TMT Investments Plc LON:TMT is on the front-line of the emerging tech sector. A venture capital investor, the investment company admitted to AIM at the end of 2010 is the brainchild of a group of Russian-speaking entrepreneurs and technology investors who initially seeded the fund with USD4m their own capital to find and develop emergent businesses in the tech sector.
Since then, the firm has been on a Unicorn hunt and had several significant successes. At the beginning of 2019, the Jersey-based VC firm exited its investment in Wrike, the San Jose-based project management software company for USD22.6m in a cash sale to Vista Equity Partners, the American enterprise software firm. The exit saw TMT make 23 times on its initial investment as Wrike’s first institutional investor in 2012.
Wrike wasn’t a one-off, a year later TMT followed up that trick with a USD41m disposal of Pipedrive Inc, a CRM and sales platform to Vista Equity Partners, making a 51 times cash return on its original investments in 2012 and 2013.
Profitable cash exits
The fund has invested USD103m in over 90 companies to date and currently holds a portfolio of over 50 investments, focused primarily on Big Data, Cloud, SaaS, Marketplaces, EdTech, E-commerce, FinTech & FoodTech and has offered a five-year IRR of 22.75% (as at 31st December 2022). All-in the fund has had USD94m of full profitable cash exits across 14 transactions and has a portfolio value of around USD195m at the close of last year.
There are some losses thrown in there – around USD19.1m between negative exits and partial impairments, but on the unicorn hunt, you occasionally find a few donkeys. However, this was mitigated somewhat with an additional USD6.4m in partial cash exits and other proceeds.
The current jewel in TMT’s crown is Bolt, the Estonia-headquartered competitor to the ubiquitous Uber NYSE:UBER, which was founded in 2013 by a high-schooler with a EUR5,000 family loan. Bolt now operates in over 500 cities in more than 45 countries with 100 million customers. TMT were early in on the opportunity, having been investors for eight years. The fund’s current stake is worth around USD69.8m with a return on investment of 217x.
The other highly tipped holding is PandaDoc, a document automation SaaS solutions provider, which TMT has been holding for nine years and has a valuation of USD10.8m, a decent uplift from TMT’s initial outlay of USD400,000 in July 2014.
Alexander Selegenev, the company’s executive director has been with TMT Investments since the outset. The founders identified that they needed someone who had had a corporate finance and AIM background and experience in investment banking, M&A and VC. Selegenev had previously worked for Teather & Greenwood, Daiwa Securities and Sumitomo Bank and had been involved in several AIM IPOs and M&A transactions.
Exporting Russian entrepreneurs
Selegenev explained: “TMT started out with a group of like-minded friends who saw great opportunities in the Russian-speaking start-up communities in the USA and Western Europe, which was rife with tech entrepreneurs and innovators, and helping take their ideas to a global marketplace.”
The founders pooled USD4m of their own funds and then approached the capital markets to raise another USD5m. However, once the company made a public offer, it raised USD16m in addition to the founders’ USD4m through subscriptions, which indicated the level of interest in the tech space and potential of its opportunities.
Tech investment, especially in the privately-owned start-up end of the market is notoriously difficult. Many start-ups have great ideas, astronomical projections, but no real revenue-generating business. Nice apps, but no trousers.
Valuing companies, and trying to project where they are headed and what they are actually doing is one of the most difficult parts of the investment universe, as in many cases there is no proven track record; investors are often dealing with young, inexperienced management and for a start-up to really get off the ground and gain some momentum, there is a requirement for a large amount of capital, with heavy investments in sales, marketing and R&D. Most tech start-ups fail and if investors are locked in there is little chance of getting any capital invested out – the only real asset is the entrepreneur themselves and a bit of code.
Technology is always changing – remember the BlackBerry, the omnipresent business accessory of the early 2000s – and it can be difficult for start-ups to keep place, thereby affecting their competitive edge.
High risk, high returns
It is a highly risky area, with a high chance of failure – however the commensurate rewards are vast and that’s why the tech start-up sector is such a magnet for capital. Selegenev said that in the early life of the fund, it had its hits and misses: “to start off with we also looked at the pre-revenue stage – but soon realised that this was a numbers game based on fleeting tech ideas and trends.”
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The fund now looks more at the fundamentals of the company and the business case behind the tech: “…ChatGPT [and other AI language learning models] is on-trend right now. The world is talking about the technology but where is the business idea behind it, where is ChatGPT going to find revenues?”
TMT looks at thousands of companies, but quickly filters out the majority as there is no solid, costed business plan behind the technology. “We’re now quite stingy investors,” said Selegenev, and TMT looks only at companies that have USD100,000pcm revenues and a consistent track record of revenue growth. “We like good apps and respect talented engineers – but there has to be a balance. The company also needs to focus on growing its bottom-line, its customer base and revenue, as well as having a great-looking, easy to use application.”
Clear view of exit
“We need clear visibility on the exit strategy […] our focus is on the quality of the management and founders – we are investing in them more than the tech to make their business work,” he added.
The fund engages in “almost borderline psychology” checking the founder’s social media feeds and websites to build up a picture of the individual. The fund is concerned about the work-life balance of the entrepreneurs it invests in, as in the tech sector the incidence of burnout or mental collapse is quite high compared to other industries. Although the fund’s managers try to stand back and let their entrepreneurs get on with developing their businesses, they are always available to offer advice and counselling as and when needed. The fund will also stage an intervention when needed if their portfolio companies are having a wobble, or could benefit from some pointed advice.Selegenev also emphasised that as well as tech entrepreneurs needing to take a wider, more holistic view of their business and the world, tech investors also need to approach the market with a bag-full of realism. “Tech investors do get carried away a lot of times – there is real [market] need to educate investors on the market and the way start-ups develop. You need to be sensible in both directions – there is a danger in overvaluing an opportunity; but also when things don’t follow a rapid linear plan, there is a fashion that investors mark-down opportunities too harshly and undervalue too much,” he said.
The fund opened trading today (12th April) at USD2.93 and has offered a year-to-date return of 3.9% and a one-year return of -58.7% with prices ranging between USD2.3 and USD7.1 over a 52-week period.
