Our criteria
In normal market conditions this is what we look for:
Valuation
The company must have been valued at A$75m+ or we must be able value it above that level ourselves.
Breadth
Revenues must be distributed widely and the more non-Australian revenues the better.
Revenues
Revenues must be growing in excess of 30% year on year. In smaller companies we expect higher growth.
Domicile
The company must be Australian or Kiwi or at least clearly connected to these markets.
Investors
The company must already be backed by a venture fund or a professional venture investor.
Product
There must be compelling evidence of at least the first incarnation of product/market fit.
Edge cases
We also have capacity to make investments that fall just outside the criteria of our core strategy. These edge cases might include providing liquidity to venture fund LP’s or a shareholder in a rapidly growing startup that just falls short of our minimum $75m threshold.
Who we buy from
Secondaries transactions come in all shapes and sizes and there are many types of shareholders who can benefit from liquidity
Employees
who see a liquid market for their ESOP as being a major reason to join or stay at a ventures stage company
Early investors
who like to realise some returns and reinvest the cash across another cohort of early stage Australian tech startups
Founders
who often appreciate realising a small percentage of their holding to help themselves and their families along the journey
Venture Funds
who want to lock in some gains on their best performers or who are reweighting their portfolio
Our process
Any secondary transaction involves at some stage the founder or CEO. Our process is designed around taking the distraction of being a market-maker on company stock away from management by reaching a quick clear investment decision with minimal fuss and overhead.
Transparency
No matter who the vendor of the shares might be, we require that the founder or the CEO be notified that the vendor is exploring a secondary transaction. Better still, the founder will already be in the loop before SecondQuarter is approached. We will often also speak to at least one of the company’s venture backer prior to engaging in serious discussion.
Timing
Assuming there are no external factors that delay the process for transactions between A$100k and A$1.5m we can generally reach an investment decision and a term sheet within 2-3 weeks of our first conversation. For transactions larger than this amount it is usually around 6 weeks.
Information
Our process is designed to ensure founders and management need not be distracted by the incessant email requests of a due diligence process. And we usually go out of our way to base our decision on information the company already has to hand. Typically 70-90% of all the information we require to make our investment decision is in a standard investment deck and dataroom. Aside from the commercial information, the key documents we will need to review are the investment deck, the cap table and the shareholders agreement.
Pre-emption rights
Many shareholders agreements contain preemption rights and whatever they are they must be followed. We will of course need to understand them before we commit down any path.