EARLY STAGE VENTURE CAPITAL FUND

Investment Memorandum


1. Investment Strategy



Hummingbird Ventures LP intends to leverage its thought leadership, proprietary dealflow, speed to market and technology focus to invest in early stage high growth internet companies. These will be technology and software businesses including consumer and social internet applications, ecommerce, mobile applications, and enterprise and cloud software across a variety of verticals like healthcare, legal, retail, services etc.

We aim to invest up and down the infrastructure, application and technology stack in a wide variety of and large number of deals. We want to back tenacious, determined founders with a capital efficient company that uses software to solve real problems for a lot of people, in a big market, is quick to be profitable, reinvests profits for growth and wants to be in business forever.



2. Fund Details



2.1 Fund Overview



Hummingbird Ventures LP is an incorporated limited liability partnership registered with the Australian Government with headquarters in Melbourne, Victoria and Sydney, New South Wales.

We are a venture capital fund seeking registration for the Early Stage Venture Capital Limited Partnerships (ESVCLP) program whereby proceeds from the fund receive followon tax treatments, where all returns of the fund are exempt from income and capital gains tax.

The target capital being raised by the fund is $12 million dollars to be deployed over a 10 year time horizon with a further 5 years to allow investments to mature before they are harvested.

Capital is being raised predominantly from General Partners, Family Offices, Institutional Investors, Significant Investor Visa Applicants and High Net Worth Individuals. The capital will be deployed with the following distribution spread. We classify deals into 3 levels: Spark, Angel and Seed with differing deal characteristics, company maturity and investment inputs.

We hope to participate in and categorically dominate the spectrum of promising early stage deals that take place in Australia.



2.2 Dealflow Generation



The fund is aiming to take minority positions in a wide number of companies. This improves the likelihood of generating a significant return on the fund capital and ensures the next great Australian company is funded by the firm.

We hope to invest in 200+ startup companies over the 10 year fund life with on average 20 deals being made every year with approximately $1 million dollars invested every year the fund is actively investing. This is the highest deal rate of any venture firm in the country and is nearly a new investment being made into a new company every fortnight, with the lowest fees charged on managed capital.

Roughly 25% of the portfolio will be investments in international companies in line with the guidelines of the ESVCLP program. With the remaining 75% of the portfolio being investments into Australian companies.

We plan on cultivating our own proprietary dealflow from inception to growth. Generally deals will be sourced and negotiated on a case by case basis using proprietary methods such as strong personal brands of the general partners, inbound deals through the writings of popular influential essays and through personal networks with close ties to the best universities in the country.

As such we have access to unique dealflow and some of the best talent and deals that few other firms have access to. In addition to attempts at fixing the education and culture of entrepreneurship and funding in Australia.

Deals will generally be hands off, without controlling provisions or board seats and with founder friendly terms. Investee companies will form colleagues with others in the portfolio. You succeed in this business by picking the right deals, not by micro-managing them.



2.3. Returning the Fund



The principle measurement of our investments is RTFE or Return The Fund Exit. An amount by which a company needs to exit for to return all the capital of the fund including all management fees and carried interest. The fund is successful if even one company reaches its RTFE with the remaining exits being additional profits.

The return is even greater when factoring in the tax free status of the funds. No income or capital gains taxes are to be paid on any returns, increasing the risk adjusted return rate by 30%. Making the fund an attractive investment vehicle.

Based on our projected ownership stakes and equity positions in businesses, the entire fund will be returned with an RTFE of $60 million dollars. Which is to say, with a portfolio of 200 investments, only one of those investments need to reach a sale price or market capitalisation of $60 million for the entire fund to return money to its investors and limited partners.

Another way of measuring this is if there are 6 X $10 million dollar companies in the portfolio or 12 X $5 million dollar companies then the fund will also be returned. Every year in Australia 15 companies are founded that end up creating market value of over $100 million dollars over the life of the company. In our portfolio of 200 investments, we would be aiming to invest in one of them at its earliest stages.

It is worth noting this is consistent with the power law distribution of the venture industry so returns from the portfolio will be skewed towards a small number of highly performing companies with aggregate or median market value of a business in the portfolio being unpredictable. This allows us to fund high risk enterprises with a huge potential payout or outcome.

Our goal is a long term weighted average of an IRR of 30% or greater at the close of the fund life or a 3X return on capital under management. Companies will be funded and held until an acquisition takes place or the company is taken public. The requirements to list publicly in Australia is an ARR of $10m per year and it is expected 1 or more investments from the portfolio will go public.

As 2/3rds of the appreciating value of a company is created after it has gone public, the harvest period for investments in the portfolio is expected to be longer than the industry average. This is because investments will be held during the first few years of public trading, allowing LPs to experience and participate in much of the company's rapid value appreciation.



2.4 Management of the Fund



Management fees of 1% of the total committed capital are being charged per year to manage and maintain the fund, deploy capital under management and assist portfolio companies and includes all operational costs and salaries of all employees of the firm. This is less than the industry average of 2-4% fees for capital management as we believe in performance based compensation.

Carried interest fees of 30% of the total return of the fund above the level necessary to return the capital under management is being charged at the close of the fund life. This is higher than the industry average of 20% as we believe our returns will be significantly higher as we have unique access to deals, high quality inbound dealflow and are deploying unique advantages such as being established thought leaders in the industry and have close ties to talent hubs such as universities.

As this is a small fund targeting early stage technology companies, the target of the fund is to return a multiple of capital under management at the end of the fund life. Industry data shows small funds in aggregate provide better returns than larger funds.

Both general partners will be managing the fund full time in addition to their capacities and responsibilities to their companies, boards, not for profits and charitable organisations. The firm is headquartered out of office space in both Melbourne and Sydney CBD.

It is expected that there will be less than 50 limited partners in the fund with limited partners having no say or influence over the investments or operations of the firm. Those decisions will be at the sole discretion of the general partners. Limited partners will be investing in the fund and seeing a return at the close of the fund life with all investing activities of the fund being published publicly every 6 months with individual investment thesis prepared for each company funded.



2.5. Social Outcomes



A fund of this nature is of huge benefit to the Australian economy and innovation in this country. It leverages a small amount of capital to create a huge outcome, with an influx of new innovative technology companies who produce new enterprise and consumer products which generate revenues and are enjoyed by millions of people. These disruptive technologies create jobs and services, solve important problems, scale rapidly and are easily exported to international markets.

It is replicating the economic model of the Keiretsu from Japan and the Mittlestand pioneered in Germany. The creation of a large number of very robust very successful companies which are world leaders that dominate a niche with a range of products. They are capital efficient, resilient businesses that are started with very little capital but grow into large companies that stimulate employment and dominate entire product categories.

These types of high growth technology companies are the future of the Australian workforce. They utilise the intellectual capacity of its technology makers and graduates, the best in the world.



3. Investment Outline



3.1 Spark Investments



Companies are still at the idea stage of the business and it is the first money into the business often when there is not even a company in existence. The investment is to pre-identified ambitious, talented and capable founders and allows them the freedom to pay for initial expenses or take time of to work on the business.

The investor is playing the role of Edwardo from the movie “The Social Network”. Being the first money into a promising new app or website with the potential to grow or is already growing but without a business model in place and providing advice and assistance.

Average deal sizes will be $5,000 for a 3% - 5% equity position in these companies with a large number of deals being made. $500,000 is earmarked for making 100 of these types of deals over the lifetime of the fund.



3.2 Angel Investments



Companies are at the growing prototype, early revenues or early users stage of the business but not profitable. A clear strategy or vision can be seen and founders will often have invested personal savings or be on the precipice of going full time to work on the business.

Companies will have been in operation for a year or more and require sustaining capital to increase the lifespan and runway of the company to allow it to reach profitability and develop a sustainable revenue generating business model.

Average deal sizes will be $50,000 for 6% - 14% equity positions in these companies with a large number of deals being made. $5 million is earmarked for making 100 of these types of deals over the lifetime of the fund.



3.3 Seed Investments



Companies are at the growing meaningful revenues, large userbases or growth stages of the business with either profitability in clear sight or are already very profitable and have been for some time or are organically growing so rapidly that profitability is not of major concern at the current moment.

Companies will have been in operation for upto 3 years or more, with founders having worked on it full time for over a year or more. They will have a firm strategy and operational culture in place and be executing on the business model of their company, using the funds to grow rapidly and reinvesting profits into growth.

Average deal sizes will be $250,000 for 15% - 25% equity positions in these companies with a large number of deals being made. $5 million is earmarked for making 20 of these types of deals over the lifetime of the fund.