Ravi Viswanathan – Venture Secondaries and Growth Capital at NewView (EP.327)

0:04Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at CapitalAllocators.com. All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

0:44Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast. My guest on today's sponsored insight is Ravi Viswanathan, founder and managing partner of NewView Capital, a venture firm that created a disruptive model for strategic secondary investing that blends portfolio acquisitions with direct investments. Our conversation covers Ravi's path to the venture industry, lessons from 15 years at NEA, catalyst for creating NVC, and the rationale and opportunity set for venture secondaries. We discuss NuView's investment process across the sweet spot for portfolio acquisitions, fallacy of discounts, work with portfolio companies, and exit strategy.

1:32We close with new opportunities on the horizon and the future of NuView Capital. Before we get going, we're hosting our fourth cohort of Capital Allocators University in New York City on September 14th. Capital Allocators University, or CAU, is a chance to connect and learn with peers. We'll bring together a few dozen allocators, each with around 5 to 15 years of experience, to share frameworks on interviewing money managers, investment decision-making, leadership and management, and investing. And we'll engage with four fantastic chief investment officers, Jenny Heller from Brandywine, Kim Liu from Columbia, Anna Marshall from the Hewlett Foundation, and Brian O 'Neill, recently retired from the Robert Wood Johnson Foundation.

2:21You'll get a chance to meet some great people and learn a lot in an information-filled day. Hop on our website at capitalallocators.com slash university to apply. Please enjoy my conversation with Ravi Viswanathan. Ravi, great to see you. Great to be here, Ted. Thank you for having me on. Why don't you take me back to the early days and led you on this path that you've been on ever since? Venture is actually my third career. I was a scientist many, many years ago in the Bay Area, a material scientist. Decided I didn't want to be a scientist, thought the commercialization of technology was more appealing to me than the research of technology.

3:00So did a hard pivot via business school, did consulting. And then really the path to venture started in January of 2000 when I joined Goldman Sachs. So I've been a VC for over 23 years, three firms, Goldman for four years, NEA, which is the bulk of my experience, 15 years, and then launching NewView about four and a half years ago. Goldman really shaped who we are and who I am in terms of what we're doing here at NewView on a number of different levels. First, I joined in the beginning of 2000, if you remember, marking back to those days. I do. Very, very interesting time. It's the first of three downturns I've lived through.

3:34Hopefully, this is the last one. The second is the group I joined as a private equity group was actually a mission-monitored fund investing, direct investing, co-investing, and secondaries. And I drove the venture piece of that. And so actually, back then, because of the downturn, I did get exposed to venture secondaries, which shaped me a fair amount. If you fast forward 20 years, we spend a good chunk of our time focused in that market. It's changed in that it's probably two orders of magnitude larger in terms of market size. Venture and secondary is put together with a bad connotation. It was really not done.

4:09And what was done was more continuation vehicles and closeout funds. It was much more transactional, more passive, more of a trade. We're trying to do something very differently, but that experience really shaped me. I spent four years there. It was an amazing experience. And I finally figured out, I really like this thing called venture capital. maybe I should try to go to a pure play firm and really learn the craft of company building, which is how I really was taught. I knew the NEA folks and joined them in 2004 and spent a wonderful 15 years with them as a general partner. NEA is a firm that really started mega funds well before it was called mega funds.

4:45I didn't even call it that because there's so many funds doing it now. But it was one fund, seed all the way to growth, tech and med. And then I was a GP on the tech side, focused on enterprise software and fintech and growth investing. I want to pick apart a few things. First, take me back to that 2000 experience. You joined venture, you decide that's the path you want to go on, and then the whole market gets a cold splash of water in the face. What did you experience going through that? As a spectator, I experienced a lot of company failures. I spent a lot of time thinking about the downturns, what we can learn.

5:20And I'd say every downturn, there's similarities and differences with the one you're facing now. There were probably a fair subset of companies that had no business being companies in that downturn. The dot-com era, we all know the lore of that era, but saw a lot of company failures, saw a lot of business models that up until then was amassed with capital. And that's something that every downturn is a referendum on product market fit. Whereas before, when you had that run-up capital or some other factor masked that, we also saw a lot of strife within the LP community, whether it's individuals or institutions that wanted out.

5:58I remember having conversations with folks and they thought, oh, if I invest in venture, I'll get a 5 to 10x in two to three years. Because in 1999, in the early part of 2000, that was actually happening. And for those that were not accustomed to that market, you would think that would be the norm. And there was a lot of education that no. This is very much a long-term, sometimes brutal game to get to the finish line in a positive outcome way. Why don't you walk me through your experience in those decade and a half at NEA? It was an amazing time. I joined in the DC office. It was a smaller office back then.

6:35And it was very much an apprenticeship model. This is the old days of venture capital. Peter Barris hired me, ran the firm, ended up running the firm for 20 years. And so really sitting at the feet of giants like Peter, Scott Sandel, and some other tremendous investors, I joined as an associate, just worked my way up, principal partner, general partner. Started as a generalist, but really found enterprise software and also started our fintech efforts about 11, 12 years ago, well before it was called fintech. It was really company building. And also the ethos of the firm from Dick Kramlick was one of the founders, very focused on the entrepreneur and really being a good partner and a long-term capital partner.

7:15And those are just lessons that I still hold pretty sacred. What does it mean to you to being a good partner with an entrepreneur? You don't really know until the negative times, but really it's two things. One is actually adding value. We're not private stock pickers. It's really company building. It's not just capital. Capital is fungible. So how do you add value to the company in ways that the company really wasn't able to do without you. And second, and this is more important, even in good times, the journey is never completely linear up and to the right. It's tortuous. It's a tortuous journey.

7:50So being a good partner when there's serious issues with the company, whether it's product or market or team or execution. And sometimes there are times, especially 08, 09, where you felt like a lot of folks left the building because they couldn't really grok that model. And we're seeing a redux of that for sure here, where it's just invest and everything will take care of itself. And that usually never happens. What were the ways that you figured out that you uniquely could add value to the portfolio companies? A lot of it was not rocket science. It's just learning from my elders, building a relationship, coffees, dinners, lunches, whatever, with the CEO, with the management team.

8:25Because what you're doing is you're building trust and respect, and you're building this goodwill bank such that when tough times happen, you have the agency and license to ask the tough questions. And you've crossed the threshold in that the CEO and the management team really knows you as someone that just wants the best for the company. Dick Kramlick would say, when you have a problem or an issue with a company, just go back to one fundamental question. What's in the best interest of the company? And it's a very simple, almost throwaway phrase, but I've actually invoked that more times than I can even recollect, especially in some of these trying times.

9:01So you have this great run at NEA. What was the catalyst for creating NewView? The catalyst really started as this grand portfolio management exercise. This is in 2017, and NEA was a single global fund. We did everything underneath that fund. That means that as a GP group, and there's 10 or 12 GPs at any point driving the firm, we really had to make sure that we were on top of the various strategies, sectors, et cetera, within the fund. So we noticed, not unlike our peers, that we were raising, the funds were getting bigger and were raising faster and faster because of the market opportunity commanded it as such.

9:41Companies for sure were staying private longer. Instead of seven, eight years, it was 10 to 12 years. So you had this portfolio that was growing. We also had a generational shift. They had done a nice job of that with probably a dozen partners and GPs had retired or left. So we wanted to make sense of the portfolio. And I raised my hand on the GP group and said, you know, I'd love to drive this. We all knew the top 1%, 2%, 3 % of the companies, it's going to really be the fundmakers, the power law phenomena, which is still very much the case in venture. And sadly, we also knew the bottom performers because it took up a lot of time.

10:12It was this big middle region that we wanted to get our hands around. And we discovered a bunch of companies that were really high quality companies, but just for a variety of reasons, either there were older funds or the lead partner was no longer there. We just weren't paying as much attention. They're also generally quite well run. So we thought, should we do something about this? Why don't we spin them off? I did some research and I thought, oh, this has been done before. And interestingly enough, it hadn't. And this is that redux to 20 years earlier where secondaries and venture were still perceived in a negative way.

10:43And it was never really strategic. It was much more transactional, more of a trade. So we thought, why don't we spin this off? It gives liquidity to any ELPs, but it's a quality enough product slash set of companies that it would attract new LPs. And then this is really Q1 of 2018. We couldn't do it within NEA because this is a secondary. So it needs to be under the auspices of a registered investment advisor, an RIA. And NEA wasn't an RIA back then. They're actually an RIA now. And for me, that was the epiphany. It was a light bulb moment. It was 20 years coming full circle and went to GP Group Scott Sandell and said, I really would love to do this.

11:18And that was the birth of NewView. And we raised capital. Funnily enough, almost all of the LPs were NEA LPs. And we closed Q4 of 2018. That was the birth of NewView, so to speak. So before you got there, I'm curious about the decision process when you identify that there's this good group of companies that aren't getting quite the attention because of the size of the organization and the power law. How do you think about doing this as you did in the secondary compared to just dedicating the resources within NEA to go and maximize the value of those businesses? It's a great question. It's one that we actually did think about.

11:57But I think what it came down to, a lot of these companies were in older funds, but interesting enough, another big dynamic was companies where the lead partner or general partner was no longer there. Just by how venture firms work, which is based on the power law where there's a lot of companies in a portfolio. And especially in this era, most general partners had a lot of companies who are generally overloaded. It doesn't get easily assimilated, so they were great candidates. As or as I'd mentioned, these companies were in older funds. We did the analysis. For us to have a group of folks come in and really manage that, it just didn't make sense in terms of the motion for the firm.

12:35The motion for the firm was really raise funds and really go after some of these opportunities that could be fund makers. and then to have the infrastructure in place to do it. I also think it's apart from the ethos of a venture capital firm. Since the dawn of venture capital, it's been IPO or bust. You're going to have these, we call them needle movers, these iconic companies that really define venture capital and define venture capital firms. The quest is about that versus we've got really good companies. How do we make sure that we get a return, a quality return out of that? And so I think part of it was ethos.

13:07Part of it was just, it didn't make sense strategically. And part of is I actually thought there was a real opportunity here. And I tested this with a lot of my peers and found that this was not just unique to any. This was really, this dislocation was happening across venture, which also made sense. So as you set out to do this, what did you see as the breadth of that opportunity and the pockets where you thought you could take advantage in this strategy? The trend line that bigger funds are being raised faster and faster was not unique to us. And And frankly, there was a lot of firms that had far more accelerated paths than we did.

13:43I saw that across industry. I also saw the generational shift happening. A lot of the things that were happening with NEA, I saw firsthand at other firms. And I also saw other firms just hadn't even gotten around to thinking through that. Now, obviously, that's a very different story, five years hence. That was probably a big determinant for us to say this isn't just an isolated incident. And then if you also look at, again, venture secondaries, it's so underpenetrated. In private equity, it's about 2 % penetrated, and that's doubled in the last decade from 1 % to 2%. So that still has some room to grow.

14:18Venture is 0.3 % penetrated. So in that market, our estimation, we've done some analysis, 50 to 100 billion just in what we're doing. So if we are to practice what we preach to our companies, what's the TAM, the market size? I felt that it was a massive market And I saw the pain point. And you could do it in a strategic, thoughtful, value-additive, partner-friendly way versus this trade mentality that was happening up until then in venture. Why do you think the venture secondary ecosystem was such an order of magnitude smaller than private equity secondaries? It really gets down to ethos of venture firms.

14:56I was trained in venture. There's the power law phenomena. It's the IPO bust. And then, of course, there's strategic M &A. And then this financial sponsor M &A started happening probably 10 years ago. Never really thought, well, we can just sell to other firms. It just wasn't really how venture capital was built. On the flip side, if you go to the buyout world, it's this evolution of man. The lower middle market folks get companies and they sell to the middle market folks, sell to the large cap folks, and you have that virtuous cycle. And actually you have situations where in large cases, every set of constituents along the way make money if it's done well.

15:32So I think that's, and venture really hadn't thought of it that way. It is really nice to see that that is changing. We spend a lot of our time, I call it in software speak, evangelical sales, really educating the market. And it's not a negative connotation. It's actually a positive connotation. I think the LPs will serve them well by doing that. It really stems to just how venture has emerged and really persisted over the past decades. So when you set out to do this as NewView, what was the process like for raising the capital to buy these assets, as you said, from existing LPs at NEA for the most part?

16:10I affectionately refer to it as I went on three different roadshows. One is we actually went to our LPAC at NEA just to, we wanted to make sure that they blessed it. And they all thought it was a really interesting idea. Actually, someone's actively managing the portfolio. So kudos to you. We need to make sure that it made sense in terms of pricing. And then I went on Roadshow with new LPs. We did it such that we wanted to make it a clean break. Everyone was going to get a check. And then there'd be a bunch of new investors that would jump in and really form NewView. And a lot of them could be the same investors, but different groups, a secondary group or different vintage funds.

16:47The third very important Roadshow went on is the companies, because this was very new for the companies. And we need to make sure that they were comfortable. And we had a rule. We said, if they resisted, this is dead in the water because that was a constituent that we couldn't have as unhappy or dissatisfied. So that was really the process. And obviously I was conflicted. So it was really the new LPs that came in and this is public knowledge, but Goldman Sachs and Hamilton Lane were the leads. Goldman was a lead and Hamilton Lane was co-lead. They priced it. And we need to make sure that all the parties knew that this wasn't a basket of dog companies, it's really quality companies, and that it wasn't a forced sale that need to make sense on all levels.

17:29And so that was the whole process. And I was just facilitating and making sure that all the pieces were in place to make it happen. What was some of the pushback that you'd hear either from new potential LPs that decided not to invest or someone that had a stake in the game all along the way? Two pushbacks from new LPs. One, this was such a foreign concept. They'd never seen such a big venture secondary that wasn't a closeout fund or something else. That was one. The second is they were trading in discounts that were far greater than the discount for this group of companies. And that was just because, well, when you're dealing with lesser companies, the discounts are higher and some folks just couldn't grok, well, wait, This is a higher quality group of companies, so hence the discount needs to be much more mild.

18:18And then there's some existing LPs that thought, wait, this discount is too high. So it's one of those things where the best negotiations are on both sides are not 100 % satisfied. And I think one of the articles that came out, they interviewed a bunch of LPs, and that was some of the sentiment which led me to believe it worked out because there was not one group that was ecstatic and the other despondent. So once you brought these assets in to take this from a one-off secondary into what it's become, an asset management business, where did you crystallize your strategy and describe what it was that you'd be doing going forward?

18:53Some of the principles we wanted to adhere to is we really thought this was a white space that we resisted in the early days being called a secondary firm. And actually, if someone asks us, are you a venture firm, a growth firm, or secondary firm, we basically say, cheekily reply, all of the above and none of the above. We sit at that hybrid. And we actually think that's where the white space is. Being able to think like a company builder, doing growth deals, company builder being a venture capitalist, but using secondaries as a way to do it strategically and thoughtfully. What that means is we wanted to make sure we had a primary practice investing in direct deals, because they feed off each other in that we're very operational and we're very thematic.

19:30And that's also something that's not really done in the secondaries world. In order to be operational and to be thematic, we need to have a portion of our first fund be blind pool for new deals, deals we could lead, we could follow the differences because we're a registered advisor, we could lead deals but have secondary components in them as well. And then that was 2018, 2020, we actually bifurcated into two separate funds dedicated for each. Direct investing could be primary, could be secondary. That dexterity for us is really powerful, especially taking advantage of market dislocations like we're in right now, and then portfolio acquisitions.

20:05And so that took a bit to really crystallize that strategy and that transition. What helped was day one, we had 31 companies that we went to and said, look, you may not have a lot of follow-on under the NEA tent because you're an older fund. Guess what? We'll reset the clock. We'll provide follow-on. We'll provide value-add capabilities. My first two hires were ex-operators in my companies. One, Tim Connor, four-time CFO, the other, David Yu, 25-year product veteran. Because we also wanted to infuse a lot more company building in the growth stage. Because five years prior to that, and especially after 2018, this high-velocity deal-making really exploded.

20:43And by the way, some of them were very successful doing this, just invest in a lot of companies and not really pay attention to necessarily helping them. We just had a different point of view that company building can still exist. We call it scale-up versus startup. So that was all infused at the birth of the firm. I'm curious, if you break apart these two business lines, there's regular direct investing and then these portfolio acquisitions, how do you compete with other venture capitalists in the eyes of an entrepreneur in direct investing when not all of 100 % of your attention is focused to those particular deals?

21:22For us, the business lines are actually a lot more similar than different. The go-to-market and sourcing is a little bit different, but even the portfolio, these are highly curated baskets. So they're baskets of companies and we look at each company as if it was a direct deal. And we're also highly thematic. I'd say 80, 90 % of what we do is B2B software and fintech, which is where I grew up investing in. But I would say on the direct side, it really is this back to basics. We're much more viewed as a boutique where we do fewer deals and we don't have massive fund sizes. It's much more artisanal.

21:54Because we do fewer deals, we can build a relationship with companies for 6, 12, 18 months. And in that gestation period, we get to know them and they get to know us. And if we really get excited about it, we'll actually try to find ways to add value. Recruiting. Our third partner on the portfolio management side is a go-to-market person, Chetan Chaudhary. So we actually can help these companies and they realize, oh, So these folks, they don't take up a ton of space in the cap table, but they're value additive and they punch way above their weight. And this flexible capital has been really significant.

22:23They can do primary, they could lead the round, but they can also help with the cap table, help with tenders, get other folks that need liquidity out of the cap table and really drive that process. And so that really helped us formulate our differentiated approach and, to your point, a pretty crowded landscape. And then on the portfolio side, we just hadn't seen anyone really do this. There's folks that do individual company deals in these continuation vehicles, but really these curated baskets were active strategic investors and partners to the VCs. A lot of it is just 23 plus years of relationships and venture for myself and decades for my partners and colleagues.

23:02That's another big difference. Venture is still an inefficient market, and it's still absolutely a relationship-based market. So on either activity, as you look through the portfolio acquisitions, what have you found beyond the industries constitute your sweet spot for what you're trying to find in companies? It's post-product market fit. Most of what we do is probably series B and beyond, but I hesitate to say that because the letter designations these days really are not as meaningful. The 10 to 50 million zip code in terms of ARR scale is a sweet spot for us. I'd say half, if not more, of what we do is there.

23:37And then there's a good chunk that's even greater than 50 million, where call it 10 to 100, where you really need to institutionalize. You're going from a hero sale to more systems and processes. You probably need a CRO or a COO, need a lot more metrics focused, and you need that machinery and that instrumentation layer to get formed. We're actually very good at that. And we've done that with lots of companies, both in my time at NEA and at NuView. And this is where the early stage investors, they're still very powerful, But where they're exceptional is really that ideation, product market fit, initial scale.

24:08And then that real hyperscale is where we spend most of our time. With these particular types of companies that you're investing in, how do you think about the risk reward profile? Certainly sounds different from a venture firm, power law distributions, because you're purposely not going after those companies. If you think about how growth used to be done, especially from 2018 to 2022, it just got exploded. Early stage folks are doing growth and vice versa. You have a more banded outcome set. You underwrite to a 3 to 5x. You have a lower loss ratio to compensate. Maybe the upside isn't as a true power law early stage franchise.