Why did New Enterprise Associates sell $1b worth of their shares in multiple startups?

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JASON LEMKIN

If I understand how it’s going to work right, this isn’t really selling off its shares at more abstract level — rather, it’s almost transferring them around via clever financial engineering.

VC funds have 10–12 year lifetimes. You can get extensions, but they are designed to create liquidity by then. Even if your portfolio is full of winners, as the time to IPO has gone up in the age of unicorns, it can be tough to get them “liquid” by year 10–12.

Smaller funds can get around this via secondary sales of their shares to Bigger Funds in late stage rounds. But huge funds like NEA have a hard time doing this.

One answer? Sell those illiquid, pre-IPO winners to … yourself. To a new fund, funded by (presumably) a subset of your LPs that are OK with more illiquidity in exchange for the next round of gains.

This provides liquidity to the LPs (fund investors) that want it now and lets the LPs that want to “roll the dice” for the winners beyond Year 10–12 to keep doing that.

It’s realistically a “fair weather” strategy in Year 10 of a bull run, but pretty clever financial engineering.

There are some potential conflicts in the model, and it must involve some level of additional costs to the LPs in the end (more fees, discounts, etc.). But aside from that, pretty clever way to adapt to the age of the Private Unicorn and Private Decacorn.

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Published on May 15, 2018
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