INVESTMENT PHILOSOPHY
UPC Fund I seeks out companies that use technology to provide enterprise infrastructure.
This is a niche sector that is essential to the growth of technology companies globally.
Tech companies are becoming increasingly specialized and disbursed, especially after covid. Most high-tech projects start off with a small group of engineers who focus on building and shipping the product. However, to build a scalable company, these project teams must build strong operations around their core products.
To succeed, founding teams must devote time and energy to areas such as entity formation, accounting, recruiting, design, social media, community building, and legal support. However, these are simply not the areas of expertise for most engineers of tech teams.
We have identified a niche sector of startups that are creating the operational infrastructure for fast-growing technology companies. By providing support for the non-tech areas of the business, these startups offer efficiency and free up critical bandwidth for their clients.
After securing angel or seed round venture capital, startups look to enterprise infrastructure for proper entity setup, design, and financial support. This way, they are able to project business competence to existing and future investors.
For example, one of our target companies helps tech teams find brand designers, legal setup attorneys, tax and accounting teams, and compliance consultants. Their work allows teams that focus on AI, web3, and other deep tech to focus on building. Teams do not have to be distracted with researching corporate jurisdictions or finding designers for website and t-shirt designs.
At series A funding and after, startups look for these companies to grow institutional. To attract and retain talent, tech companies must build culture, community, perks, and swag. Rather than going through painful recruiting and training to find their own employees, companies can easily outsource to enterprise infrastructure companies for quick ramp ups.
For instance, another potential target provides indoor plant design and monitoring services to tech companies, ensuring a natural and lovely atmosphere for the employees. Their customers never have to worry about designing, purchasing, and keeping plants alive.
Yet another potential target provides a subscription-based healthy snack service for technology startups. Using flexible inventory technology, they allow their clients to select from curated, healthy options, and track interest and inventory levels of snacks. For engineers who spend hours and hours coding, snacking is essential for health and morale.
The common theme among these enterprise infrastructure companies is the reliability of revenues. Because of the stickiness of the service, and the relatively low profile of these expenses among tech companies, there’s high recurring revenue and long client lifetime earnings.
For enterprise infrastructure companies, it is often hard to secure a bank loan given their tech and startup nature. Venture debt is also not a good fit given that lenders would want high interest rates paid from earnings and oftentimes ask for equity.
UPC is able to provide a different type of leverage to these companies that offers them flexibility. Because we know that financing is usually needed to expand only when new revenue streams are secured, such as when a new contract with a client is signed, there is good visibility on cash flows to service the financing. Additionally, unlike banks, we allow our borrowers to invest their treasury to earn returns on idle capital. This way, their treasury grows from both business and investment earnings. It is a win-win for us because our investment is then more secure.
Furthermore, we provide strict guidelines on risk parameters for treasury management. We monitor the liquidity, volatility, track record, and compliance of all investments to ensure that no company creates unnecessary risks to our investment. Because our investment comes with veto rights on draws larger than a specified amount, we are able to monitor the development of both the company and its treasury.
Finally, we add value to our investment companies by introducing them to global clients who can expand their business. By helping them to grow, we are de-risking our own investment and building more solid cash flows for our fund.
In summary, we believe that enterprise infrastructure will become increasingly crucial to startups and tech companies with global distributed teams, more specialized technologies, and increased competition for talent. We like that this sector flies under the radar but has high recurring revenues and customer stickiness. If technology were a gold-rush, we are investing in the next generation of the general store that sells picks and shovels to everyone.