Succeeding in Venture Capital is Mostly About Knowing What to Buy. But When To Sell Matters Also.

Primary Thoughts About Secondary Transactions

As my man Kenny Rogers sang…

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

Starting a venture capital blog post with 1970s country music lyrics is pretty uncommon, but so is writing about when and why an investor might choose to sell equity before the company exits. Below I’ll share some of the principles we use at Homebrew, knowing that there’s not really a single ‘right’ answer for a fund manager. Most of this discussion is about ‘playing offense’ — working towards being a good steward of LP capital and the risk/reward associated with VC. I’m not going to cover reasons to sell that I’d consider ‘playing defense’ — mostly exogenous factors which involve LP pressure for liquidity on non-optimal timelines, dissolution of funds due to partnership issues, and so on. These are all rare, but real, and fortunately not anything we’ve dealt with in our firm.

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.