Annual Investor Letter 2024
Friday, December 20, 2024
To the Founders, Investors, and Partners of Allied VC,
Thank you for another fantastic year of support as we continued to scale Allied Venture Partners during one of the most exciting periods in the last 15 years for early-stage venture investing.
Allied embodies the best practices I've gathered as an angel investor and scout over the past eleven years. To see it come to life and receive such enthusiastic support from founders and investors is incredibly inspiring.
As with my previous letters, I would like to cover three key topics 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
Allied Venture Partners boasts a thriving community of over 1,900 members from two dozen countries, creating a powerful global network. Since 2020, we’ve successfully invested nearly $6 million into 21 innovative companies spanning Canada, the United States, and Australia. Furthermore, our Scout and Advisory programs have demonstrated remarkable success, creating a powerful and diverse dealflow flywheel that gives us a unique advantage.
In 2024, we reviewed over 1,500 investment opportunities throughout North America and strategically selected the top 0.5% for investment. For reference, I’ve included a breakdown of our five-part dealflow funnel, designed to enhance collaboration and drive success:
I am truly grateful to all the founders, limited partners, venture scouts, and co-investors for sharing unique investment opportunities. Without your support, Allied would not be possible.
Regarding our 2024 investment progress, Allied raised and deployed $705,000 making nine investments into nine companies (including one pre-seed investment, four seed investments, and four follow-on investments). These investments were part of an overall $12 million in total funds raised by our founders.
These companies include:
As outlined in our investment mandate, my goal is to consistently add four to six new companies to the Allied portfolio each year. In 2024, I’m pleased to report we were right on pace, successfully adding five new portfolio companies (two in Canada and three in the U.S.).
Regarding performance, our strategy of co-investing alongside reputable investors remains highly effective. This year, we co-invested with prominent firms, including Index Ventures, Sequoia, Slow Ventures, Plug and Play, Gaingels, Techstars, Panache Ventures, Network VC, Garage Capital, and numerous others. Additionally, we invested alongside multiple professional athletes and influencers, enhancing our investment reach and credibility.
Among our follow-on investments, we achieved a notable 2.7x markup within 8 months of our initial investment, along with our fastest-ever markup of 25% occurring just two weeks post-investment. Furthermore, we are in the process of distributing our first DPI, a milestone that coincides with our fourth anniversary. Aggregate valuation across the Allied portfolio now exceeds $500 million.
As the venture capital market continues to heal, I believe we will see more consistent markups and acquisitions in the coming quarters. To reinforce our mandate, my objective is to operate Allied with the diligence and discipline of a top-tier VC firm while maintaining the agility of a syndicate. I firmly believe that our disciplined, thesis-driven approach, rooted in our core investment values, has proven resilient in the face of recent market volatility.
Nevertheless, we are in the business of early-stage venture investing, so if we don’t experience some losses, I’m likely not doing my job correctly. Unfortunately, we had two companies shut down this year.
In both cases, the founders showed remarkable commitment and did everything possible to salvage their businesses. In one case, the founder managed to sell the company's assets, which helped avoid a complete loss.
Building a company takes an incredible amount of dedication, and it’s genuinely heartbreaking to realize that after investing years of hard work and devotion, one could encounter serious personal, professional, and financial turmoil if it doesn't succeed. I greatly respect any founder who takes the entrepreneurial plunge, and I truly hope to be their first phone call when they launch their next startup.
Regarding Allied, I provided investors with a thorough postmortem and remain dedicated to refining our investment strategies to increase value for our limited partners. Moving forward, I remain focused on uncovering unique and overlooked opportunities while also doubling down on our top-performing companies. We have several exciting prospects in the pipeline, and I look forward to sharing more details in the weeks ahead.
2) The Current State of Markets (Public & Private)
In 2024, the public markets saw a significant recovery. The S&P 500 rose by over 28%, achieving more than 50 new all-time highs, and the total market capitalization of U.S. public companies exceeded $55 trillion. Similarly, the Canadian S&P/TSX Composite Index also performed well, increasing by more than 22% and reaching multiple new record highs. Both markets benefited from central bank policies, including interest rate cuts, which fueled a market rally on both sides of the border.
As we look ahead to 2025, I expect a more subdued year for market returns, coinciding with the new U.S. administration adjusting to its role and increasing uncertainty around interest rate cuts amid a robust U.S. economy. In Canada, although inflation is under control, the risk of recession is increasing as unemployment continues to rise alongside trade tensions with the U.S. and China.
What I’m Seeing in Private Markets
While the public markets have flourished, the venture capital sector has faced ongoing challenges, particularly in fundraising. For instance, many founders and fund managers continue to struggle with limited access to capital. Consequently, more founders are opting to bootstrap, and seed rounds have generally become smaller, often under $2 million.
To secure funding, founders now need to demonstrate greater traction, with monthly recurring revenue of at least $10,000 to $25,000+. Additionally, the timeline from Seed to Series A has extended upwards of 24 months.
Despite these challenges, the current market presents a very unique and exciting opportunity for early-stage investors, and in my opinion, is the most attractive time of the past 15 years to be an early-stage technology investor. There are several factors contributing to this favorable environment:
Lower Valuations: Valuations in private markets have returned to more reasonable levels following the exuberance of 2021. This reversion to the mean, along with heightened benchmarks for traction and fundamentals, presents a compelling opportunity for investors to capitalize on more favorable valuations.
High-Quality Deal Flow: With increased capital constraints, the quality of companies coming to market has significantly improved. Many founders are now bootstrapping to six-figure revenue and demonstrating double-digit monthly growth before raising outside capital.
Increased Operational Efficiency: Startups are achieving significantly more with a lot less, driven by the adoption of AI and other technologies that enhance operational efficiency and reduce costs. This trend benefits founders and investors by reducing the time and capital required to achieve PMF (product-market fit) and scale.
For example, in 2022, we invested in a company that was growing 2x to 3x year-over-year. Since incorporating AI into its various processes, the company dramatically improved the economic profile of its business, growing 4x last year and 10x in 2024, while significantly improving operating margins.
In another example, one of our portfolio companies achieved an 8-to-1 efficiency improvement in their customer service department, meaning one person could perform the work of eight, significantly reducing labor costs.
As we look ahead to 2025, I believe several key factors will continue to influence the direction of the venture capital market:
AI Bubble: I believe the rapid influx of capital into first-generation AI application startups has created a bubble. Investors must be selective when allocating capital in this sector, concentrating on companies with vertical specialization and proprietary data advantages that can endure eventual market consolidation. We have experienced technology paradigm shifts before, including internet/web, search, mobile, crypto, and now LLMs. It’s common for an initial rush to capture market share, which typically corrects as we gain a clearer understanding of the evolving infrastructure layer, after which more durable and sustainable second-generation companies emerge.
Late-Stage Liquidity: Exits in the private market remain uncertain, with late-stage liquidity an ongoing concern. However, the IPO market is widely expected to pick up next year, with numerous high-profile IPOs on the horizon, including Stripe, Databricks, and Klarna (among others). Under the new U.S. administration, expectations for a more relaxed regulatory environment, including M&A, are high.
Fund Manager Alignment: One trend and area of concern I’m noticing is fund managers narrowing their investment mandates to satisfy the requirement of institutional LPs. Although LP capital remains limited, it's critical for VC managers to invest where they have a unique edge and meaningful differentiation that can produce outsized returns. As an LP in numerous VC funds, I believe LPs should focus on aligning with managers who have a sufficiently broad investment focus since financial returns are ultimately what deliver LP success (and subsequently drive our startup ecosystem flywheel).
Overall, 2024 was a year of recalibration and opportunity in VC. The combination of normalized valuations, increased operational efficiency, and high-quality dealflow has created an exceptionally compelling environment for early-stage technology investors. As we transition into 2025, navigating the AI application bubble and understanding the evolving exit landscape will be crucial for a continued recovery.
3) Looking Forward: Phase Two, Phase Three
I founded Allied to enhance capital access for startups in Western Canada and provide local investors with opportunities to invest in high-growth startups from established VC markets. This dual approach supports innovation in our local region and connects investors with the potential for significant returns they would not otherwise have access to.
In 2021, Phase One was about successfully establishing a global investor network by syndicating compelling venture-scale opportunities across North America. Building on that foundation, I transitioned to Phase Two in 2022/23 by integrating more Canadian opportunities into the Allied portfolio.
Given that our primary focus encompasses both Canada and the U.S., it’s understandable that a significant portion of our deal flow originates from the U.S. market (which is ten times larger than Canada.) Nevertheless, I'm committed to adding 1-2 Canadian companies to our portfolio each year, and I'm thrilled to have included two more in 2024—one in Calgary and one in Halifax.
Looking forward to Phase Three – a $3.5 million Seed fund to write initial checks of $75,000 (supported by additional follow-on investments from the syndicate). In 2023, I raised over one-third of the fund before strategically deciding to return capital and temporarily put the fund on hold. I realized that to successfully close Allied Fund I in current market conditions, I would have to pause our syndicate activities for 12 to 18 months as I finished fundraising. In the interim, I would miss what I believe to be one of the most exciting investment vintages of the past 15 years.
Ultimately, my mission at Allied centers around three key objectives:
Support great founders
Continue deploying capital
Return many multiples to LPs
Therefore, until I secure a general partner to assist with fundraising, I simply don’t have the capacity to operate both entities while maintaining our high standards. In the interim, the syndicate model remains the most efficient and effective way to achieve my key objectives.
What’s Next?
My long-term vision for Allied as a venture firm is clear and unwavering: a series of early-stage venture funds that strategically co-invest alongside the syndicate, empowering us to support companies at various stages while building meaningful ownership in our top-performing companies throughout follow-on rounds.
I believe in focus and discipline regarding small fund sizes (i.e., sub $10 million) that align with the stages and markets in which we operate. Anything larger, and we lose our edge.
Looking ahead to 2025, I’m excited to continue deploying capital through our syndicate model and will assess the resurgence of Allied Fund I as market conditions evolve.
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Thank you, Founders, Investors, and Partners, for your continued trust and support in 2024. I am optimistic about the year ahead and look forward to a sustained market recovery.
Please feel free to connect with me on LinkedIn, X, or by email. I'm always happy to discuss startups, fundraising, and everything in between.
Sincerely,
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Matt Wilson, MBA
Founder & Managing Director | Allied Venture Partners