VC Cliché of the Week

Matt Blumberg reminded me last week of a saying that my finance professor at Wharton taught me, “if you aren’t a buyer, then you’re a seller”.

The theory behind this cliché is that it’s impossible to be neutral in a market. Either you want to own something or more of it or you want to own less of it or none of it.

I don’t totally subscribe to this theory because I do think there are times when you should be happy to own what you own and not want less or more.

But this cliché comes in handy in the venture capital business. I think the time I laid it on Matt was in a discussion about the endgame once you’ve built a business. You either want to take your earnings and capital and apply that towards acquisitions and growth (being a buyer) or you want to find your exit (being a seller). It’s hard to do both at the same time.

This maxim is also useful when valuations get extreme in the positive or negative territory. You wanted to be a seller plain and simple in 1999 and 2000.  You wanted to be a buyer plain and simple in 2001 and 2002.

I am spending a lot of my time thinking about what you want to be right now. We are still making new investments (buying) in the Union Square Ventures portfolio and we have been sellers for the past couple years in the Flatiron portfolio and we’ll continue to be sellers for as long as that portfolio is around. Most successful VCs are buyers and sellers at the same time, building one portfolio while liquidating another.

But it sure feels like a sellers market right now. I’ve been meeting with a lot of entrepreneurs who have been successful in the past and are starting a new company. They could easily raise a couple million and not suffer a lot of dilution. But most are choosing to raise a lot more money right now, often $5 million or more. And I shake my head and ask them why. They give me lots of reasons that make little or no sense to me and I am left with the obvious conclusion. Because they can. Because it’s a sellers market right now.

So it’s a good time to think hard about whether you are a buyer or seller. I think most people are going to be both at the same time, but you need to at least have a bias because if you aren’t a buyer, then you’re a seller.