Home » Square Peg reveals venture capital machine


A nondescript office building in a back lane of South Yarra hardly looks fit for the headquarters of a global firm whose backers include a few billionaires, chief executives, a Reserve Bank board member and one of the nation’s most senior investment bankers.

The dimly lit offices of Square Peg Capital’s Melbourne head office feature only a few desks with chunky desktop computers, a meeting room and a 1980s pinball machine.

The only outward sign of wealth is the Mercedes parked in the driveway downstairs. Even it is splashed with mud.

Yet James Packer, the Liberman family, Moose Enterprises boss Manny Stuk, Evans & Partners founder David Evans, former Carsales CEO Greg Roebuck, Seek chief executive Andrew Bassat, RBA director Carol Schwartz and UBS Australia chief executive Matthew Grounds have all contributed millions to the venture capital firm’s $US300 million ($401m) under management.

Founded five years ago this month by two former Brighton Grammar schoolmates and two members of Jagen, the family office of the billionaire Liberman family, the inner workings of Square Peg have remained hidden for much of its short history. Until now.

On this day The Weekend Australian has joined the firm for a landmark event, the first time so many of the 13 partners from around the world have convened in the one room. Only two are missing.

Suit-less and tie-less, the assembled have come from Sydney, Melbourne, Tel Aviv and Boston for the venture capital firm’s biannual offsite to take place over the next two days, fresh from raising a $US180m fund, including — for the first time — money from a superannuation fund, Hostplus.

This meeting hears a funding pitch from a start-up firm looking to transform a large, traditional industry with the future potential to use blockchain technology.

While its founders ask that its name remains confidential, the pitch and the subsequent deliberations of the Square Peg partners on its merits provide an unprecedented glimpse into the workings of the firm some of the nation’s richest people are trusting to find their next fortune.

Around the table and in addition to principal Paul Bassat are the other three founders of Square Peg — former investment banker Tony Holt, former MYOB executive Barry Brott, and Justin Liberman, who runs Jagen (Brott now also works there).

As are the more recent additions to the Square Peg team: Tushar Roy, former Fidelity analyst Ben Hensman, chief operating officer Amanda Hjorring and Eli Novershtern, who joined Square Peg’s Israel office last year.

Amanda Hjorring during a Square Peg Capital Investment team gathering in Melbourne. Picture: Stuart McEvoy for The Australian.
Amanda Hjorring during a Square Peg Capital Investment team gathering in Melbourne. Picture: Stuart McEvoy for The Australian.
That office was established by former Seek executive Dan Krasnostein in 2014.

Venture capitalist Philippe Schwartz is also now a partner based in Boston, while former Telstra chief executive David Thodey has signed up as a special adviser.

Square Peg sees more than 1000 opportunities a year and one or two of its partners meet in person with about half of those companies. Around 50 of those are assessed in detail and discussed by the partners as a team.

This opportunity is one of those. The company is seeking $US6m to get to a break-even position within two years. The presentation from the chief executive takes around an hour — she is flanked by her co-founder, who is also her husband.

Square Peg has already invested in several companies where the business partners are also life partners.

“What is the dynamic between you around decision making?’’ Bassat interrupts her to ask. “How would the people in the senior team perceive the founder dynamic — for example, if I want a project approved, who do I talk to?”

She replies: “There are business conversations and there are founder conversations … We take the founder conversations offline.”

Other partners interrupt the presentation with questions. One of the most telling comes from Novershtern.

“Why not rip and replace the inefficient parts of this marketplace — why not redo it?” he asks.

She replies: “We don’t want to poke the bears too hard. We want to work with them.”

But herein lies the challenge of the opportunity for Novershtern and his partners. When the questions are finished and the CEO and her co-founder leave the room, the post-mortem begins. It is animated.

“They were not focused on the bigger opportunity. They were focused on the opportunity as it exists today, in the existing ecosystem. And we really had to pry it out of their mouths almost as a surgical operation with tweezers to ask, ‘Why don’t you do something bigger?’ … I don’t see a real drive,” Novershtern declares.

“You can’t disrupt something when you are too entrenched in it.”

Bassat is initially more blunt.

“I am not sure I really understand what they do,” he says.

“They have a really deep understanding of this industry. And usually the challenge when you have too deep an understanding is are you challenging enough?”

He says the partners spent too much time discussing the business model.

“Yes, it gave us an understanding of the business, but we probably dived too deep. I came away from the meeting with a great appreciation for the management team. This is a big market, it is extremely inefficient, it is really boring — so that is a big plus because you wont attract kids who find an interest in this space. But I found the way in which they articulated the vision the most disappointing bit and the part I am still grappling with. What is the problem they are solving and who is the customer?”

Tony Holt, who brought the deal to the table, vehemently disagrees with both Bassat and Novershtern. For a time they engage in animated debate. But Philippe Schwartz eventually provides a different perspective to the discussion.

“They are in marketplaces with no competition today … (And) because it is an uncompetitive market, making this market better today rather than disrupting it may be the best way to leverage the opportunity. As long as they evolve eventually to something that will solidify their leadership position to be more of a disrupter,” he says.

Liberman starts his contribution with a question: “The big picture is really interesting but what is the pain point for the initial customer? Is that powerful enough to give us confidence they can really penetrate the market? What is the real arrow here?”

I ask him what got the company to this stage in Square Peg’s assessment process.

“It is the way they think about the problems they are solving. Where you can see they have really backed themselves, taken a risk with their own capital,” he replies.

“And that they are really thoughtful people. The nature of disruption is doing something in a more efficient way. You have to see that the nature of advantage they create is hard to assail.”

Holt says it is “the capabilities and the knowledge” that typically get a company to the final stages of the process.

Tushar Roy says the management team “has to be exceptional”.

“Which counts out a lot of teams. And the prospect of the business, if things go its way, to be exceptionally large, which also counts out a lot of businesses. We are not looking for a middle outcome here. We are looking at something really big,” he says.

But just how much of the $US6m requested in this case would Square Peg agree to provide?

“They don’t pull a number out of thin air. They are the existing shareholders and it is a balance between what they think and what we think is how much money they need to get the business to the next stage. And then how much that might come from us, or any other partners,” Krasnostein says.

Bassat stresses that if Square Peg is going to back a company “we really support them in trying to raise the rest of the round”.

At the end of the debate, Holt asks for a show of hands as to who is happy to continue with work on the deal. It’s known internally as the “temperature check”.

Enough give Holt a tick of approval to continue and provide suggestions for areas to assess further or people to chat to with expertise in the area. The final vote on the deal, which will require the approval of a two-thirds majority of the partners, is still three weeks away.

“The company won’t present to the entire partnership until the opportunity is very advanced,” Bassat says.

“We would probably have up to 20 companies per year present to the entire team and we make something like 10-12 investments per year,” Bassat says.

Three quarters of proposals in Square Peg’s history that get to the final vote have been approved.

This one seems no sure thing just yet. But Bassat and most of the partners aren’t prepared to give up on it.

Square Peg’s portfolio now stands at 27 tech companies, the latest additions being local firms Unified Healthcare Group and Prospa.

The former, which is also backed by Adrian MacKenzie’s Five V Capital, allows corporations, doctors and insurers to share medical records online. The latter is an online lender to small business in Australia.

Two other investments by Square Peg in local tech firms will be announced soon.

Prospective investments undergo intense scrutiny among the Square Peg princials, including, center, Dan Krasnostein. Picture: Stuart McEvoy for The Australian.
Prospective investments undergo intense scrutiny among the Square Peg princials, including, center, Dan Krasnostein. Picture: Stuart McEvoy for The Australian.
While some have questioned the firm’s commitment to backing Australian firms and entrepreneurs, Bassat counters that its four latest investments are in local companies. More than half its partners are also based here.

Square Peg doesn’t always get it right. One of its first investments, taxi app start-up GoCatch, has been rocked by a string of departures and is now without a CEO as it looks to raise more capital from its star-studded backers.

Bassat won’t comment directly on the firm, in which Square Peg has invested $400,000, but he says failure is a very natural part of early-stage tech investing.

“It is really hard for the entrepreneurs and the teams. They have put their heart and soul into their ventures and have taken on a lot of risk. You really feel for them and of course we want to preserve our investors’ capital,” he says.

“Our business is about finding a few really big winners, businesses that can have a significant transformational impact. We hope to have a few of those in each fund and the price for that is a willingness to accept that there will be some failure in the portfolio.”