I’ve long been a fan of experienced private investors building some, limited exposure to venture capital assets. Traditionally that’s meant investing here in the UK in listed, tax efficient venture capital trusts – I’m invested in Octopus Titan and Hargreaves Hale AIM VCT.
Over time we’ve also seen the emergence of listed venture capital funds working outside the VCT wrapper. The big stand out success has been the old Merian (now Jupiter) Chrysalis fund which has delivered spectacular returns. Baillie Gifford has also built a formidable reputation in VC, and has offered institutional investors access through its listed Schiehallion Fund. Last but by no means least Draper esprit, a listed London VC, has also produced some excellent results – I’ve invested in this fund as well.
All of these vehicles have served to validate the idea that a small, carefully considered and thoughtfully structured, exposure to venture capital – with say no more than 5% of our portfolio – can make sense. What also seems to work best is exposure to middle and later stage private business, especially those looking to IPO (or use the SPAC route) in the next two years.
But we also face a challenge. These are all UK based solutions and if we’re honest the biggest opportunities still reside in the US. Baillie Gifford and to a lesser extent Merian and Draper Esprit do get access to these US dealflows but on a patchy basis. Which leaves us with a challenge – how do get better access to US VC deal flow.
One possible way in could be through a little known vehicle listed on the US market called Suro Capital, ticker SSSS. This might be familiar to some experienced US investors as it used to be called GSV Capital, which was a listed business development company focused on equity investments. About three years ago, this business decided to ditch its old model of investing in other VC funds and move to an internally managed fund. Key to this transition is the appointment of CEO Mark Klein in the middle of 2019. On a side note Klein is also a Director of Churchill Capital Corp II & Churchill Capital Corp III, SPACs that raised $690M & $1.1B in IPOs on the NYSE Jun. 2019 & Feb. 2020, respectively.
Back at this fund, it changed its name in 2019 to Sutter Rock Capital Corp and then changed it again – after a threat of litigation – to its current incarnation of Suro Capital Group.
What we’ve ended up with is a straight forward, later stage VC investment fund that has built a decent track record. Between 2016 and 2020 the dividend adjusted CAGR was 17.3% in NAV (from $8.66 to $15.50) – its model is to pay out dividends on a regular basis as its investments mature. Past successful investments have included Dropbox, Lyft, Spotify and most recently Palantir.
The share price is currently $13.12 which equates to a market capitalisation of $348m – by contrast the latest booked NAV is $16.56 as of June 30, 2021 or $436m, which equates to a discount of just under 20%. As I mentioned, the fund also pays a steady stream of dividends – YTD it has paid 4 dividends totalling $5.25. It’s also worth mentioning that the fund has been a canny buyer of its shares, consistently retiring shares at a big discount. According to one analyst “alll in, they retired ~22% of their shares”. Palantir;s disappointing IPo also resulted in another set of buys and its also worth noting that the CEO has bought ~$1.25m of stock on the open market.
So, what’s in the portfolio ? The table below shows that the top five positions in its late stage, pre IPO portfolio boast a fair value $189m but cost $54m.
Key assets include the following :
Coursera. Bloomberg reported earlier this month that Coursera is looking to IPO in 2021 with a valuation of around $5B. In the last quarterly release Suro observes that “On July 17, Coursera, our largest position, announced that it has raised $130 million in Series F financing. The round was led by NEA, and we participated with a $2.8 million pro rata follow on investment. The round also included existing investors, Kleiner Perkins, Seek Group, Learn Capital and others and brought the company’s cash balance to more than $300 million, this is according to the company’s announcement.
Course Hero is also doing well and raising more money all the time, with an IPO likely in 2022. Its main rival is Chegg (CHGG) whose shares have more than doubled over the last year. SSSS has only taken their valuation of Course Hero up ~24% so far this year, and Course Hero’s last round was priced at ~10x revenue. Again the quarterly report observes that “As reported in August 2020, in a Tech Crunch article Course Hero our third largest position raised a new $70 million tranche of its Series B capital at a $1.1 billion pre-money valuation. Course Hero has over 1 million subscribers who each pay between $10 and $40 per month
Nextdoor labels itself as the friendly local social media network. I use it and it is very different from Facebook (thank god). This is another IPO target. Nextdoor had over 100 million visitors to its platform in September 2020, up nearly 30% year-over-year. On July 6, 2021, Nextdoor announced they planned to merge with a special purpose acquisition company (“SPAC”) sponsored by venture capital firm Khosla Ventures at a value of $4.3 billion. The merger would generate $686 million in gross proceeds for Nextdoor, with approximately $270 million coming from a private investment in public equity (“PIPE“)
Focusing on these big investments makes some sense as a driver of near term returns, but the real measure of this fund is its pipeline of new projects – which will hopefully produce uplifts in 2022 and beyond. On this score, Suro has been very busy.
- Invested in Colombier Acquisiton Corporation $2.7m – boutique investment bank and advisor to such companies
- Invested $0.3m in AltC Acquisition Corp. (“AltC”) is a SPAC led by former Y Combinator president Sam Altman
- Invested $10m in Skillsoft Corp via Churchill Capital , digital enterprise learning market
- Invested $10m in Trax Ltd a computer vision platform designed to deliver accurate and reliable performance analysis for CPG companies by providing insight into what is happening in every retail store
- Invested $2.5m in PayJoy which has developed a patented smartphone locking technology that locks a consumer’s device if a payment is missed. A single successful payment unlocks the consumer’s device.
- Invested $10m in Blink Health. Blink Health is a digital pharmacy platform that allows consumers to pay the best possible price for their prescription drugs
- Invested $4.5m in Second Avenue. a full-service single-family rental platform offering innovative solutions to home buyers, sellers, renters, and investors
- Invested $5.5m in Enjoy technology which operates white-glove same-day delivery and setup service for phones and other products for free to telecom carriers’ customers in their homes or other locations of their choice
- Invested $8.5m on Green Acreage which invests in cannabis related property
The fund has also moved into a new side-line providing loans backed by pre-IPO equity as well as providing asset-backed loans to high growth tech companies in capital intensive businesses. Suro describes this strategy as follows:
- “ Opportunities include asset-backed loans to capital intensive businesses or businesses with meaningful deferred revenue in order to support near-term capital needs
- Asset-backed loans in this space command attractive interest rates, often coupled with the ability to participate in equity upside through warrants assigned to the lender upon funding
- This complementary investment strategy highlights the priority to drive shareholder value as it is expected to generate recurring investment interest income and, over time, could result in a regular dividend stream to shareholders”
Uplift in valuations?
I don’t think it’s a hugely ambitious statement to say that we could see NAV go to $20 or even $25 a share if some of these deals go to plan. It’s also worth noting that the portfolio is currently very focused on the EdTech niche – worth over 50% at the portfolio level, with market places the next biggest theme. It’s already boasts a decent track record, and seems to be making some astute investments. The risks are obvious – that we are near peak SPAC and peak IPO. I can’t quite bring myself to buy the stock at this exact moment precisely because I have my doubts that there’s much bullish enthusiasm left. But if and when the market stumble, and the discount widens again, I’ll be immediately buying into this stock. My own personal view is that the EdTech market is a huge opportunity.