Airtree Ventures already returned its first fund thanks to Canva while maintaining the majority of its stake.
Venture secondaries has exploded over the last couple of years. While some firms have used the increase in activity to build up their positions in their most promising portfolio companies, Airtree Ventures is taking advantage of the momentum in a unique way.
The Sydney-based venture firm, founded in 2014, has been utilizing company-led secondary sales to decrease its equity stakes and obtain liquidity from some of its most successful investments. Among its portfolio are Australian unicorns such as Canva, currently valued at $40 billion, Immutable at $2.4 billion, and LinkTree at $1.3 billion, among others.
Craig Blair, co-founder and partner at Airtree, told TechCrunch that Airtree’s main goal, like any other venture firm, is to deliver the highest level of returns to its investors. However, unlike many other firms, Airtree is able to generate returns throughout the entire lifecycle of an investment, not just when the company exits.
“Right from the start, we strive to put as much energy and careful consideration into the exit process as we do for the funding process,” Blair said. “We analyze the fund’s lifecycles and the businesses themselves, and think about when would be the best time to exit a particular company.”
Airtree primarily invests in companies at the pre-seed and seed stages. However, with companies staying private for longer periods of time, traditional fund lifecycle returns are not as frequent. This prompted Airtree in 2021 to seek out alternative methods of obtaining liquidity for their earliest investments, according to Blair.
One notable example is Canva. Airtree initially invested in Canva’s Series A round of $6 million in 2015. Blair mentioned that the firm reduced its stake in the startup in 2021 when its valuation reached $39 billion. From this transaction alone, Airtree saw a 1.4x return on Fund I and was able to retain the majority of its original stake.
“There is no set rule,” Blair stated regarding how the firm determines when to decrease its stakes. “We consider the fund’s position and the role of the company within that fund, and ask ourselves, ‘If we sold today at this price, how much potential future value are we giving up by holding on? What is the value of liquidity versus long-term TVPI and its impact on the fund?'”
Blair clarified that each time they have employed this tactic, they have purposely retained a majority of their stake in the company. He mentioned that while the ultimate goal is still a major win, Airtree doesn’t want to rely solely on that final outcome.
This strategy is especially sensible when considering the significant decrease in valuations for late-stage startups in recent years. While some companies continue to work towards their last recorded valuation, many are still far from it and may ultimately sell for a lower amount than their most recent primary round.
However, this strategy is not foolproof, and some investors may argue that reducing these stakes takes potential earnings off the table. Blair acknowledges this, but also notes that the final exit may not be as profitable as initially anticipated.
“Selling too early can definitely be negative,” he added. “There isn’t a single answer, but rather having an active decision-making process rather than a passive one when it comes to liquidity. We shouldn’t just sit back and wait for exits to come to us.”
Airtree does not rule out the possibility of raising a continuation fund, the current preferred liquidity option in the venture industry, and may consider it if the firm decides to sell a bundle of its shares at once. However, their current secondary strategy of participating in company-led secondary tender sales has been successful thus far.
“As investors, our responsibility is to return money to our LPs at the right time,” Blair concluded. “Selling too early can be detrimental. There isn’t a one-size-fits-all solution, but instead having a meticulous process that involves active decision-making when it comes to liquidity. We shouldn’t just wait for exits to happen passively.”
