You’ve got to know when to hold ‘em
Know when to fold ‘em
Know when to walk away
And know when to run
You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealin’s done
So for the most part a venture investor holds their equity until the company exits via an acquisition, IPO, or some sort of other liquidity event (management buyout, whatever). But especially over the last decade, the opportunities to sell ahead of an outcome for the company multiplied dramatically. As more growth and crossover investors came into the startup ecosystem they were often eager to put capital to work and happy to consolidate their positions with common or preferred shares from early employees, founders and previous investors. The surplus of capital also meant that new funding rounds often presented opportunity to sell portions of equity to current investors who otherwise were seeing their pro rata allocations cut back. And finally, a more robust (but still somewhat opaque) secondary market emerged for transacting equity among parties.
As an early stage fund, often buying 10–15% of a company during its seed financing, this meant we were often being asked if we wanted to sell portions of our stakes to other approved investors (let alone the random pings from market-makers unaffiliated with the company). As former product managers Satya and I lean towards having frameworks for these sorts of decisions, for both consistency and speed in internal operations. We started by asking our LPs (a relatively small number of institutional investors) and other experienced VCs what they’ve seen play out and how, if applicable, they decide what to do with their own holdings. Then we combined this with observed data from the behavior by coinvestors in our own portfolio.
Not surprisingly there was no specific consensus. There were examples of great investors who said “never sell early — you ride your winners as long as you can” and others who had *very* specific formulas for when they sell (when it hits X valuation, take Y percent off the table each subsequent round; always sell until you hit a certain return multiple for the fund, then hold after; and so on). This was helpful because it let us know that (a) there wasn’t a universal best practice and (b) peers could have the same goals but take different paths to get there. And so next we codified our own ruleset. It sounds basically like this:
Much of success in venture is knowing what (and when) to buy. If you do that well it’s very difficult to mess it up. Conversely, if you’re not a good picker, it’s difficult to overcome that, even if you had perfect timing on secondary sales. But sometimes the difference between B+ and A- (or between A and A++++) can be a well-timed decision to turn unrealized gains into partially realized.