Yesterday at Primary’s NYC Summit, Fred Wilson (Managing Partner at Union Square Ventures) said something really interesting (and controversial) about venture firms that held on to their winners post-IPO in the recent cycle:
Their limited partners should fire them. They should never give them another dime. It is irresponsible what they did in my opinion.Fred Wilson
Reading this argument brought me back to a question I think about often as an operator-angel – when is the right time to sell? In fact, I am faced with this dilemma right now wherein I might have an opportunity to exit a 2014 vintage investment. So, I guess it’s timely for me to attempt a deep-dive into this question, and analyze what the best investors across asset classes have to say on this topic.
A. Venture Capital
Clearly, Fred Wilson believes that venture firms should keep taking chips off the table as and when opportunities arise during late-stage financing rounds, and then cash out completely post IPO. Here’s an interesting excerpt from one of his posts on this topic:
Taking money off the table is smart portfolio management. It is very different from selling your entire position, which could be brilliant but is equally likely to be a mistake. Selling a portion of your position, returning a multiple or two (or eight) of the fund, and holding on to the balance works out for you no matter which way the position goes in the future. If the position blows up, you got a lot out and booked a huge gain. If the position goes up significantly, you make even more money on the part of the investment you retained. If it goes sideway, you got a little bit out early. It is a win/win/win pretty much every way you look at it.Taking Money “Off The Table” by Fred Wilson
However, another OG VC – Doug Leone of Sequoia, has a different view. This is what he said on this pod with Jason Calacanis (paraphrasing):
It’s way tougher to go from 0 to $5Bn market cap than it is to go from $5Bn to $20Bn market cap.
There was significant upside created post IPO in companies like Yahoo, Google, ServiceNow and Facebook.
By holding for the long term, it’s a win-win-win for founders, LPs and Sequoia.Doug Leone (Sequoia)
In fact, Sequoia started an evergreen fund in 2021 where the goal is to partner with entrepreneurs for 25 years, from idea to IPO and beyond. Here’s the firm’s stated thinking around evergreen hold periods for generational companies:
So while one OG believes in taking chips off the table at every opportunity, another believes in staying all-in for decades.
Let’s see if we can break this deadlock by studying public market investors.
B. Public Markets
The first thing that comes to my mind when I think about the topic of when to sell public equities is the following legendary quote from Peter Lynch, later re-phrased and popularized by Warren Buffet:
Selling your winners and holding your losers is like cutting the flowers and watering the weeds.Peter Lynch/ Warren Buffet
The gold standard in public markets investing is inarguably Berkshire Hathaway. Let’s look at the hold periods of some of its top holdings as per the 2022 Annual Letter:
1/ Coca-Cola – first started buying in 1988, and completed its purchase in 1994. Since then, annual cash dividends from Coke have increased from $75Mn in 1994 to $704Mn in 2022. The value of Berkshire’s investment has grown from $1.3Bn in 1994 to $25Bn in 2022, accounting for ~5% of Berkshire’s net worth.
2/ American Express – completed its purchase of Amex shares in 1995. Since then, annual cash dividends from Amex have increased from $41Mn in 1994 to $302Mn in 2022. The value of Berkshire’s investment has grown from $1.3Bn in 1995 to $22Bn in 2022, also accounting for ~5% of Berkshire’s net worth.
3/ GEICO – As a Columbia University business student, Warren Buffett made his first purchase of GEICO stock in 1951. Then in 1996, he purchased all outstanding GEICO stock, making it a subsidiary of Berkshire Hathaway, Inc. Warren paid ~$2.35Bn in total over these years to completely buy out GEICO. By 2022, the business was doing ~$39Bn in annual revenue itself.
Berkshire holds winners for extraordinarily long time periods, and benefits from their compounding, like no other investor on the planet. The 2022 Letter has an interesting para on this philosophy:
So till now, Sequoia, Peter Lynch, and Warren Buffet all seem to be in the hold-forever camp. Intrigued enough? Wait till you see what the world’s best investor in real assets (real estate and infrastructure) has to say on this.
C. Real Assets
IMHO, one of the best investing talks of all time is ‘Durable Principles of Real Asset Investing’ delivered at Google by Bruce Flatt, CEO of Brookfield. In fact, if you look at the video, it’s a travesty that only about 20 people actually attended this talk. Over 5 years since then, it has had a mere 175k views on YouTube, compared to the Millions that random TikTokers get.
Anyway, one of the core principles that Bruce talks about is investing with a mindset to hold assets forever. He cites an example of investing $432Mn in a marquee downtown NYC office building in 1996. Brookfield held it for 21 years, over 4 business cycles including 9/11 and the ’08 financial crisis, ultimately selling it for ~$2.2Bn in 2017. Note that this doesn’t account for additional returns created via using leverage for this asset and rental income.
Bruce says that when you invest with a hold-forever mindset, you automatically start looking at the asset’s long-term fundamentals, rather than what will happen to it next year or who will pay up for it later.
Cool – so we now have multiple OGs across asset classes in the hold-forever camp. From Sequoia in venture capital, Warren Buffet and Peter Lynch in public markets to Bruce Flatt of Brookfield in real assets.
D. Where I Stand On This
Based on personal experience as well as observations, I firmly lean towards hold-forever as a default mindset. Here are the reasons:
1/ Motivates fundamental analysis – as Bruce rightly said, a cross-decade hold mindset ensures that in the beginning itself, an investor will be prompted to think deeply and rigorously about the long-term future of the asset. Otherwise, there is a risk of investing with a ‘passing-the-buck’ mindset (expecting someone will be willing to pay a higher price for it in a few years) without building a strong investment thesis.
2/ Be on the right side of Power Laws – business outcomes across most contexts are driven by Power Laws, wherein only a few assets end up becoming winners in any portfolio. Therefore, adequately compensating for all the losers, such that the overall portfolio drives superior returns, requires milking the few winners as much as possible.
In this regard, the following extract from Berkshire’s 2022 Annual Letter really caught my eye:
3/ Room for compounding – it’s important to hold assets long enough for this 8th wonder of the world to do the work for you. Studying the journeys of the best investors in history across asset classes, it becomes clear that compounding is really the true force that drives superior returns. As Bill Miller says – “the key to returns in the market is Time and not Timing”.
Am seeing the power of compounding in my own angel portfolio where the 2014-16 vintage companies have now hit strong product-market-fit and I expect a bulk of returns in these companies to be rear-ended. Check out what Susa Ventures has to say about its learnings from winners across vintages:
E. A Framework for “When To Sell?” Decisions
While I am philosophically in the hold-forever camp, I do believe a framework is needed to ensure rigorous thinking on a deal-by-deal basis, especially to catch edge cases where applying the default philosophy might, in fact, be sub-optimal. These could include either (1) luck-driven/ speculative upside cases (eg. a previously unknown crypto token hits unjustified all-time highs) or (2) scenarios with potential Risk of Ruin (eg. having an inordinate concentration in a single stock).
Inspired by Nick Sleep’s** decision-making framework on when to sell (via Mohnish Pabrai), here’s a set of proposed questions an investor can look to answer while making a sell decision:
1/ What is the ultimate destination? – Is there enough growth runway still left in front of the business? What does the business look like in another 10/20/30 years?
2/ Is the business getting better? – How are the operating and financial metrics trending? In particular, is its competitive advantage getting stronger?
3/ Have any of the fundamental assumptions underlying the original investment thesis changed in any way? – Is the market shaping up differently than expected? Have new competitors entered the space? Is a new technology disruption around the corner?
4/ Is a sale going to serve any other strategic purpose besides the quest for returns? – Are there any time-critical professional or personal requirements that need this capital? Is there an opportunity cost case to be made?
5/ Is the valuation egregious? – Is the asset at the peak of a hype cycle? Is the price at crazy levels that are unlikely to be seen again for several years?
Rather than giving a binary yes/no answer (real-life deal situations are rarely binary anyway), this framework should help in figuring out which side to lean on and in what proportion. Ultimately, one has to use judgment to arrive at the final decision.
My stance as outlined above applies more to the context of personal investments. In the case of managing other people’s money, various considerations related to fiduciary responsibilities kick in. My sense is Fred Wilson’s argument as outlined earlier is more focused on the latter.
Fred Wilson’s stance of de-risking via routinely taking chips off the table is a safe and conservative strategy that makes a lot of sense for most investors out there. But as many OG investors across asset classes have shown, generating outlier returns with generational impact requires going all-in and holding the winners for decades. Essentially, one has to become a smart gardener that only cuts the weeds and lets the flowers grow.
**If you enjoy reading investor letters, the Nomad Partnership Letters by Nick Sleep and Qais Zakaria are a must-read. FYI Nomad was one of the best-performing investment partnerships for 15 years starting in the early 2000s.
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