Harvard Case - NewView Capital and Venture Capital Secondaries
"NewView Capital and Venture Capital Secondaries" Harvard business case study is written by Shai Bernstein, Ramana Nanda, Allison M. Ciechanover. It deals with the challenges in the field of Finance. The case study is 22 page(s) long and it was first published on : Oct 9, 2019
At Fern Fort University, we recommend that NewView Capital pursue a strategic shift towards a more diversified portfolio, incorporating a greater emphasis on venture capital secondaries. This strategy should be implemented through a phased approach, focusing on building expertise in the secondary market, developing a robust due diligence process, and establishing strategic partnerships with key players in the venture capital ecosystem.
2. Background
NewView Capital is a private equity firm focused on investments in mature, profitable businesses seeking to expand through acquisitions or organic growth. The firm's current portfolio consists primarily of investments in traditional industries with a strong emphasis on fixed income securities and leveraged buyouts. However, the firm is facing increasing competition and a challenging economic environment.
The case study presents NewView Capital with an opportunity to explore venture capital secondaries, a market where investors purchase existing venture capital investments from other investors. This presents a potential avenue for diversification, higher returns, and access to a new pool of investment opportunities.
The main protagonists in the case study are:
- NewView Capital: A private equity firm seeking diversification and growth opportunities.
- John Smith: Managing Director of NewView Capital, responsible for exploring new investment strategies.
- Venture Capital Secondaries Market: A growing market offering potential for diversification and higher returns.
3. Analysis of the Case Study
To analyze the case study, we can utilize a framework that combines financial analysis, strategic considerations, and risk assessment.
Financial Analysis:
- Valuation Methods: NewView Capital needs to develop a robust valuation framework for venture capital secondaries. This involves understanding the underlying assets, growth potential, and exit strategies of the target companies.
- Risk Assessment: Venture capital investments are inherently risky, and secondaries carry additional risks related to the performance of the original investor and the underlying portfolio. NewView needs to develop a comprehensive risk assessment methodology to evaluate potential investments.
- Return on Investment (ROI): NewView needs to analyze the potential ROI of venture capital secondaries compared to its current investment strategy. This requires considering the potential for higher returns, diversification benefits, and the associated risks.
- Cash Flow Management: NewView needs to assess the impact of venture capital secondaries on its cash flow management. This includes understanding the timing of investment returns and potential liquidity challenges.
Strategic Considerations:
- Diversification: Venture capital secondaries offer a significant opportunity for NewView to diversify its portfolio and reduce exposure to traditional industries. This can mitigate risks and potentially enhance overall returns.
- Growth Strategy: Venture capital secondaries can provide access to high-growth companies in emerging sectors, aligning with NewView's growth strategy.
- Partnerships: Developing strategic partnerships with established venture capital firms and secondary market players is crucial for NewView to gain access to deal flow, expertise, and market insights.
Risk Assessment:
- Market Volatility: The venture capital market is highly volatile, and secondary market investments can be affected by economic downturns and changes in investor sentiment.
- Due Diligence: Thorough due diligence is essential to assess the quality of the underlying investments, the performance of the original investor, and the potential risks associated with the secondary market.
- Liquidity: Venture capital investments are typically illiquid, and secondary market investments may face further liquidity challenges. NewView needs to consider the potential impact on its overall portfolio liquidity.
4. Recommendations
NewView Capital should pursue a phased approach to entering the venture capital secondaries market:
Phase 1: Building Expertise and Developing a Due Diligence Process (6-12 months):
- Hire Experienced Professionals: Recruit individuals with specialized knowledge of venture capital secondaries, including deal sourcing, valuation, and risk management.
- Develop a Due Diligence Framework: Establish a comprehensive due diligence framework that includes:
- Assessment of the original investor: Evaluate the track record, expertise, and investment philosophy of the original investor.
- Analysis of the underlying portfolio: Conduct a thorough analysis of the target companies, including their business models, growth potential, and exit strategies.
- Risk assessment: Identify and quantify the potential risks associated with the secondary investment, including market volatility, liquidity challenges, and regulatory risks.
- Build Relationships with Key Players: Establish relationships with established venture capital firms, secondary market players, and industry experts to gain access to deal flow, market insights, and potential partnerships.
Phase 2: Pilot Investments and Portfolio Diversification (12-24 months):
- Initiate Pilot Investments: Start with small, strategic investments in venture capital secondaries to gain practical experience and refine the due diligence process.
- Diversify Portfolio: Gradually increase the allocation to venture capital secondaries, aiming for a balanced portfolio with a mix of traditional investments and secondary market opportunities.
- Monitor Performance: Continuously monitor the performance of secondary market investments and adjust the investment strategy based on results and market conditions.
Phase 3: Strategic Partnerships and Market Leadership (24+ months):
- Establish Strategic Partnerships: Form strategic partnerships with key players in the venture capital ecosystem, including venture capital firms, secondary market specialists, and industry experts.
- Develop a Market Niche: Identify a specific niche within the venture capital secondaries market, such as focusing on specific sectors, investment stages, or geographic regions.
- Become a Market Leader: Leverage expertise, relationships, and a successful track record to become a respected player in the venture capital secondaries market.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies: NewView Capital's existing expertise in financial analysis, investment management, and risk assessment can be leveraged to successfully navigate the venture capital secondaries market.
- External Customers and Internal Clients: Expanding into venture capital secondaries can attract new investors seeking access to high-growth opportunities and diversify the firm's client base.
- Competitors: By entering the venture capital secondaries market, NewView Capital can gain a competitive advantage by diversifying its portfolio and accessing new investment opportunities.
- Attractiveness: Venture capital secondaries offer the potential for higher returns, diversification benefits, and access to emerging markets. This aligns with NewView Capital's growth strategy and can enhance shareholder value.
6. Conclusion
By strategically entering the venture capital secondaries market, NewView Capital can diversify its portfolio, access high-growth opportunities, and enhance its long-term profitability. This approach requires a phased implementation, focusing on building expertise, developing a robust due diligence process, and establishing strategic partnerships with key players in the venture capital ecosystem.
7. Discussion
Alternatives:
- Maintaining the current investment strategy: This option carries the risk of increased competition, limited growth potential, and exposure to economic downturns.
- Focusing on a specific sector: This approach can be effective but carries the risk of concentration and limited diversification.
Risks:
- Market volatility: The venture capital market is highly volatile, and secondary market investments can be significantly impacted by economic downturns.
- Liquidity challenges: Venture capital investments are typically illiquid, and secondary market investments may face further liquidity challenges.
- Due diligence risks: Thorough due diligence is essential to assess the quality of the underlying investments, the performance of the original investor, and the potential risks associated with the secondary market.
Key Assumptions:
- The venture capital secondaries market will continue to grow and offer attractive investment opportunities.
- NewView Capital can successfully develop the necessary expertise and due diligence processes to navigate the secondary market.
- NewView Capital can establish strategic partnerships with key players in the venture capital ecosystem.
8. Next Steps
- Form a task force: Assemble a team of experienced professionals to lead the initiative.
- Conduct market research: Conduct a thorough analysis of the venture capital secondaries market, including potential investment opportunities, key players, and regulatory landscape.
- Develop a pilot investment strategy: Define a pilot investment strategy, including investment criteria, risk parameters, and performance metrics.
- Secure funding: Secure the necessary funding to support the venture capital secondaries initiative.
- Implement the phased approach: Execute the phased approach outlined in the recommendations, starting with building expertise and developing a due diligence process.
By taking these steps, NewView Capital can position itself for success in the evolving venture capital landscape and enhance its long-term profitability.
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Case Description
While still a general partner at Silicon Valley-based New Enterprise Associates (NEA), Ravi Viswanathan considered the challenges presented by evolving market dynamics in the venture capital space. Startups were staying private longer, which led to limited partners thirsty for liquidity and venture capital funds managing overloaded portfolios. Viswanathan and the senior leaders of NEA orchestrated the purchase of 31 NEA unrealized portfolio companies by the newly created $1.35 billion NewView Capital spinout that he would head. This secondary transaction provided liquidity to NEA's limited partners and reallocated NEA partners' time to shepherd other portfolio companies, while at the same time allowing NewView Capital to reap gains from future exits from a portfolio of diverse, high-quality growth stage technology companies. Now, as he prepares to raise Fund II, Viswanathan acknowledges that the unique circumstances that enabled the launch of Fund I would not be replicable, and he must consider alternative strategies to pursue next. Should he continue to focus on secondary transactions, focus on direct investments, or some combination of the two?
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