As investors enter bear market territory, alternative asset managers will need to differentiate themselves from competitors in ways they haven’t had to in years.
Venture capital firm Georgian may stand out thanks to the machine learning applications it is using to grow its portfolio companies. Benefitting from offerings like these is one of the firm’s most well-known investments: IEX. Short for Investors Exchange, IEX was founded by Brad Katsuyama and Ronan Ryan, who were featured in Michael Lewis’s book, Flash Boys.
On top of capital, the $4 billion venture firm provides its companies with machine learning software and research and occasionally embeds team members at its companies.
Now, Georgian is looking to grow its assets under management, with two separate investment vehicles currently in the market, according to a source familiar with the matter.
Katsuyama said one of Georgian’s employees has come to work with IEX directly on its entry into the digital asset and cryptocurrency space. “There’s something that’s incredibly unique about that,” he said.
Georgian became one of IEX’s main investors through a secondary round in 2019. Katsuyama said IEX helped Georgian become a bigger investor, in part because of its machine learning strategy. “We've been very selective about the investors we partner with,” Katsuyama said. But “If we see someone strategic who is interesting, we’ll try to get existing shareholders to sell.”
Georgian co-founder Justin LaFayette wanted to provide more support to start-ups after founding his own. “As a young founder and CEO, I saw the full spectrum of venture value-add, so when we founded Georgian we felt like there was an opportunity to do it differently,” he said. LaFayette began Georgian in 2008 after IBM acquired his startup, DWL, a customer data management software company. He spent three years doing strategy and M&A work at IBM after the transaction.
“This software helps overcome a range of issues that our companies face, like onboarding new customers faster using existing data and machine learning models,” LaFayette said. “This has helped reduce time-to-value for our customers from six months to a few weeks.”
Another company in Georgian's portfolio, Tractable, uses machine learning models to manage insurance claims. Georgian’s software has helped Tractable quickly retrain its own machine learning models, which then allowed the start-up to enter new markets.
Several large institutions, including the Massachusetts Pension Reserves Investment Trust, the State of Connecticut, the Marguerite Casey Foundation, and the California Wellness Foundation, are investors, public documents show.
In February, Connecticut’s state treasurer Shawn Wooten announced plans to invest $100 million in Georgian’s Growth Fund VI and $50 million in the firm’s second alignment fund.
According to the State of Connecticut’s public documents, the alignment fund is focused exclusively on follow-on investments in certain existing portfolio companies. The documents note that this vehicle is different from a continuation fund in that the original fund will retain interests in the portfolio company. Instead of rolling previous investments forward, the alignment fund provides additional capital to the portfolio company.
This is a key part of the firm’s strategy. “We tend to lead follow-on rounds,” LaFayette said. “We want to put as much capital as we can. It's very focused.”
Although investors are predicting a pull-back in the venture markets — both in terms of valuations and deal volume, LaFayette is confident that companies will do well — many learned tough lessons from the Covid-19 pandemic.
“I think people are forgetting that a lot of managers and CEOs just managed their businesses through two years that were really unprecedented,” LaFayette said. “It was a very chaotic period. I saw a lot of great leadership dealing with a completely unknown period of time.”