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Wall Street Journal / Tech

IPO Slowdown Leads Silicon Valley Venture Giant NEA to Sell $1 Billion Worth of Startup Stakes

New Enterprise Associates, one of Silicon Valley’s largest venture-capital firms, plans to sell off a big chunk of its startup investments in response to a dearth of initial public offerings.

One of NEA’s funds recently received a boost after Salesforce.com’s $6.5 billion acquisition of software company MuleSoft, in which the fund held shares.

New Enterprise Associates, one of Silicon Valley’s largest venture-capital firms, plans to sell off a big chunk of its startup investments in response to a dearth of initial public offerings, according to people familiar with the discussions.

The firm plans to sell roughly $1 billion worth of its stakes in about 20 startups to a new firm it is seeking to create, one of the people said, in an effort to return capital to its limited-partner investors. These companies will mostly be those that initially raised money from NEA about eight to 10 years ago.

If completed, the so-called secondary sale would be one of the biggest ever from a venture firm, according to analysts, reflecting the industry’s pressure to deliver returns to its investors amid an era of historically fewer IPOs.

The new vehicle would operate independently from the firm, the people said. One of the firm’s general partners, Ravi Viswanathan, would leave NEA to run it. Some of the capital would be reserved to make follow-on investments or to buy shares from employees, these people added.

The new firm is expected to manage the investments in the underlying companies, a departure from more common secondary deals where venture firms transfer the ownership interest in the startups but continue to manage them.

The people familiar with the deal cautioned that it hasn’t been finalized, including the size of the transaction. Since the new firm would be closely related to NEA, one challenge could be managing possible conflicts that could arise as the two entities hash out the price to be paid for the assets, analysts say.

Potential investors in the new fund couldn’t be learned. NEA may hold an ownership interest in the new vehicle, but that remains to be worked out, one of the people said.

NEA, founded in 1977, is a giant in Silicon Valley. Last year it raised the largest U.S. venture fund on record at $3.3 billion, and it currently has more than 300 active investments in companies across tech and health care. It is known for investments in, among others, human-resources software maker Workday Inc., daily deals company Groupon Inc., and networking firm Juniper Networks Inc.

Venture firms typically raise new funds every three years or so, each one investing in startups with the aim to return capital to their investors and wind down after 10 to 12 years.

The venture funds make their gains mostly when startups go public or get acquired. But in recent years, companies are choosing to stay private and independent for longer periods, limiting venture investors’ ability to cash in gains for the limited partners in their funds.

Throughout the 1990s, well over 100 venture-backed companies on average went public each year and more than 200 annually during the dot-com boom. But over the past decade, that number has averaged about 50 a year as there are fewer small IPOs.

NEA’s recent funds mostly rank among the second quartile of venture funds in terms of the multiple of capital distributed back to limited partner investors, when comparing return data available publicly with aggregate data compiled by consulting firm Cambridge Associates. Because NEA’s funds are far larger than most of its peers, hefty returns tend to be more difficult to generate.

Its 2012 fund recently received a boost after Salesforce.com Inc.’s $6.5 billion acquisition of software company MuleSoft Inc., in which the fund held shares.

Mr. Viswanathan worked in Goldman Sachs Group Inc.’s private-equity division, as co-head of its technology practice, making him a fit to run the new firm that is envisioned, the people familiar with the matter said.

Another general partner, Jon Sakoda, plans to leave NEA as well, according to people familiar with the matter. He is planning to join a corporation to start a new venture arm, said two of these people.

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