General partner Steve Schmidt explains how Telstra Ventures managed the transition from internal unit to hybrid CVC firm.
Growing “faster and bigger” was the motivation for Telstra Ventures to spin out from parent company back in 2018. “We were doing very well and accessing more capital was an opportunity to grow further,” general partner Steve Schmidt told Global Corporate Venturing.
The fund was originally formed within Australia-headquartered Telstra in 2011 and had built up a string of successful exits in portfolio companies such as Snap, Box and CrowdStrike, but was eager to get external investors on board.
“We were set up like a private company inside Telstra,” Schmidt said. “But we were employees, we worked for Telstra and we ultimately had oversight from the CEO and board. We were relatively independent even inside Telstra, [although] we had some constraints in terms of the balance between strategic focus and financial returns.
It is increasingly a common story in corporate venture capital. Several successful investment arms have split from their parent companies, notably names like Sapphire Ventures (formerly part of SAP) and Mouro Capital, which began life as Santander Innoventures.
The trick of a spinout is to achieve the agility of independence while retaining the benefits of a corporate parent. Has Telstra Ventures managed it?
A friendly split
Schmidt says the separation from Telstra was very amicable. The corporate appreciated the value the team was bringing in and did not want to lose them.
“Thankfully, Telstra as a company is quite mercantile, and the focus on returns we pushed as a team was also important to them. They didn’t want this just as a strategic playpen and they certainly weren’t going to lose money for Telstra shareholders. We had to be very responsible with the capital and ultimately show we were delivering a return on investment.”
“They didn’t want this just as a strategic playpen.”
Private equity firm HarbourVest helped finance the deal which brought the unit independence, reportedly paying $62.5m for a 25% stake while Telstra realised $75m from the deal. They each committed a reported $92m to a vehicle Telstra Ventures refers to as its Fund II, which has now been fully committed.
The firm now operates through what it sees as a hybrid CVC model, one Schmidt described as a balancing of weight. A corporate venturer has market insight, technology applicability and strategic value it can offer co-founders, to an extent it may be ‘overweight’ in those areas, while being underweight in terms of flexibility, speed of response, the freedom to act and sometimes incentives.
Telstra remains a a limited partner and Telstra Ventures is set to close its next fund in the coming weeks, targeting $350m to $400m.
The firm invests across areas such as cloud, data and cybersecurity software as well as networking, digital consumer and media technology, all areas potentially of interest to a telecoms company like Telstra, though there is no requirement to invest strategically for its ex-parent despite its status as a limited partner.
Looking ahead
The startup space remains a fierce battleground, probably more so given some of the large fund closes in recent years. Telstra Ventures is competing against traditional VC giants like Sequoia Capital and Lightspeed Venture Partners as well as the stronger corporate venturing units like GV or Intel Capital. Differentiation is vital, something which can come through a corporate partner, especially if it can help bring in new business and create synergy revenue.
“You have to bring some sort of value,” Schmidt said. “And I think the strategic angle has a lot of value for founders. The sweet spot within that which we found was driving new customers to the portfolio company.
Telstra Ventures is exploring more deals in the Web3, gaming and AI spaces.
“How can we find them customers, how can we give them and their brand exposure, how can we give them market awareness through a press release that gets syndicated very well under the Telstra banner? How can we give them access to customers?
“Telstra has 1,500 enterprise customers just within Australia. How can we leverage their sales channels and those relationships to expose that technology at a much faster rate and more organically than you would otherwise?
As the firm prepares to close its Fund III it is looking to invest in the kinds of areas which will be popular two years from now. Its portfolio includes Web3 unicorns FTX and Blockdaemon, and it is exploring more deals in that space as well as in gaming and artificial intelligence technology.
Market downturn could fully hit VC deals in three to six months
The one cloud on the horizon would be the valuations of its publicly traded software-as-a-service portfolio companies such as GitLab and Okta, which are both trading some 65% down from a year ago, a symptom of the widespread bear market for tech stocks this year.
“It’s kind of a net-zero game.”
Schmidt is seeing the first signs the turmoil is translating to private markets and expects it to be fully fledged in three to six months unless the capital markets recover. From the investor side however, there is always a silver lining.
“As investors, the market is the market and we’re always looking for a great opportunity. It’s kind of a net-zero game,” he said. “If you have a large portfolio and it goes down, you’re able to invest at lower valuations. That’s a good thing, but your portfolio is down – and the converse in the other scenario. It’s not a one-for-one scenario.”
