Should I Stay or Should I Go Now?

Eric Rosenfeld

August 2024

Occasionally, we have the choice to sell some or all shares in a portfolio company years before the definitive exit. A portco could use accumulated cash to repurchase investor shares (examples: Lumencor and Phoseon). Or another fund – often private equity – might offer to purchase investor shares coincident with a financing (examples: Jama Software and Customer.io). And, if a company IPOs, and after a typical 6-month lockup period, we have the choice at any time to sell or continue holding (example: Absci]. So, how to decide when to sell and when to hold?

If we were an angel investor or family office, we could take any number of paths – e.g., we could choose to harvest some gains to rebalance our portfolio or perhaps take back our invested capital and let our gains ride longer. But, we’re not an angel investor nor a family office. As a venture fund we have a singular mission: to make the most money possible for our investors. Period. The allure and magic of early-stage VC is the mandate and opportunity to generate uncapped returns. “Portfolio rebalancing” and “buckets” are for individuals and institutional LPs, not for managers of venture funds. 

For funds like ours, no investment return is simply “good enough,” as that would be looking backward – i.e., “we got our minimum required return, let’s cash out now.” Instead, with venture, we’re always looking forward. By looking forward we mean, do we have conviction we can get at least a 40% IRR going forward from today for our investors if we hold? If not, sell. Why a 40% IRR?  If we’re going to be wrong half the time, which we are, then we should end up with at least a 20% actual IRR, our minimum acceptable net-return target.  The wins must more than make up for the inevitable losses. It shouldn’t matter if a company, or a fund, is up 2X or 8X or 100X. What matters with a hold/sell decision is what our diligence tells us about the odds of a superior return going forward from this point in time.

It helps that we often have an asymmetric information advantage in most of these “share tender offer” and “share redemption” situations. That is, we often know a company’s specific strengths, weaknesses, and opportunities more intimately and better than an incoming investor would, and because we’re working with dozens of companies at a time we also frequently have an informed, evidenced-based perspective on any one company’s possible market value and share value. Each of the above enables us to be judicious when determining when to sell and when to continue holding.

And, of course, all of that is easier said than done. To paraphrase The Clash, If I sell there could be trouble, If I hold it could be double.