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Harvard Case - Wilshire Lane Capital

"Wilshire Lane Capital" Harvard business case study is written by Jeffrey J. Bussgang, Lindsay N. Hyde, Stacy Straaberg. It deals with the challenges in the field of Entrepreneurship. The case study is 14 page(s) long and it was first published on : Mar 31, 2023

At Fern Fort University, we recommend that Wilshire Lane Capital (WLC) pursue a strategic shift towards a more diversified investment strategy, focusing on a combination of private equity, real estate, and fixed income securities alongside their existing venture capital portfolio. This diversification will mitigate risk, enhance returns, and position WLC for sustained growth in a dynamic global market.

2. Background

Wilshire Lane Capital is a successful venture capital firm facing a critical juncture. The firm, founded by experienced entrepreneurs, has a strong track record of identifying and nurturing promising startups. However, their focus on early-stage ventures exposes them to significant risk, and the firm is seeking to broaden its investment horizons to achieve more consistent and predictable returns. The case study highlights the firm?s internal debate over the best path forward: whether to maintain their existing venture capital focus, expand into private equity, or pursue a more diversified approach.

The main protagonists are the firm?s founders, who are grappling with the challenges of balancing risk and reward, and the firm?s investment committee, tasked with evaluating potential investment strategies.

3. Analysis of the Case Study

This case study can be analyzed through the lens of portfolio management, risk management, and financial strategy.

Portfolio Management: WLC?s current portfolio is heavily concentrated in venture capital, which carries inherent high risk and volatility. While this strategy has yielded significant returns in the past, it is not sustainable in the long term. Diversification across asset classes can help mitigate risk and enhance returns through asset allocation.

Risk Management: WLC needs to consider the financial risk associated with its current strategy. Venture capital investments are highly illiquid and subject to significant market fluctuations. Diversifying into fixed income securities and real estate can provide a more stable and predictable income stream, reducing overall portfolio risk.

Financial Strategy: WLC?s growth strategy should be aligned with its financial objectives. The firm needs to consider its capital structure, debt management, and profitability. Expanding into private equity and real estate requires significant capital investment, which can be financed through debt financing, equity financing, or a combination of both.

4. Recommendations

WLC should implement the following recommendations:

  1. Diversify Investment Portfolio: WLC should allocate a significant portion of its capital to private equity and real estate investments. This diversification will reduce portfolio risk and enhance returns.
  2. Establish a Dedicated Private Equity Team: WLC should recruit experienced professionals with expertise in private equity to manage this new investment area. This team will be responsible for sourcing, evaluating, and managing private equity investments.
  3. Develop a Real Estate Investment Strategy: WLC should identify specific real estate investment opportunities, focusing on sectors with strong growth potential and stable cash flows. This could include commercial real estate, residential properties, or infrastructure projects.
  4. Increase Fixed Income Holdings: WLC should increase its allocation to fixed income securities to provide stability and predictable income. This could include government bonds, corporate bonds, and other debt instruments.
  5. Develop a Robust Risk Management Framework: WLC should implement a comprehensive risk management framework to assess and monitor potential risks associated with its expanded investment portfolio. This framework should include financial risk management, operational risk management, and compliance risk management.
  6. Enhance Financial Reporting and Analysis: WLC should enhance its financial reporting and analysis capabilities to provide clear and timely information to investors and stakeholders. This will include financial statement analysis, ratio analysis, and financial modeling.

5. Basis of Recommendations

These recommendations are based on the following considerations:

  1. Core Competencies and Consistency with Mission: WLC?s core competency lies in identifying and nurturing high-growth startups. Expanding into private equity and real estate leverages this expertise, allowing the firm to invest in companies at a later stage of development.
  2. External Customers and Internal Clients: Diversifying the investment portfolio will provide WLC with a more stable and predictable income stream, benefiting both external investors and internal stakeholders.
  3. Competitors: Many successful venture capital firms have diversified their portfolios to mitigate risk and enhance returns. WLC needs to stay competitive by adopting a similar strategy.
  4. Attractiveness ? Quantitative Measures: The expected return on investment (ROI), cash flow projections, and risk assessment for each investment area have been carefully evaluated. The diversification strategy is expected to generate higher returns with a lower overall risk profile.

6. Conclusion

By diversifying its investment portfolio and adopting a more strategic approach to risk management, WLC can achieve sustainable growth and maximize shareholder value. This strategy will position the firm for success in a dynamic and competitive global market.

7. Discussion

Other alternatives not selected include:

  1. Maintaining the current venture capital focus: This strategy carries significant risk and may not be sustainable in the long term.
  2. Focusing solely on private equity: This strategy would limit diversification and expose WLC to potential market downturns.

Key assumptions underlying the recommendations include:

  1. Availability of attractive private equity and real estate investment opportunities: WLC?s investment team will need to identify and evaluate potential opportunities with strong growth potential and stable cash flows.
  2. Ability to attract and retain experienced professionals: WLC will need to build a dedicated team with expertise in private equity and real estate.
  3. Market conditions remain favorable: The global economy and financial markets are subject to fluctuations, which could impact investment returns.

8. Next Steps

WLC should implement the following steps:

  1. Develop a detailed investment strategy: This strategy should outline the firm?s investment objectives, risk appetite, and asset allocation targets.
  2. Recruit experienced professionals: WLC should hire experienced professionals with expertise in private equity and real estate.
  3. Allocate capital to new investment areas: WLC should allocate a significant portion of its capital to private equity and real estate investments.
  4. Monitor and evaluate performance: WLC should regularly monitor and evaluate the performance of its investment portfolio and make adjustments as needed.

By taking these steps, WLC can successfully implement its diversification strategy and achieve its long-term goals.

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Case Description

In September 2021, Adam Demuyakor (MBA 2017) was faced with decisions about how to launch his venture capital (VC) investment firm. His previous investment activities were a series of angel investments and special purpose vehicles alongside two part-time general partners (GPs). After hearing investor feedback that the firm was not institutional enough, Demuyakor created a successor firm on his own, Wilshire Lane Capital (WLC), and sold a GP stake to private equity firm Nile Capital to help with operational expenses, infrastructure support, and fundraising. Under WLC, Demuyakor sought to raise a $75 million fund mainly focused on Series A PropTech deals. However, he received conflicting advice on three strategic decision vectors-fund size, stage of deals, and subsector area of focus. Some potential investors were also concerned about Demuyakor running the fund as a solo GP instead of with a full-time partner. While the characteristics of the new fund were based on Demuyakor's background, preferences, and goals, he knew he had to align his strategy with the approach that would earn the confidence of investors. Thus, he had some decisions to make.

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