Alan’s Thinking Cap | Capital Markets Update

Alan Wink:Maybe just to kick it off, Travis, give us a quick elevator pitch on top. Mark Partners, your sector, focus size, check, you're right, sort of your value add as a firm, maybe a couple of sentences on the last deal you completed and maybe talk a little bit about your fundraising if you're in the market fundraising today. I

Travis Milks:Sure you bet. Well, thanks again for hosting, Alan. Real pleasure to be here to have this discussion. Yeah, I'll jump right in Top. Mark Partners is a growth equity investment firm that's headquartered in Tampa, Florida. As you alluded to. I'm based here in Chapel Hill, North Carolina as a partnership. We've been investing in growth stage companies really for the last 25 years. We focus on rapidly growing technology enabled businesses and for us that kind of term technology enabled businesses, which can kind of sound like a broad term ends up meaning a lot of companies that are in the B2B software space. A lot of companies at the intersection of healthcare and it, but most importantly we're looking to partner with domain focused entrepreneurs. Folks that have lived in an industry, seen a pain point in an industry and are applying technology to solve a problem in that industry.

And that's really core to our underwriting. And so we, as I mentioned, tend to be B2B software and healthcare. It is our two biggest verticals. We're writing sort of two to $5 million equity checks into the companies in which we partner and over the last 25 years we've invested a little over 55 companies during that timeframe. We obviously seek to be good partners with the companies that we invest with. A big part of our business model is looking to earn our seat at the table each day with the companies that we partner with. And we're very proud of the fact that in our most recent fund we have about 25 former portfolio company management team members, CEOs, board members that are investors are as part of our most recent fund. And so hopefully that says we somewhat walk the walk in that regard in terms of being good partners.

In terms of most recent deals, our most recent investment was an investment that we made at Q4 of last year, a company called Case Status in the legal tech space and a business that has been rapidly growing in Charleston, South Carolina. It actually represents our second investment in the legal tech space and it very much hit those parameters of an attorney that saw a pain point in the legal industry and applied technology to solve a problem. It was a round that we co-led a $12 million investment round that we co-led with another firm, so remain active in the market. We're about two thirds through our current fund. It's again about a $55 million vehicle. We're not actively out fundraising today, but we expect to make probably two to three more new investments here in 2025.

Alan Wink:Thanks, Travis. Why don't we get right into the discussion about the VC market last year, based upon what I've seen, 2024 was a so-so year investment dollars were up a little bit compared to the prior year. It could have been because deal sizes were considerably larger. Exits were still way below expectations. They exceeded 2023, but still nowhere near the go-go years of 2020 and 2021. So as a result of the lack of exits and m and a activities, GPs are still struggling to return capital to LPs as one of the leaders of top market. What's your perspective on what's going on in the market right now and what do you expect to see maybe in 2025?

Travis Milks:Yeah, I think you framed it really well, Alan. I mean I think the one word is we've just kind of been bumping along sideways as an industry and I think I typically like to sort of think through this in a little bit of a similar way of thinking about the exit environment, GP fundraising and then deployment, pace of deployment and in an exit environment. Yes, 2024 pretty relative to historical last few years as we turn the corner into 2025, I think you have kind of a list of countervailing forces here. Now we're in a prospect where interest rates are going to kind of decline maybe at a more moderate pace than initially anticipated, but you've also got maybe a bit more of a favorable regulatory environment for m and a transactions here in 2025. And I think you've also got a situation where a lot of the public technology companies and other potential acquirers have seen their stocks have relatively strong performance over recent years that may put them in a better position to make investments.

So you have or acquisitions. So you have sort of a mix of factors in the market today. So it's not enough for me to sort of say that we're going to have this quick robust uptick, but I do think it is been kind of this sideways to slow recovery, which again, as you alluded to, has made GP fundraising a bit slow given the lack of return of capital. So then I think about maybe even the most important component then for folks is just sort of what does deployment look like and what does deal activity look like? To your point, we've seen some recovery in 24. I think the deal stats 209 billion deployed in 24 up from 160 in 2023, but still not anywhere near the highs. The underlying challenge I think in deployment has been just sort of this bid ask spread problem, and there's a lot of things that are sort of fueling that.

One of which is that from 2020 to 2022, you saw a lot of new entrants into the venture market, probably a thousand or so new firms that were formed and created during that timeframe. And then that also, but the pace at which capital was deployed from those firms was also very high. So now coming into 24 and now and 25, you've got a lot of firms that are saying, okay, what do we have in our portfolio? What have we been working on in our portfolio? What valuation did we initially invest at? What are some of the follow on activity, which is then giving them reservation to think about new portfolio commitments. And there's a lot of examination there that I think is slowing down. If you think about the bid side of the market on the ask side of the market, you also have an undercurrent where the time between capital raises or time between rounds has been protracting not just over the last few years, but frankly over the last 10 years.

And so that's creating longer time for companies to really kind of consider it, think through when they're going to go back to raise capital. So this just means that it takes more time for capital to cycle through the system when there's this sort of tightening. And I think as we sort of trend and that kind of time between rounds, what's causing that? I think it's discipline at companies as people understand the importance of being thoughtful about those rounds. It's larger rounds being done at times that they're completed and then it's also, there's a factor as it comes, it relates to venture lending and the growth of that asset class to allow bridges in between rounds or plusing up the size of those rounds. If you think about just the venture debt asset class, how it's grown from 10 years ago, about 14 billion deployed to 35 billion deployed even in 2024, that's again giving companies more liquidity, more runway.

So turn attention now to 2025. I do think you have some dynamics that point to continued recovery and uptick, and I think one of those things is you now have the amount of runway in terms of measured in months on average has started to decline. So for companies at the peak in 21 or so, there may have been 17 months on average of runway that they had on the balance sheet today that number's down to 12. And so the fundamental force that drives our industry is this sort of inexorable element where you've got companies that are burning cash and you've got firms that at the end of the day are paid to effectively allocate capital in those businesses. And so there's still 300 billion of dry powder available in this asset class. And so those factors start to give me a sense that there's going to kind of continue to be this recovery in 2025 and more funding available.

Alan Wink:Just to add one thing to that, we haven't spoken about the IPO market and the IPO market's been dormant the last two years, and I read recently that if you took the value of all the VC backed unicorns, it's over $3 trillion of value. You'd have to think that the IPO market has to turn around with that value sitting there. Do you agree?

Travis Milks:Yeah, I think on the one hand, again, it's kind of a bid ask of topic. I think those values on paper, are investors really going to see that outcome in all of those unicorns possibly. But I do think there's, as we've seen interest rates start to come down and some of the environment improve overall absolutely is a buildup of companies that are going to just have to get out the door. And I do think you're going to increasingly see that in 2025.

Alan Wink:It's funny. Travis, I agree with you. I'm kind of bullish on 2025, first of all because of the dry powder and also because of the pent up demand for exits and m and a. Let's talk a little bit about valuations and valuations were up across all sectors. Last and probably the greatest increases were for the larger deals, and you and I were talking earlier today, I made note of the fact that there was an article in the journal this morning about OpenAI and OpenAI raised money. Their last funding round was in October, so four months ago, and they raised 6 billion at 157 billion valuation. They're talking about raising 40 billion today at a $300 billion valuation. So their valuation is almost doubled in four months, pretty crazy. Where are you seeing valuations in your deals and are these frothier valuations a deterrent for you guys to invest?

Travis Milks:Yeah, I mean we've certainly seen some recovery in valuations over time. I think one, if you, let's start with kind of the basic substrate, which is public market performance, which historically, if you look over the last 25 plus years, that is an influence around the value of these private market companies. And so the NASDAQ was up 30% about in 2024, the NASDAQ was up about 44% in 2023. So when you start just thinking about that fundamental substrate of benchmarks, inevitably that's going to drive I think some trickle down to the private markets. But I do think the sectors in terms of valuation really matter. I mean, you alluded to this. I think a lot of times the aggregate valuation recovery data or benchmarks sort of get skewed by some of the sectors that have very, very high multiples. AI being one of those still seem very strong multiples say in the cybersecurity space as well. I think on the more just kind of straightforward vertical SaaS businesses, while we've seen some recovery, I do think those have kind of held fairly stable.

And also we've seen, I would say in the last 12 to 18 months, more introduction of some sort, some structure to deals that really didn't exist prior to that to help bridge valuation gaps. So we have seen some of that that you don't always see that reflected in the aggregate valuation data. But again, my last comment would just be that certainly companies with very strong characteristics are still garnering really strong multiples in those situations and a lot of interest as well. So it's the companies that are not showing those very, very premium growth characteristics, et cetera, that might see a little more struggle in the market.

Alan Wink:I don't think any conversation of that venture capital would be complete without talking a little bit about AI and machine learning. And last year in 2024, about 40% of the VC dollars invested went to AI and ML companies. I'm sure as a VC, you're taking a hard look at what's going on in ai. Where are the areas of AI that you're looking at for top mark partners and are you seeing valuations that concern you a little bit in that space?

Travis Milks:Sure. Yeah, I mean I think we've taken, again, we could speak during this entire session about AI and a lot's been written and published, and I think from our perspective, in one way we could argue that so far we haven't quote invested in any AI companies or you could look at it as every company, including the recent companies we've invested in and our portfolio companies are all AI companies today. I really kind of frame it, if you think back over time in history with technology 30, 40 years ago, people would often try to differentiate between, well, is this a technology company or not a technology company? And yet today I would argue every company is a technology company because technology drives some aspect of every company's business model. And so we're certainly see that filtering at a very, very rapid pace here today with AI into all the technology companies and really any type of company.

And so it's something that is a big component to all of our investment process and thesis, understanding how that's enhancing a company's business model. If you pull back to something that maybe is more pure play, I would say our strategy has still been a little more picks and shovels type strategy as opposed to trying to be the one to pick the winning LLM model, et cetera. I think we know who we are as a 55 million fund. We can't make multi-billion dollar bets. And I think the other element we look for where we are seeing companies that are trying to automate decision-making processes or automating insights, et cetera from these models, is really trying to dig in and scrub the attribution of these models and the outcomes that they may be recommending or deciding that it really can be traced back to a business impact in a very straightforward way. That's still, I would say, in the evolution of these companies, something that they have to take a lot of time to really show both to their customers and then of course to the potential investors.

Alan Wink:Are you guys seeing a lot of AI opportunities in the health tech space?

Travis Milks:Yeah, I mean we honestly, Alan, there's not an opportunity that comes across our desk in any sector that's not got an AI component to it. So certainly in the healthcare space, again, whether that's things that are treatment related, whether it's you think about just the vast amount of data that's available and all the issues that can create, we're seeing quite a few opportunities there for sure.

Alan Wink:So let's talk a little bit about top market and sort of your investment thesis. Your website describes top market as providing growth capital for rapidly expanding businesses. When a company comes to you, ideally, how much money should they be raising? How should the capital be deployed and how long should that capital last and what should the entrepreneur expect to give up in exchange for that capital?

Travis Milks:Sure. Yeah, I think for us as rapidly expanding businesses, just to kind of put some parameters around it, generally for us, again, these are scaling businesses that are somewhere between 30 and 30 million in revenue, and we really look to sort of see minimum 25% year over year type growth parameters, but of course size sort of matters. So 25% growth on a $3 million a RR company is sort of one profile versus 25% growth maybe on a $20 million a RR company in terms of size of round. I think companies really need to start sort of bottoms up in that discussion and really sort of sit down and make a detailed use of proceeds of where the investments are that they're going to make from this capital, how they are going to allocate resources to drive the continued growth that they think and that they're seeing in the market.

And so you've really got to kind of make a business case for each dollar that you're taking in as sort of an equity investment because obviously it's diluting shareholders. So I can tell you that we do sometimes experience situations where a company will have sort of say 10 million raise or 15 million raise sort of on the cover of their materials, and often they're pegging that more as well. We think there are a lot of firms that have a minimum of 10 million that they're willing check that they're willing to write versus coming at it from, well, do you really need 10 million? We certainly encourage, once you sort of look at that use of proceeds analysis, adding a little buffer, I think we all know that it's probably going to be a little low typically, but again, I think being disciplined about you owe it to yourself and to the other shareholders to say, Hey, what is the value we think we can create and how does that correlate to the exact amount of dollars that we think we need to build that value?

Alan Wink:So once again, it comes down to not what they want but what they truly need. And you guys spend the time to analyze their needs in terms of a capital deploy

Travis Milks:And bottoms up versus top down. Right.

Alan Wink:So continuing on the theme of the investment thesis of Top Mark as a VC, you're a risk taker. You and your partners are certainly risk takers. What are the things that you must see in a company or a team that has to be part of a company before you write a check?

Travis Milks:Yeah, I think there's the hard checklist items that I think a lot of folks are familiar with that are first part of that answer, which is these businesses need to be high growth businesses with scalable business models, typically high gross margin, recurring revenue. Of course, we wanted to see that there's a competitive differentiation, there's a large market we can clearly articulate the problem that's being solved. Those are obviously some fundamental characteristics that have to be present. I think it gets to your point, the art starts to come in even more with the team aspects in a team. I think it's one, is there a sense of mutual trust that can be developed and a team that feels they can partner with us and we can partner with them. And philosophically we think about scaling a business in the same way. These are very core things that I think you have to understand early on or you can have a lot of challenges later on. And then secondarily even also very pretty tangible. It's just we really look for teams too that we believe, whether it's the CEO or the broader C-suite that can attract high quality talent and retain that high quality talent. So we really try to dig into how the team has come together, who knew who beforehand, what the tenure of the team has been together, et cetera. Those attributes are also really important for us and we probably have.

Alan Wink:How important is it? The founding team has done it before, this is their first rodeo. Does that turn you guys off?

Travis Milks:I think that the key thing for us is have they lived in the industry for our particular firm? Again, I mentioned the legal tech business. This may be their first time scaling a legal tech company, but have they been in the legal industry or have they been in some tangential industry that they could have almost been the customer or they've had separate p and l responsibility for something that's adjacent to what they're doing now? Those might be areas where we have some flexibility. Of course we prefer having that sort of been there, done that perfect fit, but we have some flexibility there as long as we get a sense of how they're thinking about this problem in the industry and how it's based on the experiences they've had and that piece of it we can typically get comfortable.

Alan Wink:Jeff, let me ask you one more question. You talk about a large opportunity, and we see this with a lot of our seed stage clients and they talk about the tam. How large does it have in reality? Define large. We talking about a billion dollar, 10 billion, what's large?

Travis Milks:Yeah, I think it is interesting for us, we're investing in companies again at the growth stage where we kind of target our returns. We want to see a good pathway to make three to five times our money in three to five years is sort of the minimum, but we don't want to lose any companies. So it's a very different game than maybe a much earlier stage investor might be playing. And so often by the time we are looking at companies that TAM has been pretty well established, but I think for us it's this combination of market share and tam. So I do think typically we are looking for high, several hundred million dollars close to billion dollar type TAM metrics just because of the competitive nature of generally how fast people are going to fast follow and if you've got a lead in an industry. So you've got to have enough white space available to have multiple industry leaders emerge and still be able to create economic value and strong exits for the investors. So we still do look for a pretty sizable TAM when we're doing our analysis.

Alan Wink:So you just answered one of my questions in terms of what return on investment capital is sort of a target for top mark. Okay, we heard three to five in three to five years. Do you guys work bottoms up to determine the valuation you put on a company? Can you shed some light on your valuation process without giving away trade secrets? Of course.

Travis Milks:Yeah, no, absolutely. Look, I think for us, so you start with that kind of three to five x sort of journey, the question very much becomes an analysis of what the future value of the business could be and trying to get agreement with the company around that topic and then therefore how much equity we would need to own for our investment. That's certainly the first step in our valuation assessment. But then you're obviously going to triangulate that with market conditions. You have to think about what multiples we're seeing in the market, whether it's precedent transactions, whether it's publicly available information or even information that we might have as a private market participant and seeing a lot of these other deals get priced. And so it's really those elements that we're trying to triangulate when we're ascribing value to an opportunity. But I do think sometimes there's just this aspect of we try not to get hung up on a particular pre muddy valuation number so much as thinking about what that future value the business might be, where multiples are trading today relative to history and where they might be trading three to five years from now.

Alan Wink:So let me ask you a question. I love to ask all my participants on these webinars. You've been investing in these companies for a long time. What's the one deal that got away that you wish you had back?

Travis Milks:Yeah, it's interesting. I'll take it. Maybe I'll give you a slightly different answer than you've had in the past. I don't know that I would throw out sort of a household name company that sort of got away. What I would offer you though is that it's not so much the deals that you've passed on that you sort of struggle with. I think it's the opportunities where it's a really solid business, you're excited about it, but you can't quite get to terms with the team and the round gets done and the company goes on and experiences lots of well-deserved success and there's a great outcome. Now those haunt you a little bit and we certainly in those situations, we congratulate the team and really you kind of just keep moving. And so we've had some situations where that's happened. And so that's the one element that as an investor you kind of keep thinking about over and over again from time to time. But that's probably the most I would allude to in terms of deals that we've missed on,

Alan Wink:Because I assume when you look at the deal metrics of a firm like Top Mark, how many deals do you guys see a year?

Travis Milks:Yeah, we'll probably see these numbers vary when you ask that across firms. I would say we probably see around 300 or so deals a year.

Alan Wink:And how many of those deals do you kind of take into due diligence?

Travis Milks:Due diligence? I would say probably five to 10.

Alan Wink:And of those five to 10, how many do you take to closing?

Travis Milks:Yeah, two to three.

Alan Wink:So it's two to three out of 300. Pretty tough number.

Travis Milks:Yeah. So you got to pass on a lot unfortunately. So yeah, the art of no.

Alan Wink:So we're down to our last couple of minutes and I like to do, we're talking about 2025 and we'll do what I call the lightning round and maybe just give me your answer whether you think the market's going to be up, down or remain about the same as 20, $24 invested by the VC community

Travis Milks:Up

Alan Wink:Exits, IPOs and M&A

Travis Milks:Up

Alan Wink:Fundraising.

Travis Milks:Same

Alan Wink:And probably the same because it's going to take some while for those exits to circulate capital back to the LPs.

Travis Milks:That's right.

Alan Wink:And how about valuations?

Travis Milks:I'm going to go, I think about the same.

Valuations as well. So yeah, I would go back to my previous comment, which is as this industry has grown, these cycles just take a little bit longer to filter through. And now I think we're at that getting to that tail end. So I think as we see the pickup in m and a, as we see the pickup in investment disbursements, that's where we will get some into 26. That's where I think you see fundraising for GPS pickup, et cetera. So I think we got another great year ahead of us here and we're certainly looking forward to it from a top market perspective.

Alan Wink:Travis, I just want to thank you again for spending a half hour with us. Your comments we're awesome. Can't wait to see where 2025 comes out. One other thing before I hand this back to Astrid, for those of you on the webinar looking to take your company public and would like more insight into the process, I would encourage you to take our IPO readiness assessment, which is accessible via the take the assessment button on your screen today. So without further ado, I want to hand it back to Astrid.

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