Goanna Capital’s Robert Hilmer on Growth Stage Investing and His Unique Approach to Secondaries

Samir Vig Welcome to this episode of the BARE Ventures Podcast, where we open the book on venture capital and give you a seat at the table. I’m joined today by Rob Hilmer, founder, and general partner of Goanna Capital, where they invest in growth-stage companies, implement a unique mix of primaries and secondaries. Rob, it’s great to have you on today.

Robert Hilmer Good to be here.

Samir Vig I’m happy we were able to do this. I know, we caught up a few weeks back on what you’re building over at Goanna. You’ve launched fund two and have had great success so far. I like to usually start with an intro of a little bit about the fund and yourself, and we can go from there.

Robert Hilmer Absolutely. So, we’re raising our second fund now. As you mentioned, we focus on the growth stage, predominantly on US technology companies. We focus on Series C companies, all the way to true pre-IPO opportunities. One aspect of our model that is particularly unique in the ecosystem is our focus on not just primary, or just secondary, but combining the best of both worlds.

Later on, we can talk more about what each of them is and the pros and cons associated with each deal sourcing channel, really bringing those together. The second big difference for us is our CO investment program. We think co-investments are very important for investors in funds, not only because the V level on a blended basis is lower, and therefore hopefully higher expected returns, but it gives investors more discretion with their capital, across different companies, sectors, etc.

We partner with our investors on the co-invest program. That’s very important to us. That’s where we are and it’s good to be here.

Samir Vig I appreciate that. Those are two great points that I definitely want to touch on. Before we even get to that, I have a few folks listening that currently add funds, are thinking about raising funds, or in fund one. You have been through the trenches of fund one successfully, and you’ve launched fund two.

You’ve got great momentum behind you. I’d love to hear, just briefly, your experience raising fund one, what pushed you to do that, a little bit about your experiences, and some more stories of how that really played out.

Robert Hilmer No real horror stories, which I think is potentially unique. I was formerly at Coatue Management, which is an amazing, incredible founder-led firm. I think it helps me for a range of reasons. Most notably, I would say, from a process perspective, by being there, I saw a number of unique things, most of which were around the importance of process with regards to building the firm.

Investing, just organizational structure, and record-keeping that focuses on process, I think is lost with many funds, because there’s an emphasis put on diligence on a particular investment opportunity. But when you’re building out a firm and doing diligence, I think the processes that you run in terms of record-keeping, meeting notes, how you conduct meetings, etc.

I think it’s particularly important. From the first day of fund one, to now, let’s say, six to eight weeks of wrapping up fund two as a race. For me, the most important thing revolves around the process. Everything needs to follow a consistent process.

I do believe that’s been the underpinning that has allowed me to raise the first fund, do well with that deployment, and hopefully go on and raise a strong second.

Samir Vig It’s a good point. I know there are more ways than ever to launch a fund. Whether it’s different structures on angels last or how much easier it’s gotten to kind of get the right folks behind you to outsource some of the work and get things started or those folks that just run SPVs. But, to your point of wanting to really reach scale, and build on what it is, you’ve done at Goanna, that’s a very important point.

I appreciate you sharing that. Kind of jumping into the fun. You mentioned primaries and secondaries. Before we even jump into the why, for those that might not be familiar, could you just quickly go over what that really means.

Robert Hilmer A primary round is what you read about in the press. That is, a company will raise a fresh round of preferred equity that will sit on top of prior rounds as a capital infusion to go and grow the business. That’s the simple story; you’re putting money on the company’s balance sheet. We do that.

We also do secondary. A secondary is when you’re buying shares from an existing stockholder in a company. In other words, you’re not giving, you’re not putting money on the company’s balance sheet, you’re giving liquidity to an existing stockholder of the company. Do you want me to get into why each is interesting?

Samir Vig Yes, it kind of leads into my next question precisely. It’s a good point that secondaries are a great way to build up positions and companies we’re excited about, even if they’re not around at the moment. It’s something that you do, quite actively and heavily at Goanna. What was the reasoning behind making it such a big part of your strategy?

Robert Hilmer I always try to do things that are uncompetitive. That’s important to me. Secondaries are not a well-understood market. In other words, when you think about the incentive of a GP, it’s typically to raise as much money as possible.

The path of least resistance for the investors who are investing in the best companies is to have the most amount of capital. They then want to have the most amount of capital for the least number of people in the firm. Another way, what they’ll end up doing is seeking opportunities that are predictable, and where they can deploy capital at scale.

That’s what they’re trying to do. That lends itself to primary investing. When a company is raising a primary round, it’s essentially like an auction with a well, I would say, publicized process, meaning sufficient numbers of participants understand the process, it’s very clear, transparent, etc. So that’s a competitive situation.

An uncompetitive situation might be, for example, if you’re talking with an angel investor who says, “I really want liquidity. I want to sell 20% of my stake. I need to sell in the next three weeks. I wanted to find my next GP commitment, or a house, or whatever it might be. I’d like to sell it to someone who the founder of the company would like to have on the counter”. That is an uncompetitive situation.

In an uncompetitive situation, typically, you won’t be, by definition, bidding against other participants, and therefore, across the board, and over time, hopefully, the prices you pay for the same assets are superior, and therefore your forward returns are also superior. For that reason, secondaries can be particularly interesting, I would say, within the market itself, it’s often marred by unreliable investors who are found to not want to make happen.

The niche we fit is that we approach companies first. We always start with the company. We say, look, you’ve got this issue, you’ve got this problem. You are sufficiently large now. You’re sufficiently aged. There are a lot of investors, there’s a lot of former employees in the company. They have held the stock for a long time. They want liquidity. If you don’t get ahead of it, or have a clear process, they will go to the open market, they’ll go to brokers, etc.

They will wind up doing deals with investors who you don’t want on your cap table. You don’t know who’s selling when, how much at what price, and have no idea what’s going on. Let’s get ahead of that. Just allow me to go out and buy the stock. We’ll agree on a set of transaction documents, etc., price, you know, timeline, process, etc. We’ll clean up that market. There are different ways to do it where you can do secondaries in the form of a tender with the company, where the company facilitates a broader tender.

You can-do one-off transactions with the management, or you can do transactions with former employees. That can be combined with a primary route. There are all these different ways to be a secondary investor now. I think what’s most important is that if you’re starting with the company, you are a primary investor, and it is your primary investor who solves problems. So, the reason I did this was that I needed to solve a problem.

Everyone in business, whether you’re an investor, an entrepreneur, or whatever you are in the business of solving problems, that’s what we all do, we solve other people’s problems. When I thought about Goanna, I thought, “What are the problems out there?” We ignore the LPs and the investors in the fund for a moment.

The problem for the founder, the CFO, and the GC of the company, is that, as I just ran through, they don’t know who’s selling and buying the stock. I said, well, hang on. If I have relationships with all these people, I can tell them the story and what I’m going to go and do. That should solve their problem because they want me to buy the stock.

So, clean up the market for them. I’ve solved that problem, so that addresses the first aspect of what makes Goanna different from other primary and secondary splits. The second aspect that makes Goanna different, which was the co-investment program that I mentioned, solves a problem for investors.

We can talk more about why investors want co-investments, etc. But really, for me, it was that two-pronged attack. That’s why I built the business where I said, on one hand, I’ve got a problem that companies want solving. On the other hand, I’ve got a problem that investors want to solve. If I solved those two things, I could sit in the middle, and hopefully, pick some good companies, investigate some good prices, and generate some abnormally high returns.

Samir Vig I think what you mentioned, that the founder approved the sale of secondary shares, is really the key there. Earlier on, nearly a few years ago, you’d even see some very messy situations where, you know, everybody was running around trying to liquidate shares, whether it was an employee or an early-stage investor, and the founder didn’t always have knowledge of what was going on.

The scale of it really is such that having it aggregated is really exciting. Have you seen this play out? Do you pass that transaction into, for example, access to more primaries for the next rounds? Do you see the founders coming to you for anything in their companies?

Robert Hilmer So it helps me get into primaries, because I basically just say, look, if I’m not in a primary already, but I’m chatting with the founder, I’ll say, just let me buy a little secondary. Maybe someone who wants to put it in, maybe I can buy it from you. If someone approaches me to sell just in the open market, just let me buy a little liquidity. I started with a little secondary. Then let me go to the cap table.

Alternatively, if there’s a primary ongoing, I’ll tell them that I would love to be included in this round. You should include me even though it’s oversubscribed because by having me on the cap table, I’ll then go clean up the market for you. I view myself as a bit of a bodyguard for the cap table, if you will, because there’s no one else out there protecting it, and the company can’t protect it on their own.

When they let me into the primary, I say, the way I’ll pay you back is by being the bodyguard on the secondary market.

Samir Vig The true keeper of the realm, interest plays an important role. Thinking about it, you’ve got this unique mix of primaries and secondaries. Have you seen a big difference between, for the most part, where you’re getting valuation-wise on the secondary rounds versus the kind of where things play out in the primaries?

Then more broadly, a few of your thoughts on, what valuations look like generally in the growth stage. It’s a place where everyone’s looking to jump in, you’ve got the pre-IPO folks coming a bit earlier, and the early stage folks coming out of opportunity funds. How do you see that kind of tug of war?

Robert Hilmer In life, there’s always a mismatch. You see some equalizing variable, to stabilize the issue that we all have to grapple with. His funds have gone and raised a lot of money in the last two years, and there’s a finite number of high-quality ones. The money has to go somewhere. These mega funds can’t just decide not to deploy for six months, because they think prices are high, the money goes out.

I think that it’s very important for earlier funds in earlier vintages to be particularly mindful of this dynamic because it can change, and it doesn’t take much to change. So, if you’re a tiger or Cotu, or whoever it might be of this nature, you can probably get away with a fund that doesn’t necessarily perform that well. If you’re an early vintage manager, like me, you have to be very mindful of it.

That’s another reason I’m particularly focused on secondaries because the prices are often better. That’s a result of the uncompetitive nature of the market. So secondary can be a way to insulate yourself in that you might be buying but say 30 to 40% cheaper than where the primary is going to come in at, let’s say in three to six months. I’ve done that many times. You create a margin of safety there.

It is a challenge. I would say, as I look forward, I’ll be investing in fund two over the next 24 months. I think that next year, the macro environment will dictate things a lot more than this year. I do think there’ll be more volatility. So, all private companies seem to have just gone up to the right.

Whereas if you look at the macro or other markets, there was a lot of movement under the surface in the public equity spectrum that didn’t transcend into privates in that everything kind of went up.

I think next year, there’ll be a bit more movement on the private side in terms of the business models stage, how much cash do you burn? How efficient are you? How are you growing 50% or 110%? There is going to be a little more dispersion within companies, but also, I think the macro will cause a little more volatility.

When that’s happening, the secondary market is where you can really do some great investing because I think the secondary market is where the volatility really shines through brightest. I’m pretty excited about next year. I hope there’s more volatility.

I don’t think the general primary investors would say that because they don’t pick up as much return from that as I do. You can think of me as being a little bit longer than those guys. I hope to see a bit more of that.

Samir Vig You’re definitely the first to say that and I can see why?

Robert Hilmer You’re not going to hear a typical growth equity investor come in and say, “I hope next year is really volatile.” I really hope the publicly listed equities are down 15 to 20%. You’re never going to hear them say that. Although for fund two, that would be a good backdrop for me to invest in. I think that’s partly why people are investing in my fund as well because they recognize that we are late-cycle.

You do need to be thoughtful about how you’re actually investing now within an asset class. I also think that what we’ll see next year with potentially a little more interest around credit exposure to these companies is just to have a slight, obviously, different payoff profile. But where you have some real downside protection, and you’re not seeking multiples on capital within two to three years, you might be seeking a 20% or 18% return, rather than your 35% IRR. But we’re in for some interesting times.

Samir Vig I think as long as you believe in the underlying businesses, to the point that the timeline, the IRR is kind of what gets tweaked and bold. As long as the underlying asset is sound, that’s a little bit less of a worry. It’s a good point. I appreciate your commentary on volatility. I’ll have to let you know if anybody else has a similar sentiment, but it certainly makes sense. Looking at the funding itself, you’re talking about fund two.

Where do you focus? Is there an industry focus where you may look at? I know it’s a growth stage, but if we really see it, we have to pre-IPO. But are there any industries or KPIs that you look very closely at?

Robert Hilmer We try not to be too formal with these things, but within the sectors themselves, it’s healthcare, cybersecurity, FinTech, and data. They’re the four sectors that we spend our time on, so really, we’re certainly not doing seed and A, that’s for sure. If we did a B, it would be very small. Typically, it’s going to be a series C or pre-IPO situation.

I suppose as it relates to portfolio construction, we do run the fund quite diversified. That plays into the co-investment because we partner with our investors a little more, I would say, than most GPs, and so from my perspective, I would rather run things a little more diversified, knowing that, given our CO investment model, LPs will be concentrating risk where they want it. Rather than me doing that on my own, I’m a little bit more collaborative, I would say, than most GPs. I think that’s the way the world’s going.

I think, if you look at the way things are trending, it is towards more of a bespoke menu type situation where people want to pick and choose. They want to have a few, they might have staff at the family office, etc. So, they’re viewing managers more now as partners and access points than viewing them as if we are the smartest, that we know how to do everything, we’re just going to give you money, and we’ll see you in seven years.

It’s what it used to be. It’s not really what it will be in the future. I think some of these large managers are going to wake up to that.

Samir Vig The changing dynamic of LPs is a very real thing. One of the real thesis behind what we’re doing here at Bare is that it’s a very different target than the RLP basis. We see that sentiment across the board, both from individuals and retail investors all the way through institutional.

The CO invest program, which you’ve mentioned a few times, is really an important piece of it all. For those that might not be familiar with what a comas program is, can you just quickly go over what that really means to an investor?

Robert Hilmer So a co-investment is basically the resource of an opportunity, whether it’s an investment in a primary or a secondary. Let’s make one $50 million available to Goanna to invest in a series E primary. The fund might need 15, so ​​there’s 35 million left, so what we do is we set up a Goanna managed Delaware LLC, just to buy the 35 million that’s left, we turn around to our LP base, and we share our investment memo and offer calls.

We basically talk through the thesis, why the fund is investing, and that we have a co-investment vehicle that they can opt into at their discretion and invest in. If they like the investment opportunity, they can pass. They don’t have to do any work, but they can do some. It allows them to the right size for their portfolio.

A lot of the time LPS now like certain sectors or companies, so they want to see that, they want to be involved, and some of my LPS even want to dig in and kind of help with the diligence form you have with me. A lot of my LPs are a lot smarter than I am. I appreciate that. It’s just part of the collaborative approach now where more investors want input into the underlying exposure.

Samir Vig That certainly makes sense. I think what you’re implying is that a lot of LPs want enhanced exposure to certain sectors or companies within the portfolio, and it is completely optional.

Even at Bare, we’ve got probably a third of the portfolio where there’s additional access to our LPs by way of SPVs. For those who invest in funds, we always like to see how we can access some of the best directs within the portfolios that we work with as a fund of funds. We certainly welcome and thank you for sharing that Rob.

It’s an interesting space. I think you came from a great well known successful fund. You saw a space in the market where there might be a gap in the current processes. You saw the idea between mixing primaries and secondaries as a true differentiator and then got a ton of access and then had another differentiator where you offered that access to your LPs.

I certainly applaud you for all you’ve accomplished so far at Goanna. One of the things that I also like to ask, before I let you go is, looking not just at fund two but beyond, where do you see Goanna and where do you want to take it, what do you want to see come out of the fund? What’s your vision for this?

Robert Hilmer My vision for the fund or for Goanna broadly?

Samir Vig For Goanna more broadly.

Robert Hilmer So more broadly, I would like to say I’m still a relatively young guy at 34. I have a decent runway ahead of me. So more broadly, when I think about yield curve control, general interest rates suppression need for yield mismatch of assets, to my abilities, etc, that exist across all investor types across most regions of the world.

I think that investors will continually allocate more capital to private assets, private markets, and alternatives in that hunt. I think that within that they will allocate increasingly to, let’s call them subscale strategies that take advantage of persistent inefficiencies driven by opaque fragmented market structures. So, you might say, the secondary within private technology is an example of that, which it is, I could give you five more examples of that outside of this particular asset class.

There are aspects within the energy, there are aspects within litigation financing, private credit, and even within real estate. So, longer-term, I think that Goanna will be a multi-strategy, investment management firm, focused on private markets taking advantage of persistent inefficiencies driven by fragmented opaque market structures.

That is a solution where LPS can leverage the platform, the compliance, back-office operations, broader Investment staff across the business, and come to Goanna, and get exposure to a range of strategies that should be differentiated, relatively uncorrelated, and over time, potentially invest in a feeder fund going across the platform, or simply invest in particular strategies.

So said another way, I’m not trying to compete with some of the big boys, but I’m certainly going to take some of their LPs.

Samir Vig It sounds like a plan. It’s an exciting vision where a lot of folks don’t necessarily have the expertise in every asset class. Venture for many is still a very foreign subject. But to build the trust and the brand through, this first leg, which is, while growth stage venture capital, and then to expand into other areas where people at the end of the day are seeking yield. For you to be a one-stop-shop for them to do that.

Diversifying even beyond just venture but into other asset classes is certainly quite exciting. It’s something I plan to keep my eye on, personally, as well. I appreciate you sharing that with us, Rob. It’s sort of an exciting vision, which I actually didn’t even know about, that’s certainly great to hear. I appreciate you being on the show today and sharing a bit about the fund and the market and your vision. It’s always great to have a diversity of folks here.

We’ve talked to everybody from debt investors to early-stage investors. It’s great to have someone that truly understands the growth stage market and secondaries on top of that. I appreciate you being on, for those of you listening, please do follow Bare Ventures on LinkedIn, follow myself on LinkedIn as well. Also, you can check out www.barevc.com to stay afloat on new episodes that air.

Until next time, thank you.