Despite write-downs, TMT is a bargain way to own start-ups

Investors' increased focus on start-ups' profitability has created a ‘survival of the fittest’ environment in the venture capital market. On the one hand, companies with superior products and business models that continue to grow and improve profitability are attracting new capital at higher valuations. On the other hand, companies with weaker business models or non-mission-critical products that were more dependent on future funding have come under increased pressure.

In line with the market, TMT Investments (TMT:300¢), a venture capital company with a portfolio of more than 55 high-growth, internet-based companies, has continued to see divergence between its stronger and weaker performers.

Indeed, there were significant revaluation uplifts on new funding rounds for several portfolio companies as investors continue to back fast-growing, high-quality digital technology companies. 1Fit, a mobile app providing users with access to multiple gyms and yoga studios in Central Asia, completed a new SAFE funding round that led to a 216 per cent uplift to $1.6mn in the value of TMT’s 4.7 per cent stake. Collectly, a patient billing platform for medical organisations, completed an equity raise that more than trebled the value of TMT’s 3.23 per cent holding to $6.4mn.

However, there were $5.2mn of write-downs on four unlisted portfolio companies, too, a reflection of the negative impact of the current macroeconomic environment on their businesses. The impairments accounted for 76 per cent of their average carrying valuations at the end of 2022. Also, TMT took a 28 per cent hit on its 10.39 per cent stake in Nasdaq-quoted cloud storage group Backblaze (US:BLZE). The holding is now worth $16.2mn (51¢).

This is part and parcel of investing in early-stage technology companies, as is seeking out new investments to uncover the next unicorn. TMT made $0.8mn follow-on investments in four exiting holdings, including Cyberwrite, an artificial intelligence (AI) cyber insurance platform providing cyber security insights and risk quantification for businesses. Since the period end, the group has also invested $0.2mn in Mobilo, a smart digital card solution, $1mn in fashion and sports AI chat platform GameOn, and $0.5mn in Phoenix Health, a Canadian direct-to-consumer health platform for men. TMT still holds $7.8mn (25¢) of net cash so is well funded.

It’s worth noting that TMT's 1.3 per cent stake in Bolt is being very conservatively valued. It was revalued upwards by 2 per cent to $71.2mn (227¢) even though it had a read-through valuation of $103.3mn following Bolt’s €628mn (£555mn) fundraising round in January 2022. Moreover, the share price of its closest comparable, listed rival Uber Technologies (US:UBER), has surged 81 per cent this year to above the level in January 2022, recouping all the paper losses in last year’s tech rout. Bolt continues to record double-digit annualised revenue growth, too.

The point is that the stake in Bolt, cash and the listed stake in BackBlaze are cumulatively worth 303¢, so back up all of TMT’s share price. That leaves more than 50 investments in the price for free, a ‘margin of safety’ that made the shares a shoe-in, at 285¢, in my 2023 Bargain Share Portfolio. That’s still the case with the shares priced on less than half book value. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com. They are priced at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.