“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.

It used to be that companies would get acquired or go public in “7 to 10 years,” but now many are staying private longer. Either because the founders don’t want to go public (or believe they need to get further before doing so) or because acquisitions have dried up as a combination of valuation mismatches and regulatory pressure, everything is taking longer. Whether it’s the multibillion dollar AUM VCs being able to go deeper and later into their companies, or new sources of capital (sovereign wealth, crossover funds, etc), the financings or tender offers relieve the pressure previous startups faced, and which the public markets could uniquely solve. (More companies should go public earlier but that’s a different post). So seed folks, often first in from a preferred share standpoint, are sitting there for a longer period of time, buried under a larger preference stack, and taking more dilution. Repeating from above, ‘playing the game on the field’ means considering selling portions of your stake.

It used to be more challenging to find secondary buyers. Now there are many more folks on startup cap tables with access to incremental capital to purchase slugs of stock, plus many fund LPs are looking for direct investment access. There are also an increase in market makers/secondary shops, although it’s still very much YMMV – there are folks we’ve worked with on both sides of transactions who we trust, and there are other stories we’ve heard that didn’t go as well.

Besides these three factors you have other more specific situations, such as the liquidity of tokens/crypto currencies, that might impact specific seed VCs. At the end of the day, if you’ve backed great companies, ‘hold and wait’ is certainly a reasonable strategy but it’s not clear it’s still the optimal one.