Babak Poushanchi, the founder and managing partner of Cota Capital, has a unique tech investment strategy that eschews the handful of mega-cap stocks in the United States worth more than $US10 trillion ($14 trillion).
In an exclusive interview before Friday’s Sohn Hearts & Minds, Poushanchi explained why Cota Capital invests in tech right across the spectrum of opportunities, from series A funding to initial public offerings.
He knows of no other fund manager in the US adhering to this approach.
“We’re a specialist firm. Our view here, really from an investment platform perspective, is that the days of the generalist investment firms are behind us,” he says.
“The days of siloed investment firms are also behind us as well.”
He says it is a mistake for investment firms specialising in technology to limit themselves to one silo such as public markets, series A investment rounds, growth equity or solely private equity.
According to Poushanchi, the silo mentality, which dominates global markets, ends up missing the fastest growing and most disruptive technologies that are transforming companies and industries.
He says being agnostic about whether tech companies are private, early stage or publicly listed allows Cota Capital to ride the innovation cycle and the tech-sector lifecycle.
What this means is that the businesses that Cota Capital is buying in public markets have shown themselves to be early winners and have carved out a few percentage points of market share in a large and growing category.
By definition, Cota Capital’s investments in series A funding rounds would have a different thematic and be at a different place in the innovation cycle.
“Over the last few years, we didn’t really invest in the public market in any space companies or satellite businesses – we’ve been doing that on the private side,” Poushanchi says.
“In five to 10 years from now, when you and I have this conversation, the kinds of businesses in the public market that we will be talking about are some of the businesses that in the last five years we were seeding and doing the series A on.”
Poushanchi says the tech world tends to have clusters of tech companies that move through the capital raising cycles from series A to later-stage private growth businesses and ultimately to public markets.
Cota Capital has steered clear of the mega-cap tech companies while favouring faster-growing companies.
“Our belief here is really that the better opportunities lie in some of the more recent modern technology businesses that are in that zero to $US50 billion range,” he says.
“Those companies are the more under-the-radar opportunities, perhaps less appreciated, and perhaps earlier in their opportunity sets and may have an easier time moving the needle and creating outsized growth for a more prolonged period of time than some of the mega-cap companies at this point.”
Cota Capital invests across four sub-themes: modern infrastructure, which includes the shift from cloud to the edge; workflow automation, which involves software collaboration tools; fintech and health tech.
“The way we define our broad mandate is we invest in US-based modern enterprise technology companies, we do very little in consumer tech,” he says.
“To me, that’s a really big opportunity set – it’s a multitrillion-dollar, multi-decade opportunity that is probably 10 to 15 per cent of the way into the opportunity set at this point. It covers every company in every industry.”
Poushanchi confirmed his reputation as an outstanding stock picker at the 2020 Sohn Hearts & Minds conference with the best performing stock of all that were named – Bill.com, an automated payments outfit, which was up 179 per cent.
Poushanchi will join other investment titans Charlie Munger, Bill Ackman, Ray Dalio and Howard Marks in donating their pulling power and insights to raise money for medical research via the Sohn Hearts & Minds event, which is now in its fifth year and has raised more than $30 million for various charities.
This year’s event takes place on December 3. It will once again be held virtually as the COVID-19 pandemic has restricted travel to Australia, which has led organisers to price tickets at $500, a fraction of the standard $3500 live event price.
Poushanchi says Cota Capital has its own commitment to charities through a fund it created called the Cota Impact Fund, which is a Donor Advised Fund with the San Francisco Foundation and has a mission to support innovative social impact and philanthropic efforts.
This article was originally posted by The AFR here.
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