#44 VC Liquidity Mgmt.: Buy or Sell?

Hi Everyone! 👋

Welcome to the new members of @TheFundCFO crew! Every M/W/F, we bring you actionable tools, real-world experiences, and insider insights for #VC CFOs and fund managers, #LP investors, and general industry enthusiasts/people who want to learn :).

“I like to think of the investing discipline as composed of three key modes of operation. Buying, Managing, Selling.

Selling – This is all about when to exit an investment and how. It is the hardest part of the investing discipline in my view.”

VC Liquidity & Portfolio Management: Are You a Buyer or Seller?

It’s February 22nd, 2023. VC GP’s and investors, finance professionals, and their LP investors are emerging from their annual review of investment portfolios. The last couple of years were a unique time to invest, manage, and sell. As Fred Wilson shares, selling is perhaps “the hardest part of the investment discipline.”

The annual portfolio review forces investors to look back at their buying, managing, and selling decisions over the past year. Which ones do they feel great about? Which ones do they wish could have back? Most importantly, what can we learn from these decisions and how can we apply it going forward to future decisions and processes?

Many VC investors are likely looking back over the past year and wishing they sold more when they had the chance. Hindsight is 20/20. How have other investors learned from these experiences and applied the going forward? More on that below from Fred Wilson (USV) and Hunter Walk (Homebrew).

From Pitchbook in December 2022: “2021 was a banner year for secondary deals. Investors of all types were willing to pay premium prices for shares of late-stage, high-growth companies. In 2022, however, trading of private stock between new investors and existing owners such as founders and employees came to a near-standstill when tech shares tanked.”

The USV Approach (Fred Wilson)

One of the hardest things in managing a venture capital portfolio is managing your big winners. A big winner can dwarf the rest of the entire portfolio and you end up sitting on enormous paper profits that you can’t get liquid on. I realize that this seems like a great problem to have, and it is, but it is still a challenging situation.

I like to think of the investing discipline as composed of three key modes of operation. Buying, Managing, Selling. Selling – This is all about when to exit an investment and how. It is the hardest part of the investing discipline in my view.

And, as a result of some really poor decisions earlier in my career around selling or not selling public stocks that were distributed to me, I have developed an approach for selling stock that is distributed to me.

I like to sell one third of the position immediately, put one third away for a long term hold, and actively manage the other third.

The Homebrew Approach (Hunter Walk)

“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 co-investors in our own portfolio. Not surprisingly there was no specific consensus.”

  1. Every time a portfolio raises a new round we should be ‘buyers’ or ‘sellers’

  2. We should strive to execute decisions that are both in the best interest of the company -AND- in the best interest of Homebrew

  3. Pigs get fat but hogs get slaughtered. Even if we believe a company has tremendous long-term upside, it’s not inappropriate to take some money off the table in order to manage that risk.

  4. We’re aligned with the founders and the rest of the cap table until we aren’t.

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.

That’s all for today folks! Thanks for your support and for spreading the word! Share this on Twitter or LinkedIn to help grow “the crew!”