Ravi Viswanathan has been an investor long enough to see some serious ups and downs.
Viswanathan most recently founded NewView Capital a couple of years ago — a firm that launched with $1.35 billion from investors, largely to acquire the stakes of 31 companies that had been funded by New Enterprise Associates.
But before NewView, Viswanathan spent nearly 15 years with NEA, co-leading its growth investments. It’s how he knew which companies to take with him to NewView, which, by the way, largely shares the same investors as NEA.
Because he has seen the business world come to a stop a couple of times in his career — and because he has a lot of insight into the later-stage market — we talked with Viswanathan yesterday about the impact the massive public market meltdown could have on his piece of the startup world — and for how long. Our chat has been edited for length.
TechCrunch: You’re pretty much focused on late-stage companies, correct?
Ravi Viswanathan: We’re mid- to later-stage growth. It accounts for 70% to 80% [of the portfolio] and the balance is earlier-stage companies where I have a lot of conviction based on where I’ve invested previously, including in fintech and SaaS.
NewView Capital founder Ravi Viswanathan
What are some of the companies in your portfolio that are entirely new deals, meaning they were not part of the package of companies you took to spin out NewView from NEA?
Plaid was a new deal. Course Hero. Hims. Scopely. Heap, which is a product analytics company.
So fintech, education, consumer, mobile games… what’s the common thread?
It’s companies that are hyper-scaling and have really strong management teams.
Plaid is selling for a bundle. I know another company of yours, Acquia, sold to Vista Equity Partners last year. With the market down something like 27% in recent weeks, will the number of acquisitions fall off a cliff? How much does this kind of drop impact your companies?
The most important thing, having lived through massive downturns, is recognizing that cash is king. We’ve always been of the mindset that it’s important to be focused on efficient growth versus pure growth. Efficient growth is making sure you focus on every dollar you invest so that you’re building a more durable business. Companies focused on efficient growth are more readily embraced not just by public markets but also by strategic and financial buyers.
The [belt-tightening trend we’re] seeing really started in Q4. When WeWork didn’t go public, people quickly ratcheted back and I think you’ll see that a lot more. Growth will certainly be affected. But when you have your wits about you and you’re focused, these are company- and market-building times. A lot of amazing companies have been funded and built during extreme downturns.
But we’re not talking about brand-new companies; your portfolio companies are older.
That’s right, some maybe have already seen the ’08, ’09 crisis, and a lot of them are big fans of the rule of 40 [the idea that growth rate plus profit margin should exceed 40%]. They are well-run. They are taking proactive steps. They’re talking about what happens when your top-line growth gets affected adversely — and it probably will — and what are the contingency plans.
But the other side of this is opportunity. Efficient businesses in these markets can be advantaged because you can grow your market share in these times, whereas competitors that haven’t been efficiently growing and may have raised a large pile of cash —
Are these opportunities from a buying standpoint? Are acquisition targets on sale right now?
For sure. Several of our portfolio companies have active M&A programs and are buying companies.
At what kind of a discount to where these companies might have priced 6-12 months ago?
It’s very contextual, so multiples on a lot of these business have been in the double digits. Now, can you see that getting whacked? Absolutely. You just have to track over the last 20 years to see how multiples get impacted. SaaS multiples plummeted in ’08 and ’09, for example.
The scary thing about this downturn is that it isn’t just a financial one but a global health crisis, and we just don’t know how long it will be and what the recovery will look like. Will it be fast or slow? Will it be gradual or bounce back? It’s pretty much unprecedented.
Are you hitting the pause button while things get sorted?
We used to think in these situations: Let’s focus on companies’ cash position and make sure they survive. But right now because of the health piece, I think a lot of folks are looking inward right now and are more focused on how they ensure the safety of their employees. We don’t know how far this will go, but for the time being, the focus is on putting in safety measures — curtailing travel, curtailing person-to-person meetings, hosting more video calls, talking more by phone. I think [everyone with any kind of company] right now wants to make people feel safe and calm them down to a degree. There’s a lot of stress in the system.
You sometimes work with private equity firms. Do you think they see this as an opportunity to roll up certain types of startups?
We do have really good relationships with them. I think you’ll see tons of activity because they’ve raised huge pools of capital. But overnight? No, because they’re going through the same exercise — making sure they are structurally safe and that employees feel safe.
They also use a fair amount of leverage and they have to [be mindful of not becoming] over-leveraged in a downturn and getting upside-down.
That said, SaaS is starting its third decade. There are a lot of mature enterprise software businesses, and some PE firms have an attractive and money-making playbook in terms of centralizing [these companies’] spending, cutting costs… so for them, SaaS is still a massive market in the early innings. You could continue to see them run hard at [the sector].
Let’s talk IPOs. Are these mostly now dead for 2020?
How do you even think about a roadshow now? A lot of the financial institutions are working remotely from home. You could see Zoom roadshows, but especially with high-growth stocks, that’s tough. I’d say in general that when you have these types of shocks, [public offerings] go dormant.
Does that impact NewView? Do you have companies in the pipeline?
I can’t talk about any on the cusp, but if you ask a company, no one knows if this a two- to three-month-long [pullback] or a 12 to 18-month thing. It’s way too early to tell.