start ups seem to dominate in an app on the press, it's a little bit hard to imagine what it was like back then, but it was incredibly, incredibly fast. Historically in Australia we haven't had a really strong track record of venture capital activity in the eighties. That was the big programme which led to a bunch of funds being set up in the mid eighties, but they also go out in the Asian crash and then we had the dotcom bubble bursting. And so really from the early 2000 to early 20 tens, most of that activity was taken up by family offices. And so for us and also a few other of my colleagues have the funds that set up at that point in time really were, you know, at least for Australia, category creators or creators. And so, you know, for us at that point in time, it wasn't really so much a question of why do you want to get to work in a sector? Which fund do I want to go for? It was more a question of who shares the same ethos as you guys about obviously in the space and and in who you want to work with. So, yeah, so it's probably history. 

Candice: [00:06:32] And your personal background. Talk to us through how you got involved in this space for sure. 

Damian: [00:06:37] So my background was I started working at Quarry Capital, I worked in the investment banking division in the Sydney office and then the office of a variety of different teams in different parts. But one thing that I did a bunch of, you know, one of the advantages and one of the reasons I went to Macquarie was, was the history of doing business investments. And so I actually was able to participate in a few much later stages than what we do that venture capital transactions. And so I managed to build up a bit of experience there. When I decided to leave Macquarie, I originally thought that's not my own tech business that was funded by leases and I was living in the size of the time and reached out to a colleague of mine who had done a similar thing and had previously worked at a pitch on just to try and get some intel about the space. And it was just purely opportunistic where he said, Hey mate, you have to get back to Australia. My old boss from my old fund, it's putting together a venture fund. You have an opportunity to suck the ground up and set up your own venture fund in Australia. So much so that just really the next day and the rest. The rest is history. 

Candice: [00:07:39] That's really interesting. And I guess one quick thought just from what you were saying there, because you've seen both sides, the equation, right, in terms of the US market, which is very large in the space, you know, typical funds over there might put an asset allocation of like up to 40%. But you mentioned Australia is, you know, not as a crowded space in the VC space. Why do you think that is? Why are we not as heavily invested in the VC space here in Australia? 

Damian: [00:08:08] I think ultimately comes down to track record. I think it takes time to get big if you think about the investments that LPs put into venture funds, you know, these are the superannuation funds, big pension funds, big big large asset managers. For them to be able to deploy decent capital into a fund, they need to see a track record when they see history and they need to see cash coming out the back. And so that's something that all of us have been very, very focussed on is making sure we actually get returns. And it's not just so just, you know, returns on paper, it's actually cash in return to investors. And, you know, I think we're definitely getting to the point at the moment where, you know, increasingly it is still quite limited on the number of super funds, for example, that there are missing individuals here. There's probably one major one plus that's deploying the most. There's probably a handful of another five that have done one or two investments with a few venture funds. But it certainly doesn't have the same history or doesn't have the same levels of confidence. That would be that if you went into what's going to us.

Felicity: [00:09:08] That's really interesting. So essentially there's a lot of opportunity in the Australian VC market for category creators like yourselves. So there is a lot of noise in the market at the moment. Could you fill us in? You know what's kind of been happening in the VC Australian market over the last 12 months? How is financing the financing landscape at the moment for early CVC investment? Is it all risk off or do you have a lot of dry powder on the side? You know, what are investors doing at the moment? Are they investing? 

Damian: [00:09:37] Yeah, so I mean, I mean, like lots of other sectors, it's been a pretty, pretty interesting 12 months to say, to say the least. I mean, if you go back to the mid to late 2021, yeah, my USG listed equity markets were going crazy and we saw a lot of often offshore very large hedge funds basically comments on investing in the US but. And also in Australia, and it's totally transformed the landscape at that point in time. They come in running massive checks very, very quick but very low due diligence. So the effect of that really filtered down through the early stage funding market as well. And look, recently saw valuations getting a little bit a little bit sort of out of touch and tenants becoming incredibly founder friendly when the market turned basically all these big hedge funds and all the non traditional non-professional bases over the space, not just to speak, so that straight away hadn't had an impact on things, but on the plus on all the professional. They see funds in Australia that raise capital over that period of time and done pretty good job. That is not only investment businesses, they've also been able to raise decent capital. And so, you know, if I think about it now, there's still plenty of dry powder supply of capital and good businesses are continuing to get funded. 

Candice: [00:10:54] Okay. And what about a comment on the SPACs side of things? Do you think that's what you mentioned, you know, they quickly draw it out very fast with the market turned. What do you think the future of SPACs holds? 

Damian: [00:11:06] Yeah, I mean suspected to be interesting, one of the seats not allowed on the ASX but it was popular in the US and a few in Europe as well. I mean we spoke to one of our businesses that is a US based business. You know, certainly you know when that was happening, we all came into each other and this is a top of the market type phenomenon. Super interesting. SPACs emerged suddenly. There was a lot of demand for bringing, you know, private assets that had competitive history and staying private of bringing them on to a listed market to give listing misses exposure to those types of assets. As soon as the market turned, we saw that pretty much all the others acts which had successfully been able to acquire asset and least most of those traded pretty quickly and those SPACs which haven't successfully acquired an asset, those either coming up on the majority or positive maturity and so they under pressure to deploy capital. And so we've seen the fees with what's called the promoters just getting squashed massively. And this is a huge amount of activity of the existing assets. 

Candice: [00:12:08] Yeah. And I guess if you look at pretty much every market at the moment, when you look at the last 12 months for recently listed businesses, IPOs like it's rare to find one that's done well in the last 12 months because equity markets have been tough. So one thing I keep hearing about on our desk in day to day jobs looking after clients' wealth in the markets is that the private markets are essentially closed.

Damian: [00:12:29] Or locked up at the moment.

Candice: [00:12:30] Do you think that's a correct assessment from where you stand?

Damian: [00:12:34] If you think about the VC part of the private markets, I'd probably disagree with that. You know, we certainly still have a point. Capital is still this amount of dry powder out there. You know, having said that, if you're in a Start-Up and you were raised at the top of last year and since then you burn through all your cash and you haven't made progress with that cash. You've been pretty richly expecting that same valuation, the same times. There's a loss around that. So, you know, not all business is going to be a stomach and or physically able to make that change within the business to reduce their burn. If the amount of capital available to them is reduced. And so that they get stronger. [00:13:15][41.7]

Felicity: [00:13:16] Yeah, we've definitely noticed that. I think that they can't raise the same multiples for sure. 

Candice: [00:13:22] And on the burn rate, I guess that's the big question that a lot of investors and businesses are facing because we're in a rising rate interest environment. So follow up kind of thought process, there is a lot of market commentary in the investment community saying that they see private equity as a good place to kind of hide out when the markets excuse my French as a market the life gets sucked out of it and the shit hits the fan. So do you think that's a correct assessment in that asset class? You know, is it a good place to hide out from inflation, recession risks and rising interest rates? 

Damian: [00:13:52] So I think, you know, most of that type of commentary and that type of analysis comes from someone who is looking down from an economic perspective and looking down at the industry as a whole in the sense that, you know, private markets, generally speaking, GFC was a perfect example of this, reacting much slower too to the markets. That's both on the up and on the down. And so as pretty much, you know, get to the fact that private investors and long term investors and so there isn't necessarily a public mark, so to speak, or a transaction or something that's made public to some extent from it can look down ago go okay cool that the market has moved in this but valuations have been so in that sense. That's correct. But the reality is that if you're a fund manager or private asset fund manager, it's not like you bring years into the hands of years of ignoring what's going on in illicit markets. And so you're definitely taking that into consideration when you're thinking about how you should value your assets. I mean, the one thing that's particularly different and unique to these is just the high growth rates. And so if you're in a business that, you know, while the market might have. Some of the numbers are 50% for your specific asset. If in the meantime you've triggered growth, well, how do you deal with that? How do you come to a valuation in a super complicated in a in a very you know, if you're in a pre-revenue super early stage business where the quantitative factors which drive you valuation have the most part at the end of the day, you know, if your on equity or venture capital manager at the end of the day, the thing that matters is actually the underlying portfolio company. So if you are in a business that can increase its prices relatively easily as inflation, as interest rates increase, especially on a relative basis relative to your peers, then you're going to be, generally speaking, in a much better position than some of the top. But, you know, having said that, on the flip side, if you're in an early stage business, generally speaking, the labour costs relative to the amount of revenue that you produce is incredibly high. And so if the effect of the increased interest rates, interest increase inflation is there is a massive increase in the cost of labour in those parts of the business is going to be under a lot of pressure and is going to increase as a result. 

Felicity: [00:16:07] And you've actually said off the record to us, basically the quality of businesses that we're seeing in Australia and New Zealand has actually improved by over 1,000% as a venture investor. So you mentioned the Adobe acquisition of Figma. Could you elaborate a little bit further on that? 

Damian: [00:16:24] Yes. So I mean, that's that's obviously it just really goes to the broader economic environment and the the importance of venture capital and the value of the assets that you're investing in is that in Australia, since we've been a fund in Australia like the look back, you know, ten years ago, the quality of the opportunities and the ecosystem was a totally, totally different place. Like now it's pretty cool to go into a Start-Up or two into the city, whereas back then, you know, you have a conversation with someone and you'd say, Hey, I work in venture capital. And the first question is, what is that property. And so that whole world has changed. And fortunately, there's been enough time since these funds here have been able to raise this mix, so committed capital. And so for new students entering university, it's actually been a real, real career option for them rather than, hey, you know, I broke into my finance degree and then go get a job at a bank or a professional service fund or I want it for my sake, actually. Hey, I can go create something from now and there might be some money there to help me make this realise the opportunity. I mean so you know, having to deal with tech matters but you know, it's done sort of school and multiple or something like that. I think it just goes to show that even in a down market, if you create a business that's got incredible traction and accredited start-ups and is strategically important to a potential existing incumbent, that you can attract huge amounts of value for that business. 

Felicity: [00:17:48] That's really interesting. So essentially in the VC space, you do try and ignore the short term noise. I suppose that's going on in the macro. I mean, not ignore it completely, but kind of look at the underlying business that you're actually investing in. So with that being said, are you quite bullish, I guess, looking at your VC pipeline? 

Damian: [00:18:08] Yeah. I mean, you know, when you talk about the pipeline, there's probably a few different factors or aspects to that. There's your pipeline of new incoming deals and then there's sort of your pipeline and your existing businesses that you're managing that you want to get an increase you're starting to get more capital into. There's the ones we use sort of more the management phase where you want to bring in new third parties like capital or those that you might want to be too realising given that valuations and you know, turns them down. Yeah, that definitely lends itself more to being, you know, to deploying capital. Then you find a business that we think is a great business at the moment. You know, you kind of still get the business model for that. Business probably makes sense when I ask prospectively to be staying in those businesses and realising they might be a contributor to this in the growth of business. 

Felicity: [00:19:03] So with your current portfolio, do you find that at the moment you're adding a larger stake for a lot of the businesses? And I guess also how many businesses do you actually see awake? You know, how many businesses are coming across your table each week? 

Damian: [00:19:17] It's probably 30 to 50 that we review. 

Candice: [00:19:20] Wow. That many. That's a lot. 

Damian: [00:19:22] Yeah. So we've got a pretty because you see so many we've got a pretty good process. I think we're quite unique in this approach. But we do a for every single member of the investment team from, you know, senior founding boy down to the new intern we go and independently blind review every single opportunity and we didn't have an in-house developed proprietary scoring model that we use just so not to make a decision, but just to prioritise which ones we think are interesting. So we blind score everything and they come together and compare our schools and then debate that every week and go, okay, cool. Where the ones with bully to score really highly, let's support them into coming in eventually. And we're the ones with the message of virgins where, you know, someone might be saying, hey, this is super interesting, or, you know, how a person might be saying, all this is not interested in this. Let's look at those and understand why that might be. And it is just basically trying to elicit different views on what we are going question and thinking all the time and make sure that just because age is often a super useful thing and that is when it's on a consumer facing product, if you got more younger members of the staff who might be more in touch with the applications of a specific piece of technology than they their view and they click on on that part of the. 

Felicity: [00:20:33] Yeah, that's really interesting insights. Damian, thank you for that. 

Candice: [00:20:36] Just a quick one there, Damian, on that process because I found that really insightful. Do you have to have a unanimous decision with your investment team? 

Damian: [00:20:44] To just be clear? That's not that's what I'm this decision process that's just a way to prioritise the do you get 30 or 50? You can't, you just don't practically have enough time in the week to take, you know, a 45 minute. 

Felicity: [00:20:56] That's who will come in the office, who they'll let in the office. 

Damian: [00:20:58] Yeah. I mean, I think the way to think about it is a bit of a funnel where a lot of opportunities come at the top of the funnel. So maybe get 50, you then go to prioritise which ones you think it worthwhile diving deeper into. And it's probably only 5% of the opportunities that are coming in that were actually taking it. And then from there we get into further, you know, deeper stages of diligence to ultimately to get to a point of making a decision. 

Felicity: [00:21:20] Okay. That's great. Thanks for clarifying for us. That's right. That's when they decide to go into the data room, the deep, dark data room. So we've actually covered off a lot this morning already. But we want to move into your recent investment decisions the fund has made, and here are some exciting businesses that you're keen on because that is what our listeners love. But before we do, we're going to take a quick break and hear from our sponsors. 

Candice: [00:21:45] And we're back. Alrighty. Let's get into the exciting part of our conversation that we want to have with you, Damian. So let's talk about. 

Felicity: [00:21:51] Not that the rest wasn't exciting. N. 

Candice: [00:21:53] No, definitely not. This is where it's like the nitty gritty, finer details. This is where we get to learn some exciting new businesses that might be coming across our screens as listed companies in five, ten years. Who knows, right? So. So within the funds that you've mentioned, you've had three or four now. Can you give us a few examples of recent investments you've made? What sectors and I guess why they are bullish and if you can list the company as. 

Damian: [00:22:17] Well, that'd be awesome. Yeah. Yeah, no problem. Always happy to talk about the companies. So one that we're in the AFL for this week was an investment in a business called Path zero. So that a sponsor provides software to enable businesses to measure their carbon emissions. And then from that they can form a reduction plan, buy offsets from net zero that actually apply to various employees. Find what the major one is is climate action. Now what we really like the space. What this business is in the industry tailwinds. It's a shift towards ESG. But we also at the same time recognise that it's a reasonably competitive space and there's lots of start-ups doing, taking lots of different approaches to this problem. Why we like Xero or its competitors is it's really about its approach to scale. And so they approach they are taking is very much focussed on late stage private equity funds and their portfolio. And so how the platform works is it appeals to the investors in a private equity fund, so they OPC sit at the top, those investors under immense pressure to be able to firstly reduce just to understand what the carbon emissions are across their entire portfolio. And so by engaging them, they're able to then put pressure on the actual managers of the private equity assets, who then in turn put pressure below them onto each of the underlying assets themselves. Now, what we like that approach is, is something called pay factor in venture capital end, and that's the idea of the viral potential of a particular product. And so usually when people talk about pay factor, it's usually about consumer facing apps. But this is showing that it's actually applicable to a business business as well. And so you can imagine the AOP at the top, they want to get a report and understand and measure the carbon emissions. They put a lot of pressure down to the top level. The TPI themselves for their own business have huge amounts of carbon emissions from their own activities, things like professional services, travel, accommodation, all that sort of thing. But then below them they have each of their portfolio companies as well, so they push it down to the portfolio companies. And so the portfolio companies themselves will then have to go through that all in different carbon emitting sources. And so very quickly you see this big spiderweb and so forth by acquiring one customer at the top, you're actually ten, 20, 30 different customers below. And we see this as a super efficient way of growing the business and hopefully will create a viral loop in the in a very short period of time. Another business is called Cascade Strategy. It was one that we funded originally last year, but we just doubled down on originally heavily this year. It provides software to enable businesses to effectively manage their strategy so within like a medium to grow a large size organisation. Now a lot of these businesses, it's really about the product to the point that it's on. So the way lots of strategies, the strategies within an organisation currently manage are often incredibly siloed and disparate and as a result, internal strategies ultimately fail. So by creating software that unifies, enables people in the organisation to plan, track how the strategic activity is going, is super useful and just increases the chance of succeeding or at least be able to measure why it's failed in a much more mature way. It also has a valuable throughout the the chain of uses of the product. So if you're at the top, if you're a senior executive being able to go and track how across each of your separate business units, how everyone is progressing, whether you are here on the left or doing core business, how that's all going to be at the track that is useful. But actually if you're further down the chain as well, because if you, hey, I'm doing this task, whereas in the past you just have been told by when you get to this task, I really know what you're doing, being able to look at the pool of strategic objectives of the business throughout the teams, the name, the business, the cascading strategy within the business. You can very, very much say, Hey, I'm doing this activity. This is a foundational building block. This is something which makes up a part of the strategy. And besides that, also businesses just got incredible growth traction given that it's pretty much a corporate globally that has a strategy which is pretty much any company. Yeah, it's got a very, very large addressable market. 

Candice: [00:26:33] So just on Cascade strategy, that sounds really interesting, but I don't know that space very well. But my first thought process was, does Salesforce do anything like that? Like what is CapEx? Landscape in that same. 

Damian: [00:26:47] It's because the woods stretch quite broad. There's quite a lot of sense businesses that play that in some ways indirect competitors. The way Cascade is approaching it is quite unique. So yes, I mean, that's often quite a common theme in venture capital investments. You see what you tell someone heads up and pitches in and says, Hey, we've got this product. We're totally different from every other product under the sun and we're unique with great. But the reality is that from the customer's perspective, the pool of capital that they're using to actually fund that to them, they see them as competitive to other pieces of software or, you know, they've only got a budget for a certain amount of software. And so they're maximising based on their priorities, what they think is, is as you sort of their budget. And so it's definitely, definitely in that sense, but I'd say they're quite unique in the approach that they're taking and really targeting strategy versus other forms of control company communication. 

Felicity: [00:27:43] And when you do look at these companies right for investment, do you look at a minimum revenue that needs to be coming in to actually invest in these companies? Or what kind of benchmarks do you have here? 

Damian: [00:27:55] Business by business, we're acquired at an early stage, so we're happy to go pre-revenue into the right type of business. But, you know, if you're in a bit of excess business where it's it's hard to really imagine, you know, what product market fit might be like without evidence of attraction, then sure, we'd like to see more revenue, but it doesn't have to be huge, huge numbers of revenue. But for us it's just all about getting confidence around being pro-competitive. 

Felicity: [00:28:20] Amazing. So all this Talk Money To Me is if you've got some great ideas, Damian is happy to have a look at pre-revenue. 

Damian: [00:28:27] Seriously, that's. That's nothing. Nothing. A business like my email is Damian Capone a capital account. So feel free to shoot through anything and we'll make sure everyone on the team takes a look at it. 

Felicity: [00:28:36] You never know, honestly. You never know what's the next big idea. So I guess staying on this positive theme, what other areas or thematics are you really excited about at the moment and the team's excited. 

Damian: [00:28:47] About, yes, I've been expanding a little bit on the path zero idea. This idea of that's very carbon emissions focused. But thinking about ESG broadly, we've seen in Australia globally that the environmental considerations are having massive, massive impacts on things even as far as elections, the rate of change that's expected of organisations to become compliant with new ESG regimes as they as they emerge, it's getting quicker and quicker and you've got other days where you can just simply, you know, at the end of a presentation, have an ESG slide and skim over it and say, let's have a ESG page on your website and just say, hey, cool to see policy and then feel like you're done. You know, increasingly you're going to have to measure how you comply with whatever policy that that deemed appropriate. You know, how to measure how you're actually achieving that and what your plan is, is to reduce that. And so, you know, we see in a very short period of time, this is just going to be a cost of doing business. And it's not trivial for a big incumbent corporation to be able to just very quickly stop complying with you when you're done with the business operations, etc.. So glad to report it's been set up and so it's very difficult to do very quickly move to that new regime. And so you start to solve the problems of these incumbent businesses in a very effective way. It's going to have huge, huge tailwinds behind it. I also just sort of going back to prior thoughts about the current economic climate. I mean, old school, you know, what is to be, you know, what was a couple years ago very unsexy in these businesses. You know, those that had a great product, great traction, great metrics that are super, super exciting in this environment. I mean, it's like both from the point of view of if it is for future fundraising. I think like I stated, this could very easily get their heads around economics of that type of business at scale. So that helps. But it's also just really optionality is it's, you know, once you've got to a certain scale of being default live, you've got a huge amount of offshore value there where you know, if the funding market deteriorates and the away from here, then you can very easily reduce the issue growth, extend your runway. But on the flip side, if conditions come back, you can very quickly open up the taps again to go for growth again. And so I think that optionality is just super valuable in this environment.

Felicity: [00:31:03] I think that's really exciting because there is a huge concerns, right, that we've heard from various fund managers and various specialists that the decarbonisation goals of Paris 2030 aren't going to be met. So it is great that you guys are investing in companies that are potentially, you know, helping with those goals. 

Damian: [00:31:24] That's a plan. And, you know, it's also great to have so much support from, you know, our institutional investors who are very much aligned with detectives as well. So it's great very on area. 

Candice: [00:31:34] And just one comment there, if we can just pack it a bit more with you, Damian. You mentioned if funding was to dry up, so what is that catalyst? What's that big? A moment that you think may or may not happen in the markets to really suck out more innovation in the markets in the next 2. 

Damian: [00:31:51] To 3 years? Yeah, I think ultimately it comes down to those pools of capital that are being raised. If those investors go, hey, we don't want to invest like we just going to spike, rather just to even though we've got five points capital, we'd rather just sit on that capital and not deploy or only deployed in very, very specific, very restrictive means. You know, given that we're investing in early stage entrepreneurs, one big solution to that is always that growth sort of tends to be a solution to a lack of capital. So, you know, there's plenty of businesses in there that mess up less and less businesses without even taking a dollar for investment. So in that sense, if you can get in the early stages and then back those those businesses, you know, that's a great sign. But I think realistically you have to have a pretty serious, you know, the GFC financial meltdown where people and businesses just lost all confidence and said, hey, you know, our fundamental business is gone, we're not going to start investing in businesses. So, you know, I'm not too stress, not too stressed about that being a thing. I think it's more a question of people's propensity to continue to write the same check sizes, the speed at which they are deploying. And therefore, that ultimately comes back to the chances of you as a business getting funded. I think it's more of that type of observation that focuses on the hands. It doesn't. 

Candice: [00:33:09] The point I was just thinking about is maybe we stress test of money to me as a business. Good timing. 

Felicity: [00:33:13] So yeah, that would be funny. All right, so that's a positive. What about the negative? What other areas or segments are kind of keeping you up at night? Have you made any bad investments? Yeah. 

Damian: [00:33:28] I mean, I'd say the areas that we luckily don't have too many in our portfolio have in our portfolio. But the areas that I worry most about are those that have been sort of masquerading as a tech business. So businesses where they might have a technology front end or they might be really smart in the way they acquire customers using technology. And so they've been able to successfully grow faster than their direct immediate in their traditional tiers. And so, yes, they should be rewarded for that. And yes, they should trade in a higher growth model than their existing peers. But that doesn't necessarily mean that when they get to scale that they're actually they've got tiny margins as a business. That's a great example of this maybe like an asset leasing business or something like that. That's a really, really smart way using technology to acquire customers. And so they are growing really, really fast and they're doing a great job. That doesn't mean they're a $100 billion company. The economics of that business is akin to that of the equivalent $100 billion business. Another great example is the delivery businesses. So, you know, they receive a lot of funding from a lot of bases internationally. And if you can solve the delivery problem through some really smart form of technology, they're obviously kind of right down the path during delivery. But if you can solve that for sure, you know that that is a technology business. But if at the end of the day, you can acquire customers, you can have a really good app that people use that is really convenient. That's great. But at the end of the day, if someone still needs to physically get in, they can't deliver the product to you or that business is going to be constrained by those type of operations. And so it could be a really, really good business that could be doing really well, but is going to scale and shouldn't be treated the same size as Texas. 

Candice: [00:35:18] Gosh, how far away are we from drone deliveries do you think. 

Felicity: [00:35:20] Oh, that would be cool if you invest in anything like that. 

Damian: [00:35:24] I mean, the good thing, the good thing is going hands on. It's hard for businesses like that to emerge funded, especially in environments like this to be funded by venture capital, but plenty of investments to be made in that space. This business called Zipline, it does delivery in Africa of things that need medical supplies or things like this is he tried to go down that path. Ultimately, my gut says it's going to be someone like Amazon, then it's going to win that race. Yeah, yeah. I mean, they've got the capital behind them and they've got the distribution and they've got the infrastructure and they're happy to be funded by these things. And you tear 50 million bucks and don't achieve much, then business is basically dead. But at Amazon, if you have a little bit of a misstep, but the competition is still to get that piece of delivery is seen as key to the broader strategic objective of the business, then you're going to continue to invest in that area. So the US is known for being a very innovative, forward thinking business. So that's going to be their space. I mean, I think it's already happening, but delivery is already happening in the US, so I don't think it'll be very contagious. Took them a while to build Infrastructure Australia and there's certainly plenty of challenges around actually setting delivery as well as just regulations about the drones flying around for sure. Right. Yeah, I think I think we'll get out of. There'll be some, there'll be some small way to do it. 

Candice: [00:36:45] So speaking on valuation, you know, Amazon is known as one of those stocks that always does have a high multiple. So we've obviously seen valuation per se come off in the listed space. But how can I guess investors trust a valuation put on a private business? You know, I thought back to Canva, they did a down race right in the valuation only recently. So any thoughts on that? Do you think that's going to be a trend as we go into potentially this recession that the market's pricing in, you know, thoughts on really the trust on a valuation in the private sector? 

Damian: [00:37:18] Yeah. I mean, obviously, you know, Campbell is a great example of that getting played out in the media a couple of months ago with where there was lots of questions around whether that was the appropriate valuation to be applying that we're not an investor in Tampa on that specifically like this were really smart investors in there and in the sense of things like business is continuing to grow at a rate a lot. So you know, I don't really have a strong opinion on that. But, you know, first and foremost, you know, I'm not sure that people necessarily appreciate that because we got institutional capital behind us. We have to go through a pretty rigorous auditing process every year. And we haven't even completed really just coming up the back of that learning process, the 30 June. So there's also complexity in how valuation and what at what value holds each round of investment that you do. So because venture capital is fundamentally private capital means that there's different terms for each round of investment that you do. And so, yeah, an example of downside protection terms that people often have is one is liquidation preference, right? And another is an anti dilution type mechanism. And so what ends up happening is that even though a business might be valued at a certain headline valuation, the reality is that if the tranche or the the round of capital that you put in has some form of downside protection, even though the value of the business might have gone down, your holding might still be at cost. And so you can imagine when you've got multiple different business rounds of different periods of time each round, different times, you have a very complicated waterfall structure of how that capital, if the business was to be sold at that valuation, how the capital would be returned to investors. And so when you've got in the case of 40 or 50 portfolio companies in each of them we've done, you know, 1 to 5 rounds of investment into them. It gets very complicated very, very quickly. And so I sort of highlight that you'll do spend a lot of time going through each line of every single thing with you, what it is of having to justify while you come to that valuation. And they will take a balance. They will look as if it is a comparable listed company, yet you've held this at this price. Why do you think that's appropriate? We have to justify our business with comps, but then also referring back to the progress of the business cycle, I think, you know, fundamentally we're not incentivised to mark up things or mark down things at the end of the day we get paid when we realised. So ultimately it's about the hierarchy. And so if a venture fund is consistently maxim or you know, undemanding over marketing, well that's only going to be yeah, that's going to make you look like you when it comes to go in touch with your investments. Your point is that point in time. 

Felicity: [00:39:57] So of course, I think I want to just quickly mention that one of your successful investments was actually Life360. That's one that Candice and I followed quite closely. So that's very exciting to see and that you actually have won the Venture Capital Investment Awards in 2019. So thank you so much for those comments, Damian. It's been a really interesting episode. We have one final very important question, Candice, what is it? 

Candice: [00:40:23] You're ready. This is the toughest part of the whole chat. Coffee, tea or tequila? 

Damian: [00:40:28] Coffee. 

Candice: [00:40:30] Straight away. No hesitation. Easy. 

Damian: [00:40:32] I hate tequila.

Candice: [00:40:33] Oh, really? 

Felicity: [00:40:34] Oh, you hate tequila? 

Damian: [00:40:36] Definitely not a team. And although I was like, you know, I love to love to think I was a tea man, but really, this was definitely a call from anyone else. I mean, the site's probably the worst part of living, and it was just. 

Felicity: [00:40:47] The coffee being so bad. That's true. And you're going to need a lot of coffee if you're looking at about 40 different companies a week. That is a lot. Well, thank you so much, Damian. It's been great. 

Damian: [00:40:58] Really, really appreciate it, guys. Thanks very much. 

Candice: [00:41:00] Well, that's a wrap. We hope you enjoyed our conversation with Damian folks from Cathorna Capital. It was great to get a deep dive and his insights into the private markets because, you know, the Lister market gets a lot of press, but the private market is just as important. So it's good to know his insights there. For me, you know, personally, I love chatting with experts in different fields. Like I didn't know what the key factor was. So I learnt something new today which essentially, like he explained, it's the hyper growth business model that is really attractive to investors and anything in the tech space in particular that just goes viral very quickly is essentially how I understood the definition of the K factor. So with that. Cause we're going to sign off. But before we do, please remember although Felicty and I financial advisors at Shaw and Partners as always our discussion today does not constitute personal financial advice, nor is it a financial product. As always, you should go out and seek your own professional advice and do your own research before you make your investment decisions. And everything that we spoke about is factual at the time of recording being the 25th of October 2022. 

Felicity: [00:42:09] I know I don't say that my life is flashing before my eyes. And make sure you follow us on at Talk Money To Me podcast for daily market updates. There's been a lot of scammers at the moment, so please triple check the spelling. We also won't be contacting you directly, so it's definitely not eyes sending you inboxes telling you about trades and crypto trades or we don't do that. We don't know anything about it. So it's definitely not going to be us so just triple check the spelling because there's going to be a lot more scammers, said Sascha.

Candice: [00:42:41] So not good. Not good. Also, please give us a nice review on Apple Podcasts, Spotify, if you've got any questions or want to talk to us at all. tmtm@equitymates.com and if you want to check out the Cathorna fund, go to www.cathornacapital.com because some really interesting information on their website. Until next time. 

Felicity: [00:43:03] See you next time.