Why we say no to taking early liquidity
OCTOBER 19TH, 2018
As investors, we face buyout offers for their equity at every point in a company’s lifecycle. Founders face the same offers. It can be tempting to sell.
We typically don’t. If an investment is doing well, someone will try to buy it from you. We will say ‘no’ unless we can return 1x our fund for a small piece of the stock.
Instead, we will consider doubling down with our pro rata. Buyout offers are a strong market driven signal to hold onto the investment — not sell it. The market wants to steal your winners, not your losers, and it wants your winners before they've realized their full value potential. Offers are a signal to hold onto the investment — not sell it. The market thinks there’s upside in the stock.
Our 2013 vintage fund contains fourteen companies- we have only one write-off (totally only 1% of invested capital), five companies we expect to return 1x-3x, four companies we expect to return 4x-8x, two companies we expect to return 10x-15x and two companies we expect to return 20x-30x. Most of our returns will come from the investments returning 10x or greater. Taking early liquidity in any of these investments eliminates the 10x-30x return that will make us a top decile performing fund. The lack of write-offs and overall positive performance in our portfolio provides some insulation that other funds don't enjoy (i.e. we don't 'need' the 10x-30x winners to all pan out in order for our overall fund to be successful- this is not the case for a lot of VC funds), but even given that cushion, we will not take early profits on our expected big wins.
We may consider selling ~20% (or less) of our stock if:
You know the price is fair because you know a lot about the company,
Other good investors are selling at the same time, and
We can return at least 1x our fund and make our LPs happy in the process.
Learn more about this in Taking Money “Off The Table” by Fred Wilson. Another strong reason we might sell is if we’re going to take the returns and invest in more compelling startups.
You can rebalance your portfolio when the company goes public. Sell all your stock or hold on to some if you think the company is still undervalued. If the startup is acquired by a breakout company, convert your stock into the acquirer if that’s an option and the price is right. The price is often right because it’s anchored on the breakout’s last round valuation, which is often undervalued in the first few rounds. Congratulations, you just got a free ride on a rocketship.
Instead of selling stock in our best investments, we consider doubling down on our pro rata. We know this isn't an industry geared towards quick returns, we're investing to build monster companies that help society and spawn new investment opportunities. Supranormal returns in venture capital are built with conviction and a steadfast grip on your winners. Hedging results in industry standard returns. Be bold.
