Square Peg is raising for a sixth fund, as well as a new “Opportunities Fund 3”, but cofounder Paul Bassat has promised more money will go back into investor pockets than they will invest in the years ahead.
Twelve years on, Bassat said in Square Peg’s half-yearly update to June 2024 that “the last two years have been the toughest since our inception”, and “perhaps” the toughest for venture investors in two decades, but the VC has seen its “best years of performance” in the last 24 months.
“We have seen our best-performing portfolio companies continue to create significant value, we have identified opportunities to invest in new companies that we hope will be the future Canva, Rokt, Kredivo, and Airwallex in our portfolio, and we have returned significant capital to our early investors,” he wrote.
The sale Deci.AI to Nvidia as well as secondary sales of a small stake in Canva along with all of Bugcrowd meant that “exit activity was also higher than anticipated during the half” with investors receiving US$187m (A$283m) over the period.
“We have now returned almost US$800m to you since inception,” Bassat wrote
“Most importantly, we are now at a point in our evolution where the default should be for us to return more capital in a given period than we invest during that same period.”
Nonetheless, the Square Peg boss said the firm’s “investment cadence has increased” in the first half of 2024.
“We have invested in several new portfolio companies, including AI-first businesses and others that operate at the intersection of SaaS and fintech. From a geographic perspective, these businesses span our investment geographies, including Australia and New Zealand, Southeast Asia, and Israel,” he wrote
“We have also made a number of follow-on investments in existing portfolio companies.”
Meanwhile, the firm believes that artificial intelligence will be “defining technology theme for an extended period of time”, while Square Peg has been learning about it since its first AI investment in Israel in 2013.
While the rise of AI in the over the last 5-10 years “has surprised almost everyone to the upside” Bassat said, it was still “very early days” and unlike the internet era, it will be difficult to predict the rate of progress for AI, although “it is likely to be profound”.
“While not all of those innovations will be driven by startups, if history is any guide, many of these new applications will be created by startups,” he wrote
“Trillions of dollars of shareholder value will be created. We have just scratched the surface in terms of creating practical consumer and business applications from the advancement of AI technology to date.”
What’s clear, Bassat believes, is the quickening pace to revenue, with Open AI’s annualised revenue hitting US$3.5 billion just 19 months after the launch of ChatGPT, compared to Google hitting $100m after 3 years and Amazon’s $1bn after five.
“Even allowing for inflation, these are dramatic differences of scale and offer some insight into the significant scaling of addressable markets in the last 25 years,” Bassat observed.
You can read the full letter to investors here.