Annual Investor Letter 2021
Friday, December 24, 2021
To the Founders, Investors and Partners of Allied VC,
Thank you for an incredible year of support and enthusiasm as we launched and scaled the Allied Venture Partners syndicate.
Allied is the amalgamation of the best practices I’ve learnt over the past 8-years as an angel and scout, so it’s wildly exciting to finally see it exist in the world and for such a positive response among founders and investors.
I know you’re very busy, so I’ll do my best to keep this brief. There are three key topics I’d like to cover in this update:
Syndicate Metrics, Outlook & Portfolio Construction
The Current State of Markets (Public & Private)
Looking Forward: Phase Two, Phase Three
1) Syndicate Metrics, Outlook & Portfolio Construction
First, I’d like to highlight some brief metrics for the syndicate.
In less than twelve short months, I’m pleased to announce the syndicate has grown to more than 1,000 members globally, becoming the fastest-growing syndicate in Canada and the largest angel syndicate in Western Canada. Our traction and progress have exceeded my initial targets, and I look forward to continuing this momentum into 2022.
Additionally, the launch of our Scout Program and Advisory Partner Program has proven highly successful. I’d like to extend a special Thank You to all the members who have referred investment opportunities and/or helped throughout the diligence process.
Demographically, Allied consists of VC funds, family offices, high-net-worth individuals and entrepreneur/operators, many with deep technical expertise and/or successful track records investing in software & technology companies. We are privileged to have a very diverse group of individuals, from executives at Fortune 500 companies to founders of billion-dollar unicorns. Thank You for your trust & support over the past year; we could not have done this without you.
In addition to our North American investors, I’m excited to welcome our diverse international investor base, including members from Australia, New Zealand, Singapore, Japan, Hong Kong, the UK, France, South Africa, Turkey, Mexico, and numerous other countries.
Having spent time in Australia over the past year, I’d like to say a special Thank You to my friends and fellow investors Brendan, David and Mark for being so generous with your time, introductions, and making me feel at home while I was in Sydney.
Lastly, and most notably, a very special Thank You to my mentor Paolo for advising me on the initial structure & formation of Allied, as well as my Venture Partner Steve for your outstanding support and friendship over these past years – this definitely could not have been done without you and I sincerely appreciate all of our late-night and early-morning phone calls.
Regarding Allied’s investment progress, as of November 2021, Allied helped raise just over $2M USD, making ten investments across eight companies. This was part of an overall $25.7M in total funds raised by our portfolio companies – well done founders! These companies include:
In line with our investment mandate, these investments were predominantly Seed-stage, with two Series A investments and one follow-on Series B.
I’m not one for promoting multiples, TVPI or IRR in the early days – frankly, the only metric that truly matters to LPs is DPI (cash-on-cash returns) in relation to PME (public market equivalent). However, I’m happy to share the news that two of our portfolio companies have subsequently raised at higher valuations since our initial investment (one at 2x, one at 4x), while several others are currently assessing term sheets at considerable markups to their previous round.
From the beginning, as highlighted in our investment mandate, my goal is to operate Allied with the diligence and discipline of a top-tier VC fund, yet with the flexibility of a syndicate.
Particularly with syndicates, it’s easy to fall into the AUM game, focusing on quantity over quality. With that said, I’m very adamant about maintaining our disciplined and thesis-driven approach in pursuit of a slightly more concentrated (yet higher quality) portfolio. My original 2021 forecast was to include 4-6 new companies – we added 8.
In 2022, I anticipate adding 6-10 new companies at a pace of 1-2 per quarter. This pace aligns well with our typical process time of 3-4 weeks and will get us to our target portfolio size of 25-30 companies within 3-years – once again, thinking more like a fund, less a syndicate.
I’ve spent a lot of time thinking about portfolio construction over the years and it’s something I believe truly matters in generating optimal returns for investors (and subsequent available capital for founders). Additionally, I want the capacity to support our founders when required, so scaling Allied in sync with new portfolio additions is critical to avoid spreading ourselves too thin.
Lastly, with capital becoming increasingly commoditized, we’re seeing a bifurcation in the marketplace where founders who simply want capital can go out and raise funds from a handful of passive RUVs or syndicates; while others want investors who can bring additional value to the table.
There’s no right or best way, and there are great opportunities on both sides of the fence, but there is undoubtedly increased competition (and dilution) among those playing in the passive/commoditized pond. My preference has always been to find the unique opportunities others have overlooked, then double down as they breakout.
With that said, you likely won’t see Allied elbowing for allocations among pre-YC companies at $100M valuations. I’m not saying those deals are unattractive; I simply don’t have the capacity to play in such a crowded pond while there are so many great opportunities elsewhere.
2) The Current State of Markets (Public & Private)
In July, I wrote a Medium post highlighting my thoughts on how current markets got to where they are and where I think we’ll go from here.
It’s interesting to see several predictions already coming to fruition, particularly regarding inflation, central bank activity, corporate earnings, remote work and global supply chains. I still believe we are in the early stages of a strong expansionary economic cycle, albeit fragile.
On a macro level, given the unprecedented volume of liquidity governments have injected into economies, we’ve known inflation was coming since Q4 2020. However, I don’t think we will see complete runaway inflation provided Central Banks appropriately taper their stimulus measures. Therefore, although the liquidity baseline has unquestionably shifted upward, I maintain my belief that annual inflation is here to stay, likely in the 5%-7% range.
In response, I still believe we are in a frothy market that is due for a healthy 10%-20% correction (particularly in developed markets). However, with two-thirds of the world yet to receive a vaccine, I believe this reopening trade will persist for several more years, thus continuing to drive economic growth and subsequent corporate earnings.
Over the ensuing 12-24 months I anticipate public markets will taper to more sustainable levels of ~9% annual growth.
As for private markets, I maintain the beliefs expressed in my July Medium post. To paraphrase, there is simply too much capital chasing too few opportunities. As a result, we’re seeing some startups take on incredible valuation increases without the supporting KPIs, forcing the herculean task of growing into those valuations to achieve the next funding milestone.
We first started to see record amounts of VC funding hit markets in H2 2020, so as that current cycle of runway comes to an end we will see if this hot market can persist.
Personally, I still believe we will see an increase in the number of flat or down rounds. However, those startups which maintained discipline (i.e. stayed focused on product, customers, team and a responsible valuation), will begin to emerge as the next cohort of potential unicorns.
3) Looking Forward: Phase Two, Phase Three
I’m excited to continue our momentum into 2022. I launched Allied to expand the pool of available capital for Western Canada’s startup ecosystem while concurrently providing local investors with greater access to high-growth opportunities from established VC markets.
To achieve these goals, Phase One required building a global investor base by syndicating attractive venture-scale opportunities from established VC markets. Once the syndicate has reached certain milestones, Phase Two will introduce more Canadian (and potentially overseas) investment opportunities.
From a pacing perspective, I anticipate approximately 10%-20% of investments will be Canadian-based. Why so few? It’s simply a numbers game (i.e. with a US population ~10x larger, there are simply more startups, and we see far more opportunities from the US market).
As for Phase Three, my goal is to launch a small pre-seed fund enabling early checks for founders in which we have high conviction, supported by larger follow-on investments from the syndicate as each company progresses through Seed and Series A.
Although the flexibility of a syndicate allows us to avoid strict ownership requirements, I maintain our principle of working with founders to build our ownership position over time, targeting 50-to-300 basis points per investment, ultimately reaching 5%-10% ownership (pre-dilution).
Additionally, I’m a big supporter of follow-on investments and continuing to support companies as they achieve milestones, so having a Pre-Seed fund (reinforced by the syndicate at Seed & Series A) will allow us to support our founders across additional stages while allowing investors to double-down on their favorite companies.
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Thank you again, founders, investors and partners, for your trust and support in 2021. You can always reach me on LinkedIn, email or DM, and I’m always happy to chat startups, fundraising and everything in between.
Finally, I’d like to say a special Thank You to my wife for her unwavering support throughout this process. She is a great litmus test when assessing potential investment opportunities and is never shy in telling me when I’m at risk of a blindspot.
I look forward to another great year ahead!
Best,
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Matt Wilson, MBA
Founder & Managing Director | Allied Venture Partners