The early Shopify backer has written down more than two dozen holdings – including four total writeoffs – this year
WorkFusion Inc. was supposed to be a big winner for venture capital firm Georgian Partners Growth LP. The Toronto firm had been looking to back fast-growing startups that usedto transform the business world. WorkFusion was ideal: It had a “powerful vision” to improve productivity with robotic process automation software it deployed to help financial giants automate and optimize business functions, Georgian head of firm Justin LaFayette said.
The information comes from quarterly reports sent confidentially to Georgian investors, or limited partners , and obtained by The Globe and Mail. The documents offer a rare look into a key Canadian private capital player, portraying a fund manager dealing with a serious hangover after investing heavily at the height of the COVID-19 pandemic tech bubble rather than selling when spendthrift fundersHow Georgian performs has broader consequences.
Even against that backdrop, Georgian has underperformed. After this year’s writedowns, returns to date for its five oldest active funds, which invest mostly in the United States, are in the single digits. As of June 30, Georgian’s Fund II, launched in 2013, had an average annual internal rate of return net of fees of 8 per cent, while Fund III, from 2016, had a 3-per-cent IRR. That put both in the bottom quartile of funds of their vintage, according to Cambridge. Fund IV, launched in 2018, and Fund V had IRRs of 9 per cent and 8 per cent, respectively, both in the third-lowest quartile. Georgian’s 2020 Alignment I fund, which bet big on WorkFusion, had an IRR of zero, also in the third quartile.
Some observers and LPs believe Georgian grew too fast, was too willing to overpay, too inexperienced managing a cyclical business or too enamoured of its companies to divest shrewdly. Instead of selling into the biggest tech bubble in 20 years, it bought more of its highly valued companies. Given how widely Georgian funds are held by other Canadian funds, the firm’s results could drag on returns across the domestic VC sector, which until recently had narrowed the performance gap with its U.S. peer. It has been hard enough for Canadian VCs, and many LPs here have complained of meagre cash returns, though that has been a broader problem for the sector globally of late.
But it was a 2011 opportunity at home that made Georgian a VC star. Shopify was raising $12-million from a trio of U.S. VCs declared its engagement, education and networking program for fledgling startups was a “freemium version of Georgian.” Other VC firms didn’t do that.in early 2022 that he planned to invest US$100-million in Fund VI and US$50-million in Alignment II, after previously backing Fund V.
Revenue growth for companies that sell software to corporations slowed or reversed as clients cut spending. Several Georgian companies lost momentum. For example, Georgian led a US$135-million investment into Noname Gate Ltd. in 2021, valuing the maker of security products for software developer tools at around US$1-billion. That was more than 1,000 times revenue that fiscal year and 100-plus times the next year’s sales. By comparison, average multiples for the top quartile of publicly traded cloud software companies reached 24 times forward sales in 2021 and are now eight times. Noname had a big valuation to grow into. It didn’t get there.
Georgian didn’t sell a share, and still hasn’t. CS Disco’s stock soon deflated, falling further when chief executive officer Kiwi Camara resigned last year over allegations he had groped an employee. The stock recently traded for US$6. Georgian’s stake is worth about half what it paid. Not selling was a point of pride for Mr. LaFayette, even though VC funds, with 10- to 12-year lives, eventually must exit their positions. “That is many tens of millions of carry that would have been paid out,” he said on the video. “We are not doing this to lock in carry and provide liquidity to ourselves,” but because Georgian believes in the companies.
Negative feedback and market conditions have prompted many writedowns and left some Georgian holdings in a bind. Silicon Valley virtual reality training company Strivr Labs Inc. is struggling with product-market fit. It lacks customers, and cash and financing or exit options. Georgian wrote down its US$40.2-million Fund V investment to US$6.1-million in Q2. The firm warned that any solution Strivr finds likely won’t improve Fund V’s performance.
But Georgian is feeling pressure from LPs. The firm, which used to be aloof and terse in disclosures to investors, has recently provided expanded commentary about market challenges and portfolio issues in quarterly reports. It has enhanced governance, valuation and investment processes, and committed to managing its portfolio with transparency and discipline.
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