VC secondary market partner perspectives: Ravi Viswanathan

In this second release in a series of interviews with successful figures in the secondary market, Derek Minno talks with Ravi Viswanathan , the founder of NewView Capital, about the Venture Capital secondary market. This article features Derek's takeaways from the conversation along with his own insights, as written by Derek himself.?

Story Voices?

Derek Minno (interviewer and author) —Derek has served as a GP in a domestic VC Fund; a GP in an international PE Fund, a LP in multiple PE and VC Funds, and a C-level executive in VC backed companies. He is the President of Point Capital.?

Ravi Viswanathan (interviewee)— Ravi led the spinout of over $1 billion of venture capital assets from New Enterprise Associates (NEA) in 2018. This was the first large VC secondary transaction and led to Ravi founding NewView Capital, which now manages more than $2 billion AUM.?

Before jumping in, a note from the author:?

"This collection of conversations features insightful interviews with successful figures in the venture capital secondary market. Discussions are focused on the perspective of opportunity analysis, historical evolution, and the current as well as future market trends and activities. The participants of these interviews offer insights and contribute diverse perspectives. We will summarize the interviews and provide both key information and wisdom honed from experience."???

VC Secondary Market Partner Perspectives: Ravi Viswanathan?

The spinout from NEA created a $1.35 billion fund in 2018. The bulk of the funding was for the transferred NEA portfolio, including existing investments and anticipated follow-ons for those companies. There was also capital for new deals, which Ravi had done his whole career. In 2020, NewView bifurcated their strategy into two dedicated pools. NewView’s Flagship Funds are for direct investing into companies, mid -to -later stage, but secondary is a big piece of it. Then also Special Opportunity Funds, especially for portfolio acquisitions, that are dedicated to venture secondaries.? ?

In summary, Ravi/NewView's approach to venture capital secondaries is centered around careful selection, customized deal structures, and a focus on operational engagement to enhance the growth and value of the companies in their portfolio. Their ability to manage financing risk and efficiently allocate capital positions them as a strategic player in the secondary market. In the world of venture capital secondaries, there are several strategies and approaches. NewView focuses on these key principles and considerations:?

Financing Risk and Portfolio Selection: The level of financing risk in a portfolio depends on how you define financing risk. NewView's approach is to focus on companies that are growing efficiently, shunning capital-intensive growth. When acquiring portfolios like the NEA portfolio, they assess each company individually. They aim to allocate follow-on dollars to late-stage companies that require less capital, have secure funding, or are already fully financed.?

Deal Structures: NewView employs several deal structures based on the needs of sellers. They don't engage in LP stake sales and often refer them to their partners. The focus of their portfolio acquisition strategy is on heavy curation and typical sellers in these transactions can include seed funds, early-stage funds, later-stage funds, and older funds that are in harvest mode and are approaching the end of their life cycles. They also have the operational capacity to take on board seats, which is different from traditional secondary investors, as they can actively participate in the management and growth of the companies.?

Portfolio Preference: NewView often prefers highly curated opportunities even if the process leads to the purchase of a single company or a smaller portfolio over a large portfolio of many companies. They prioritize cash-on-cash returns and can work with a variety of stakeholders who need liquidity, whether they are institutions, GPs, angels, or individuals.?

Valuation Considerations: NewView emphasizes the importance of accurate valuations based on a company’s fundamental value. They are cautious about steep discounts that may be calculated based on a significantly inflated valuation, especially in the venture capital sector. In their view, a discounted price should be the output of a view on intrinsic value rather than an input driving decision. They often avoid deals with excessive discounts (e.g., 80%) because they believe such discounts are not sustainable as these highly valued companies are likely to raise down rounds with associated risks that may be introduced through structure.?

Thematic Focus: NewView's investment focus is highly thematic, with the vast majority of their investments dedicated to enterprise software and fintech. Their in-depth industry knowledge enables them to make informed investment decisions and tailor their investment approach and operational impact to each company's unique situation.?

Reserve Allocation: In primary investments, they reserve approximately 20-40 cents for every 60-80 cents of the original investment. This allocation is calculated based on the company's financing needs going forward.? For secondary investments, the reserve amount may be lower given these companies typically are later stage and many are fully financed.?

Risk Mitigation: NewView avoids binary risks and focuses on post product market fit companies with substantial recurring annual revenue (ARR) and growth. They believe in the value of active portfolio management, risk-adjusted returns, are diligent in their underwriting process, and are disciplined when it comes to valuations.?

Market View?

Ravi provides an overview of the venture capital secondary market, its opportunities, challenges, and the evolving dynamics of venture capital investing. Ravi provides insights into the venture capital secondary market and the dynamics of investing in venture capital secondaries. Here are the main points:?

Market Opportunity: The venture capital secondary market represents a significant opportunity, estimated to be between $50-100 billion. This market has traditionally been more associated with Private Equity (PE) investors, some of whom allocate funds to venture capital.?

Demand for DPI: There is an increasing need for distributing profits (DPI) among General Partners (GPs). GPs are under pressure to generate returns and close the gap between the bid and ask prices in the secondary market due to LPs (Limited Partners) asking for liquidity.?

Potential Growth: Ravi anticipates that in the future, larger venture portfolios, will become more actively traded. However, there may be a need for some time to settle valuation mismatches between buyers and sellers.?

Attention to Portfolio Companies: In certain cases, venture capital firms might pay more attention to their portfolio companies than a traditional secondary market investor. NewView can provide follow-on investment and help companies secure additional funding when they might not be getting much attention from the original VC investors on their cap tables.?

Reputation Considerations: NewView emphasizes the importance of maintaining a good reputation in the venture secondary market. It's advised not to engage in short-term trading but to play the long game and support portfolio companies. Engaging in secondary trades too quickly can be seen as more aligned with a trading mentality rather than a long-term investment approach.?

Evolution of the Venture Secondary Market: NewView reflects on the relatively slow growth of the venture secondary market in the past, which might be attributed to the venture capital mindset. Venture capitalists often focus on creating something new, while buyout investors are more commercially oriented.?

Changing Fundamentals: The dynamics of venture capital have been changing. Total Value to Paid-In (TVPI) ratios and the distribution to paid-in (DPI) ratios are diverging. Fund managers have been raising capital quickly, which has created a backlog of investments that need liquidity. Secondaries are recognized to provide liquidity and effectively managing portfolios.?

Investment Strategies: The venture secondary market often targets later-stage companies that might not yet be profitable. Some companies that have performed well within the earlier funds may be ideal targets for secondaries.?

Challenges of Venture Secondaries: The venture secondary business can be challenging. There is an "evangelical" aspect to it, where convincing participants to engage in secondary transactions can take time. Bid-ask spreads can sometimes be irrational, despite the understanding that such transactions are necessary.?

Key Interview Quotes ?

“These days pretty much every cap table on the planet has folks that need liquidity.”?

“We recently put together a thought piece where we discussed what we call the fallacy of discounts. We said, the focus on discounts really emerged from the private equity where you have a more efficient market with a tighter range of outcomes and multiples (generally calculated off EBITDA). So, with company X to company Y to company Z, that discount was comparing apples to apples to apples but with venture capital the apples can be vastly different. You have different financing histories, different types of companies, growth rates, burn rates.” ?

“We don't take binary risk. If it's real binary risk, we'd just stay away.”?

“We are big believers in the venture capital secondary market. By our estimation, we think it's a $50 billion - $100 billion opportunity. The practitioners of secondary have been more the PE folks. And some of those PE folks have an allocation to venture.”?

“I think the TVPI - DPI spread didn't have attention for a while. The tension now is this extreme need for DPI. And that is forcing that spread to close because GPs are realizing this isn't what I wanted to get, but I need to do something. I think the LPs are in every meeting saying, hey, have you sold anything? Hey, give me a check.”?

“I think it'll be later stage companies that are good secondary targets. They can still be unprofitable provided they are growing and have a defined path to profitability.”?

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Disclaimer: The information presented in this post is the sole opinion of the writer and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies. This is for information purposes and should not be construed as an investment recommendation.?