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Winning at Seed Investing Isn’t Just About When to Buy, but Increasingly Also When to Sell
“What’s one thing you stress to new VCs now that wasn’t as important, say, 10 years ago?” That was the question put to me last week by a senior leader at a large university endowment during Screendoor’s yearly Convening [part annual meeting for our LPs, part community event, part strategy session]. My answer was something like,
“That knowing when, and how, to sell out of a company is now not just opportunistic, but part of your job.”
It used to be as a seed investor that you’d largely just hold on and wait until the company exited via acquisition or the public markets. While this might still be the default posture for most of a portfolio, if its your only mechanism for liquidity you’re not thinking strategically. Here’s why:
It used to be that all venture investors had largely the same goals and incentives, up until maybe the growth round pre-IPO. Now even the Series A investor is often playing a different game than the seed VCs. Most seed shops are smaller AUM firms, where the partners own/share the economics. They are likely to own the most of the company with their first check, and take substantial dilution pre-exit. Most multistage firms have multiple levels of partners, with many needing to prove themselves to get momentum within a fund cycle. While of course the outcomes ultimately will be final word on their performance, 3, 5, 8 years of ‘hot deals’ and buzz, is what makes many careers. Combine this with early and multistage firms who are now routinely $1b+ in size, and you’ve got a recipe for *very* different incentives. We used to talk about outside led rounds as being ‘the market’ setting a fair price by independently minded firms. Now we have more and more consensus auctions where the price is an outcome of a VC’s ballooned business model and FOMO. These leads to both higher valuations earlier -AND- different underwriting targets for the larger fund (that is, $1b AUM fund is trying to get to 3x net, $60m seed fund is trying to get to 5x net). So ‘playing the game on the field’ means considering selling portions of your stake to other investors earlier than ever in order to lock in some gains and recycle capital.
