It is almost a decade since I first ventured inside the offices of Frontline Ventures.

The venture capital firm had closed its maiden seed fund round of €50 million and had already disbursed €20 million of this fund, backing eight companies including Logentries, Boxever, Qstream, and CurrencyFair.

Since then, the fund has continued to deploy capital, including through Frontline X, a growth stage fund targeting American companies.

And the fund’s office, on Lombard Street near Trinity College Dublin, bears testament to its string of investments. The building has high loft-like ceilings and houses a wall setting out the various companies that Frontline has invested in over the years. It is an impressive, and lengthy, list.

Frontline partners Will Prendergast and Stephen McIntyre greet me warmly as I make my way back to the building a decade on, before we take a short staircase up into a meeting room overlooking the main floor of the firm.

It has been a tough last 12 months for technology investment. Even before Silicon Valley Bank imploded in March, valuations were falling in the sector.

As two seasoned investors who manage a portfolio of investments in Europe and the United States targeting the business-to-business (B2B) software sector, Prendergast and McIntryre have witnessed the ‘tech slump’ firsthand.

There is a lot to talk about.

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Frontline was founded in 2012 by Shay Garvey and Will Prendergast. Garvey was previously a partner with Delta Partners while Prendergast worked with NCB Ventures. A key seed funder of Frontline in its early years was Declan Ryan’s Irelandia but its investor base is now much broader and includes, among others, the Irish Strategic Investment Fund (Isif), the European Investment Bank, AIB, and various family offices.

Its first early-stage fund was €50 million in 2013 followed by a second €60 million early-stage fund in 2017 before its third €70 million fund in 2021. In 2019 it launched the growth stage fund Frontline X, which raised $70 million (€58 million) and targeted American companies expanding into Europe.

For regulatory reasons, Frontline can’t discuss its plans for new funds, but it is actively working on its next phase of investing. 

McIntyre leads Frontline X along with Brennan O’Donnell. 

The former is a former vice president EMEA with Twitter who was previously a senior director with Google. The latter, from Texas, is another ex-Googler who has also worked in senior positions with Yammer, SurveyMonkey, and Euclid. This experience of seeing the insides of fast-growing American technology companies that have either listed on the stock market or were acquired inspired Frontline to launch its X fund.

McIntryre had seen firsthand how important having an international story is to investors came while working for Twitter prior to its New York Stock Exchange IPO in November 2013. “Twitter was really late to expand internationally,” he told me. “International expansion has to be part of the story for most successful companies when they go public.

“I saw from the inside how US companies expanded internationally as did Brennan. There is a huge revenue opportunity of 50 per cent of global revenue coming from outside the US. But that said, they can make a lot of mistakes. 

“We started talking to high-quality US founders and realised that if we designed a fund to help them expand internationally that was something that even the best US investors weren’t offering. No VC fund had done that.”

Prendergast added: “If you look at Europe most funds start local and stay local. Europe is increasingly creating great outcomes but if you think about the big returns historically a lot of them are in the US. Creating a differentiated product in the US is extremely difficult so we designed something to allow us to play there.”

“There was a time not so long ago when well-known VCs within the US would only invest in companies within a drive of Palo Alto,” McIntryre said. “But we think in Europe companies like Workvivo have the characteristics of the best pre-IPO companies in the US.” 

“Ten years ago, when I was going over to the US,” Prendergast said. “You would talk about deals done in Europe and VCs didn’t care.”

In the last five years, Prendergast said many of the top tier US funds like Sequoia, Bessemer, and Benchmark had put teams in Europe: “Why does a tier 1 Valley team come to Europe? Because they believe a number of IPOs are going to come out of Europe. We also believe that.” 

“Ten years ago, people (in Silicon Valley) thought of Europe as more like a copycat market,” McIntyre said. “This is no longer the case. We always advise US founders not to wait too long to expand into Europe as competitors won’t be just trying to copy you – they will be trying to beat you globally.”

“The market won’t be there for you in two years’ time in the same way so you need to go early,” he explained. “Europe is now able to punch its weight.”

Workvivo: The story of a successful exit

In the weeks before we met, Cork employee communications company Workvivo was sold to Zoom for an undisclosed sum, albeit a number that is understood to be hefty. Frontline was an early backer of the business, as was Zoom founder, chair, and chief executive Eric Yuan. 

Frontline is restricted in what it can say on the financial aspects of the deal, but Prendergast is happy to discuss Frontline’s thinking behind backing a company like Workvivo, which was founded in 2019. “We are always looking for global category leaders,” Prendergast said.

“Workvivo is in a very mature category called employee engagement. There are more than 100 companies in that sector so the lens we use when thinking about investing in a company like that is, ‘can that company become a category leader?’

“The fact Zoom came in and acquired them when they could have acquired any number of other companies is evidence that Europe can create category leaders.” 

Prendergast said one of the things he had learned in venture capital is that even great European companies can lose out to better-funded American competitors. 

“If you are not properly funded, you can’t win,” he said. “You can be working with the best Irish or European founders with the best team and the best idea – but they get overtaken by the US company which isn’t as good because they got the $50 million cheque when your company got the $5 million cheque.” 

He added: “Our job as venture capitalists is to ensure companies are properly funded at every stage of the journey.”

With Workvivo, he said, Frontline could see it had a great product that would require funding to stand out in a mature category. 

“We reached out to Tiger Global who were at the time the most active investor in the market and asked if they would lead the (series A) round,” Prendergast recalled. 

Tiger led a $15 million round with Frontline and Enterprise Ireland both following their money. “This meant Workvivo was immediately well funded,” Prendergast said. “We knew that Tiger would be good for that cheque and the next cheque (a $22 million series B round in June 2022).”

Frontline can’t say what multiple it exited it on, but its investment in Workvivo paid off for it and all stakeholders.

The road to IPO

In recent months, tech valuations have dropped steeply, and the meltdown of Silicon Valley Bank has dented confidence.

However, Stephen McIntyre highlights several investments by Frontline X that are performing strongly, and which, despite the macroeconomic challenges, have the potential to list on the stock market in the future. 

“The stages we invest in the US is at series B and C when the company has between $10 million and $30 million in revenue,” McIntyre said.

Frontline invested in business travel management company Tripactions, now rebranded as Navan. “We invested at a value of $200 million and their last valuation was $9 billion,” McIntyre said, adding that Frontline advised the business on its European roll-out, sales, hiring, and finding its base in London and Amsterdam.

Frontline also invested in New York-based Attentive, a personalised mobile messaging platform, whose founder Brian Long sold his previous business to Twitter for a reported $100 million.

“Another company which is very successful is Lattice [a people success platform] which was founded by a guy called Jack Altman,” McIntyre said.

Altman’s brother is Sam Altman, the chief executive of OpenAI, the maker of ChatGPT, which was valued at up to $29 billion this year. “I haven’t met Sam,” McIntyre laughed. “But he has some successful siblings!”

Another company Frontline X has invested in is hiring software firm Greenhouse, which is based in New York but employs about 50 people in Dublin.

Overall, Frontline X has made about 15 investments to date. “We are only about four years in but already about four of them are of a scale to go public once markets open up (with others not that far away),” McIntyre said.

“Our ultimate goal is to invest in standalone companies that can go public. In Europe, we invest very early so that could be a ten-year journey. In the US we invest probably halfway through that journey in companies that are established in the US, but they haven’t yet really expanded internationally.”

The best American-founded companies are usually backed by the same dozen venture capital firms. “It is very hard to break into that set of companies,” McIntrye said. “We use our international experience as an angle to access deals that wouldn’t normally be available to European investors.”

To successfully IPO, most great American tech companies need to be in international markets and that means Europe for B2B software companies as the largest market outside the United States. 

“The US is about 50 per cent of software sales, Europe is about 30 per cent,” Prendergast added. “You have to be in those two markets.”

For companies on an IPO journey, he said, Frontline could help them establish themselves in both markets.

A tech downturn

Prendergast admits technology stock valuations have been hit, and that when Frontline values its investments on a quarterly basis some valuations are down. But he says the good companies will recover. “Something that gets lost in all the share price noise is the market for B2B software is global,” he said. “It is a market that has slowed from 30 per cent annual growth to 20 per cent. But how many markets are growing at 20 per cent?” 

“We are investing in companies that have a long-term plan over five to ten years,” McIntryre added. “A market swing in one or two years doesn’t have a long-term impact on what we do as these companies take many years to build.”

Listed tech stocks are down 60 per cent, and IPOs have stopped, something McIntyre accepts has “a knock-on consequence on private companies”.

“More so on companies at a later stage than early stage. In the private markets in the last year relatively few companies have been raising as they know valuations are lower so they are conserving cash and trying to make it last as long as possible,” McIntyre said.

“That makes sense as a strategy, but many companies will eventually start to become short on cash – even ones that have raised say $50 [million] or more two years – as they are burning cash. So, we think by the end of this year or early next the number of deals being done will go up dramatically.”

“The end of this year or early next year, a lot of companies are going to come out to market (to raise capital) again,” he said.

“Will prices be lower than two years ago? They definitely will in many cases. There may be down rounds, but in many ways that will just mark a return to a normal market (after inflated valuations during the pandemic). I think by early or mid-next year we will be back to a normally functioning private market.”

Just as the private market normalises, Frontline expects the public market for tech IPOs will also return. 

“We don’t build any assumptions off markets opening up,” Prendergast said. “But I think history says they don’t stay closed for longer than five years. We don’t depend on it, but history would say the market (for IPOs) should open in the next 12 months.”

McIntyre added: “If we saw public market prices start to tick up…there is a holding pattern of high-quality companies that intended to go public a year or more ago that are waiting. “Once the first great company goes out and does it there is a big clump of others behind it.” When will that happen? “I don’t know exactly but the kind of company that will go public next year will be different to the type of company that could have gone two years ago. The markets were rewarding high growth above all else but now it is rewarding growth and profitability.”

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In March, Silicon Valley Bank collapsed after a bank run leading to the business being sold-off to other banks. “It was a big shock to the system,” McIntyre said. “SVB was at the heart of the tech ecosystem in the US. Most high-quality startups in the US had some banking relationship with SVB but most were not completely dependent on it as they had equity from venture capital investors. It was potentially very destabilising but the long-term impact was low to moderate.”

McIntyre said Frontline learned very fast how good the finance teams were within its portfolio when SVB got into trouble. “We learned pretty fast who the good CFOs were,” he said. “Most of them had good structures in place but that is not always the case in a very early stage start-up.” The fall in tech valuations caused tech IPOs to be pulled across America and Europe, and Frontline was impacted like all tech VCs.

“There were at least two companies (in our portfolio) that had confidentially filed S-1s (an SEC registration document required before listing) before the market changed,” McIntyre said.  

“Europe has created companies that are worth $1 billion or more,” Prendergast said. “We have invested in companies worth $1 billion on both sides of the Atlantic that are capable of doing it and will do it.”

There have been reports of Irish-founded tech companies thinking about an IPO, but very few have made it in the last decade. Why? “In the US the venture industry is 50 or 60 years old and it took a long time to get going,” Prendergast said. “In Europe, it is really only 20 years old and it takes at least ten years to bring a company to the public markets. It is not surprising we don’t have a stream of companies that have done it yet.”

“But you look at the ambition and size of some Irish companies that are worth $1 billion privately or on their way there it is inevitable that we will have a stream of companies going public on Nasdaq out of Ireland in the next few years. We believe we have invested in US and European companies that will be among them.”

AI and disruption

Our conversation is nearing an end to how artificial intelligence (AI) is rapidly transforming businesses. This is something Frontline is tracking closely, and something it is excited about excited about. “This new wave of AI is potentially a huge change that is as big as the arrival of the iPhone, cloud computing, or the Internet,” McIntyre said.

“It will provide a big tailwind to the type of investments we make and software in general. The step change is so great over such a short period of time it creates a lot of potential new winners.

“The internet created a whole new wave of winners and killed off a lot of the old guys

“The iPhone both killed incumbents and made Apple get bigger while making new companies like Uber possible. As an investor we need to figure out who the winners will be – will it be the incumbents who adapt or will it be new companies? It is an interesting time to invest. AI affects our existing portfolio companies and it has created an explosion of new companies. It is an exciting time.

“As an investor you have to ask yourself how much of this technology is going to be commoditised and how much is not?” McIntyre said. “AI can be tremendously powerful and still not make anybody any money. There is no doubt about the power of the technology but as an investor, you need to also ask where the value is and what is defensible?” 

Prendergast said an example of an Irish portfolio company that was using AI to drive value was LegalTech firm Brightflag. “Taking new AI models and applying it to their business is so powerful,” he said.

“Going back to what I said, B2B software firms’ revenue may have seen their growth move from 30 per cent a year down to 20 per cent… but as this AI category kicks in it will make a big difference to many companies’ bottom lines and growth. I think we could see a reacceleration of the software category.”