At a time when risks are escalating and so much can go wrong, there’s power in flipping the lens to what can go right. Square Peg and SEEK co-founder, AFL commissioner and non-executive director Paul Bassat reflects on the risk, rewards and picking and sticking with talented founders.

    Paul Bassat is looking for what can go right, not what can go wrong. When the venture capital investor and founder of global employment portal SEEK considers an investment, makes a board decision or weighs up a risk, he focuses on the upside.

    “We’re not looking for what can go wrong, we’re looking for what can go right as our primary lens,” says Bassat, a co-founder and partner of one of Australia’s most successful venture capital firms Square Peg. Media reports say the company had $1.4 billion in funds under management in 2020, in 2021 returned $650m to investors on the back of 10 exits (both full and partial), while its holdings in companies such as Canva and long-rumoured IPO-hopeful Rokt were estimated at $2.4b by the Australian Financial Review.

    Had he taken a different view of risk, Bassat may not have joined his brother Andrew and friend Matt Rockman to start SEEK, which now has a market capitalisation of over $10b. In 1997, he was a lawyer on the partnership track at Melbourne corporate law firm Arnold Bloch Leibler, when he quit to work on the startup. A lot of people questioned his decision, which they said would mean forgoing a prestigious and well-paid career.

    But Bassat looked at the risk differently. He saw that if he didn’t pursue the opportunity he would always regret not giving it a go, which was a higher price than disrupting his legal career, which he could return to if SEEK didn’t work out. “For me, it was a classic example of misunderstanding risk, because the risk I was focused on personally was the risk to my mindset and psyche — after having an idea like this — of not pursuing it,” he recalls.

    Bassat left SEEK in 2011 and the following year founded Square Peg with former investment bankers Barry Brott, Tony Holt and investor Justin Liberman, where he continues to focus on what can go right. Risk is a highly misunderstood concept, he says in a rare interview. “Sometimes, we focus on the wrong questions when we think about risk — we need to identify the right questions,” he says.

    Bassat and his colleagues have applied this approach when assessing opportunities at Square Peg, which invests in Australia, Israel and South East Asia with a focus on Series A and Series B funding. In the early days, its limited partners were a small group of entrepreneurs determined to support the next generation of technology builders. A decade on, its investor group includes superannuation funds such as Australian Super and Hostplus, endowments, family offices and entrepreneurs.

    Incentive vs risk

    To take a hypothetical scenario: if a business has a 20 per cent chance of making a 100-times return and an 80 per cent chance of failure, it is obviously a good investment. However, the most likely outcome is failure, and if the investment failed it would be easy to look back and say it was the wrong decision, but in reality, it was “absolutely” the right decision.

    “People get a bit surprised about the risk that we’re comfortable with and that we take, and the tolerance that we have for failure,” says Bassat. “But in our business, if we put $100 into a company, we can only lose $100, but there’s a chance we might turn that $100 into $10,000. It’s just understanding what that risk-return equation is and what the likelihood of different scenarios are — or at least estimating those.”

    The risk equation is all about incentives for the individuals involved. For a startup founder, there is the incentive of having a positive impact on society and making a lot of money. It’s similar for people who join a startup and take stock options.

    And the downside of failure is not so high. There is no longer any stigma in founding a startup that doesn’t take off and it won’t preclude the founders from other career opportunities. In fact, says Bassat, it’s the opposite, and a lot of investors place a value on failure and the experience that comes with it. It’s similar for the team members.

    By contrast, in the stereotypical corporate construct, the risk and reward balance is different. An individual pushing a project or initiative can expect recognition and promotion if it is successful, but the question is whether that is enough to outweigh the damage to their career and the potential job loss if the initiative fails.

    “The startup construct is designed to create the right incentives for people to create value, and for where there is an asymmetrical risk between upside and downside. Whilst in a corporate environment, there is often an asymmetrical risk to the downside rather than an asymmetrical risk to the upside,” says Bassat.

    It’s easy to point at a director or CEO of a large established company and put their conservatism down to their age or background, but more often than not, it’s the way the incentives are structured, says Bassat, adding that he would act differently on a corporate board to on a startup board.

    Corporates often fail to ask which risks make sense for them and which don’t, he says. Rather than taking a blanket approach to risk, they need to be more nuanced, identify risks specific to a situation and assess the potential upside and downside. That said, large corporates have a major advantage over startups and can take risks, which if they don’t pan out, might have quite trivial consequences for them, whereas for a startup they could be existential.

    Return on investment

    Bassat and his co-founders started Square Peg with a shared passion about the need for Australia to become a more innovative economy at a time when the work was going through a period of incredible change and disruption, based largely on software-driven business models.

    “We wanted to help capitalise greater investment and support and mentoring of amazing founders and help them on their journey,” he says. Of course, there was also their belief that it would prove to be a good investment opportunity.

    In 2021, Square Peg invested US$300m in 14 startups, put more funds into 17 other companies and returned US$170m to investors. Its successful investments include design platform Canva, valued at US$40b, fintech Airwallex, valued at US$5.5b, and Athena Home Loans.

    Bassat’s view of asymmetrical risk informs his definition of success and failure at the fund. “If we can have a similar number of successes and failures, but those successes can be way, way larger than the failures, then that’s a really good starting point,” he says.

    He defines a “failure” as an investment that doesn’t return its investment. Those they are least concerned about are where they would make the same investment if they had their time over again. “The company did everything it could to create value, it just didn’t pan out.”

    Then there are those investments they would not repeat, where Square Peg’s investment assessment processes let them down and they didn’t ask the right questions.

    The failures the fund is “most obsessed about by far” are those where they passed up the chance to invest and the company became wildly successful. The fund spent time with the founders of Melbourne-based social media platform Linktree, which was valued at US$1.3b after a capital raising in March.

    “The most common mistake generically is not seeing something unique and special about the founders,” says Bassat. “Like maybe a particular insight they had that we missed — or perhaps not recognising how much they would grow and scale.”

    Bassat’s directorships focus around startups Square Peg has invested in, with seats on the boards of Rokt, Athena Home Loans and HealthMatch among them. He is also a board observer on Airwallex and cybersecurity manager UpGuard. Bassat is also an Australian Football League commissioner.

    Founder quality

    For a startup, the biggest determinant of success is the quality of the founders, says Square Peg co-founder Paul Bassat. “More than anything else, it’s about the founders. You’ve got a group of people who’ve identified this opportunity, who’ve been able to build a product that meets a market need. They’ve been able to scale the teams, scale the organisation, raise capital. Ultimately, in each case, these are just the amazing skills and attributes of pretty remarkable founders.”

    When the team meets a founder, they ask themselves how they compare with the founders of other successful businesses Square Peg has invested in — Jack Zhang and Lucy Liu at Airwallex, Micha Kaufman at freelancer marketplace Fiverr, and Bruce Buchanan at ecommerce transaction platform Rockt. Bassat says successful founders usually feel they’re doing their life’s work and are incredibly focused on the problem they’re solving. Their motivator is building an amazing business, not money or status.

    He adds these founders often have a unique insight into a problem and how it can be solved, and are incredibly resilient. They’re good listeners, open to ideas and feedback. They’re also good storytellers who can paint the vision of the future they need to raise capital and attract customers. “We’re identifying people we think are outliers — incredibly bright, incredibly driven, incredibly focused,” says Bassat. “Often, that becomes apparent over multiple meetings.”

    Sometimes, Bassat and the team have years to get to know a founder before they make an investment decision. On other occasions, they must make a decision very quickly. “That’s part of the muscle we develop,” he says. “We don’t get it right all the time [because] our construct is looking for things that can go right as opposed to things we’re missing.”

    Startup governance

    The most important role a director on a startup board can play is to help the founders be successful and, once again, look for things that can go right, says Bassat. The last thing founders need is directors with a list of questions, or who beats them up after a few lean months. Founders and their teams need to be fired up and energised by knowing the board and investors have got their back and are really passionate about what they’re doing.

    Boards can help founders with several different things — thinking about a big strategic question, hiring for a key role and making introductions, or helping them raise capital. “The best startup directors and investors are those who don’t have a cookie-cutter approach, but really understand in individual cases what the founders are looking for and provide that support,” says Bassat.

    The burgeoning of Australia’s startup ecosystem has spread beyond Square Peg. In 2012, there was about $300m invested in startups in Australia — which, Bassat points out, is about the price of a mid-sized commercial building in the Sydney or Melbourne CBDs. By 2021, that figure had grown to more than $10b.

    “We’ve got a long way to go, but if you’d asked us what our expectations were a decade ago, what’s occurred in the past 10 years exceeds our wildest expectations,” he says.

    The result is thousands of emerging startups attracting Australia’s best and brightest talent. However, Bassat reels off statistics that put VC funding in Australia into perspective. The amount of money invested in startups in Israel — population 9.45 million — was more than double that in Australia last year. The amount of money invested in startups in greater Los Angeles — with a population smaller than Australia’s — was about four times the level of Australia. Investment in nearby Silicon Valley was much higher again.

    “We still have a way to go, but the main focus is the glass-half-full perspective,” he says. “We’ve just seen this dramatic change and we have real momentum in the start-up ecosystem in Australia.”

    Investment focus

    Square Peg has focused a lot of its investment around fintech, digital health technology and SaaS (software as a service) business models. These will remain a focus, along with emerging opportunities, such as addressing the challenges of climate change with Web3, a new iteration of the World Wide Web based on blockchain technology.

    “There’s been no better time to build a transformational business that has global impact, than today,” says Bassat. “Having said that, I suspect in 10 years’ time, if we’re having this conversation, I’ll say exactly the same thing. Things will continue to evolve and we’ll continue to see more and more opportunity. But it is an incredible opportunity right now.”

    The ability to grow and scale a digital business is very powerful, he says. Square Peg has zero distribution costs because of the internet, and a lot of ability to scale up in terms of staff, infrastructure and tools to help develop the product. Bassat says the business doesn’t always get it right, but that comes back to the way he views risk — looking for what can go right, not what can go wrong.

    There is also the importance of the idea and the problem the business is trying to solve. The investors consider what the opportunity is, whether now is the right time, what the investable market is, and its size.

    That said, the quality of the founders remains paramount.

    “It’s very rare for us to come across some founders who’ve had an idea that no-one else has had before,” he says. “In most cases, there are dozens and dozens of people pursuing that same idea at the same time.”

    Bassat emphasises that many people have identified the same opportunity to streamline global payments and transactions that Airwallex had, yet haven’t built an Airwallex. Many have identified a need for an easy-to-use online design platform, but haven’t developed a Canva. Good ideas are one thing, but the time has to be right for an idea. And the importance of timing is often obvious in hindsight, but can be really hard to judge in the moment.

    He adds that part of making a successful VC investment is making a subjective judgement about what the right time is for a business to emerge — just as Square Peg is making subjective judgements about the founders and their ability to grow the business

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