Reblog: Let Your Winners Run

One of the things I am going to do on this extended vacation is go back into the archives and reblog posts that I think are still fresh and relevant. I’ll start with this one from Feb 2012.


I met with a group of very experienced and sophisticated investors yesterday who make up the investment committee of a large charitable foundation that is an investor in USV. I gave them a two minute brief on our macro investment thesis (large networks of engaged users that can disrupt big markets) and then took them on a tour of some of these large networks (Lending Club, Kickstarter, Etsy, Twitter, and Codecademy).  Then I took questions.

This group doesn’t spend a ton of time on AVC, Techmeme, Hacker News, or the tech industry in general. And yet the questions they asked me were as good as I ever get. I guess four decades of investing teaches you a lot.

One of the best questions I got was “when do you decide to sell?”. Such a great question and such a hard one to answer. I’ve got scars from this one.

I explained that first and foremost, we generally don’t make that call. The entrepreneur and her management team generally makes that call and the board is asked to ratify it.

But when and if we get to weigh in on the timing of the exit, my view is that you look to exit your weakest investments as soon as you can and you let your winners run as long as you can.

USV 2004 is instructive. Between 2004 and 2008, we made investments in 21 companies. So the youngest portfolio company in that portfolio is four years old now. Most are five to six years old. And a few, like Meetup and Return Path, are ten years old or more. We’ve exited six of the 21 investments, you can see them here, under past investments at the bottom.

We still have fifteen investments active in that portfolio including Zynga and Twitter and we own large blocks of stock in both of those companies. We own stakes in thirteen other portfolio companies most of which we believe are super strong companies that are building large and sustainable businesses. We will likely exit a few weaker investments in that portfolio over this year and next. But there are at least ten companies in the USV 2004 portfolio that we would be happy to own for the rest of this decade.

This does create a bit of an issue in that we raise ten year venture capital funds. So we are supposed to wind things up in the 2004 fund in another two years. But I am fairly sure that my partners and I and our limited partners will be happy to let this fund play itself out over a longer period of time.

I’ve made the mistake of exiting investments too quickly. Back in the middle of 2007, my previous firm Flatiron exited our investment in Mercado Libre at the IPO selling our entire position for about a 10x gain. In the almost five years that MELI has been public, it has gone up 5x. So had we held our position for another five years, we’d have made 50x instead of 10x. That stings. Lesson learned.

When you have portfolio companies that are category creators, category leaders, who are well managed, and growing 50% per year or more and delivering 20-30% pre-tax margins (or more), and who have no existential threats to their market leadership, you might want to hang on to them for a bit. They may be just getting going on the valuation creation thing.

#VC & Technology

Comments (Archived):

  1. jason wright

    “I gave them a two minute brief on our macro investment thesis (large networks of engaged users that can disrupt big markets) and then took them on a tour of some of these large networks (Lending Club, Kickstarter, Etsy, Twitter, and Codecademy).”It’s a good thesis, but to me it has always seemed incomplete, as if there should be at least a subordinate clause added to round it out.When I see Zynga I’m concerned. Zynga is at present clearly a success in the context of the thesis and is therefore a great financial capital investment. What concerns me is its impact in a broader social context, the context beyond financial capital investment. What lifestyles do Zynga users live, what are they learning, what values are they being offered, what behavior is encouraged, what outlook is nurtured? Sometimes people have to be saved from themselves, and gaming can become utterly addictive and socially regressive.

    1. fredwilson

      zynga doesn’t fit our investment thesis. we made that investment because we’ve known mark pincus for 20 years and i’ve invested in every single of his startups since i met him. sometimes you have to do things that don’t fit with your thesis.

      1. jason wright

        that was my recom. i think i’ve mellowed a little bit since then, and i may need to sharpen up again.

      2. JamesHRH

        That’s a great anecdote too.Wish I had met you in 1994.

  2. JimHirshfield

    ReComment: Nice, thanks for re-Sharing.

  3. William Mougayar

    When looking back it’s easier to say “coulda woulda shoulda” than when making the decision then.

    1. JimHirshfield

      Monday morning quarterbacking?

      1. William Mougayar


  4. pointsnfigures

    I wouldn’t beat myself up over losing 5X post IPO. I recall a different post where you asked yourself if you were a trader or a VC. Once it IPO’s, you are at the mercy of the stock market. Many times markets don’t treat stocks nicely because of macro effects-doesn’t matter if the company is doing well or not. Conversely, if the market is on a tear higher, even subpar stocks feel some benefit.The let your winners run analogy makes a lot of sense with investing early and re-investing in companies that are doing well, and killing ones the firm sees no hope for. I was talking to some folks the other day that want to start angel investing. They want to find companies and invest at $2M-$3M and cash out when they raise money at $10M-$15M. No way that’s going to be a profitable strategy in the long run, even if you could execute it.

    1. fredwilson

      yeah, but we should have at least waited for the six month lockup to expire instead of selling it all on the IPO

      1. pointsnfigures

        maybe. six months is a short time. but, you had a positive market. Suppose they went public in November of 1999, and the six month lockup expired in April of 2000. You never know.

        1. Richard

          Double Down

          1. Jeff

            Trading maximsWhen in trouble double. If you have a hunch do a bunchNever go broke taking a profitYou can’t lose money when you spread

    2. PhilipSugar

      They should call their angel group the TGF group. Meaning The Greater Fool group.

  5. Michael B. Aronson

    Fred great post. How do you “justify” holding on to public positions post lockup vs selling or distributing to lps? We have our first ipo coming up soon.

    1. fredwilson

      we distribute as soon as the lockup comes offbut as an individual, i will hold a lot of the stock personally

      1. JamesHRH

        That would be an interesting post topic.It seems a conflict off the top that you invest personally along side USV fund investments. I remember seeing an online stinkfest over Jim Breyer investing personally in FB.Transparency w LPs the issue I assume.

  6. awaldstein

    Better to lament when you didn’t make what you could of, then lament when it all crashes in hindsight.Did just that with a buddy yesterday where he was the CFO, me the CMO of a hot pre bubble company that got caught in the implosion and sold for a small % of what the previous offer was.That still stings.

    1. PhilipSugar

      This is so true on an individual level. You know it, Charlie knows it, I know it, and I bet JLM knows it all personally. If you have been doing this from the entrepreneur side those losses seem to hurt more than the wins.Fred provides absolutely marvelous wisdom and advice. It is from a VC perspective (well that’s the name of the blog isn’t it?) There is a huge difference when you have a 21 company portfolio in one of your six funds and when you have one company that is a huge percentage of your net worth.I believe right now we are in a bubble. Does that mean it can’t go much longer? No, but tellingly if you look at the USV conversation at the bottom of this post, there is a note on how George Soros is massively shorting the S&P 500. You can say that makes no difference on building a company and you would be right, but when it comes to accessing the capital markets it makes a huge difference.

      1. awaldstein

        Great comment.

      2. LE

        Fred is an engineer and a numbers guy mainly. (Not meant to be offensive hope it doesn’t sound that way.)When you actually are dealing with the public and events on a first name basis you see fully what can go wrong and what does. And you deal with it and the outcome (or not).Reminds me of the guy who bought my first business. All I had to worry about was him paying the note every month. I didn’t have to worry if the employees showed up or if the delivery truck broke or if the insurance went up. Or if he lost a big account and had to find a way to replace it. An investor is kind of like that. They don’t deal with the bumps in the road and the cars coming at you from left to right. They might hear about it but it’s more like as as a kid where in the end Daddy typically makes out ok even if he seems to be going through a rough patch from time to time.That’s why an investor can do things they way they do. They don’t have much of a clue of what can go wrong and how close the plane comes to crashing (just like a passenger in an airplane or someone in the hospital isn’t aware of how close they came to being killed).

        1. PhilipSugar

          My point is this: If you have a portfolio of 100 companies and you have 10 winners, letting those winners run and having 9 double and 1 fail, that is a great strategy. Except if you are the 1 failure.And that is where you are right, when you see what can go wrong at a feet on the street level you realize how easy it is to be the 1.Now I think Fred is extremely sympathetic, the first thing he says is the entrepreneur is the one that decides to sell.Secondly, something that has changed tremendously is letting the entrepreneur take money off the table.Finally, my point would be that is one of things that makes it easier if you have had a successful exit.My point is that nobody likes discussing failures. You point out why do you want to tell people a negative, and I agree from a personal level its not a great idea, but from balanced opinion it is.I would love to see after 5 years what is the distribution of outcomes from the breathless releases on TechCrunch, that so and so raised money at a huge valuation.

          1. LE

            Now I think Fred is extremely sympathetic, the first thing he says is the entrepreneur is the one that decides to sell.Would add to that that both Fred and the entrepreneur are to emotionally close anyway to the situation to fully evaluate the most rational decision to take. Can’t easily evaluate the potential upside and the downside.Like a person who is dating (or their parent). The parent sees “kid comes from a rich family, went to Stanford, must be a good kid!”. The person dating sees “I can’t stand to be without this person I love the way I feel when I am around them”. Someone on the outside, with no emotion or axe to grind sees “kid is unstable rationally this relationship is doomed to fail”. (Evaluation of downside risk..)Your comment about the market bubble relates to this. I can say fully that it makes sense to take profits now when the market is at 17k. Doesn’t matter if it will go up to 21k. More chance it will drop and take 5 years to recover. Hogs get slaughtered. Pigs get fat and all.I would love to see after 5 years what is the distribution of outcomes from the breathless releases on TechCrunch, that so and so raised money at a huge valuationWhat would you conclude from or do with that info isolated in the way that it is? Could you draw helpful conclusions that would be more than just infotainment? (Which is a valid reason btw.)

          2. PhilipSugar

            Infotainment. Which is what they provide.

          3. LE

            I’ve always felt that it would be helpful for some think tank or academics to take all the news of a particular day and look at it years later to see how much of it turned out to be true or not. In other words anytime people have said things you actually follow it for years and see how much of it is true.Jim Kramer makes all sorts of stock recommendations and I’ve seen people attempt to divine how right he is. WSJ used to do this with some analysts iirc. But I’ve never seen anyone stick with it consistently. It’s kind of a light feature.A start might just be a college professor assigning his students to look at business magazines in the 1980’s (or any year) and make an index of every point made about the future and see the percentage that turned out true or not. (Point being, other than infotainment, to teach the students about being more skeptical about what they read).

  7. Rohan

    Just wondering – have you had cases when your winners did the exact opposite? I know you give the Mercado Libre example of a winner that could have paid off big time? But, could there have been cases when a winner (in your perception) actually lost value after you exited?

    1. Guest


      1. Richard

        Plot their t-1 sales numbers and you’ll see why

      2. Rohan

        Okay. well played. 🙂

  8. JamesHRH

    What a great post.When to sell is a waaaaay tougher question that what to buy or when to buy it. Even investment guppies have been burned on that one……if you are paying attention, you only have to learn that lesson once though!Mercado Libre – wow.

    1. Richard

      But there’s an informational assymetry difference between the events of an IPO and a equites with long historical performance. Who better to capatalize on it than an insider?

  9. Richard

    With VCs holding virtually all the informational cards up to the last day before the IPO, how do VCs justify letting IPO bankers dictate your exit multiple.

    1. mike

      IPO price is largely driven by the market and if the price set by the market doesn’t meet the boards expectations the IPO will be shelved

      1. Richard

        That’s an Example of the trivial case! The nontrivial case is facebook.

  10. LE

    When you have portfolio companies that are category creators, category leaders, who are well managed, and growing 50% per year or more and delivering 20-30% pre-tax margins (or more), and who have no existential threats to their market leadership, you might want to hang on to them for a bit.Problem is that there are always external forces that are not under your control (the economy, some threat from something new that doesn’t exist today) and at the point you then want to (or need to sell) [1] the pool of buyers has dried up (or what they will pay has decreased) and perhaps you are facing less than ideal conditions (not a fire sale but less than ideal).So after the fact of course you are going to say “should have held on longer” if none of that happens, right?At one point Ivory Soap brand was a clear winner for P&G. Today they are looking to shed that product (and others) because (they say at least in the WSJ article) it doesn’t earn enough and people are using body washes and liquid soap instead of bar soap. So the value of that product (to another company) is not going to be what it would have been back in the day (obviously).Most important point is business is not a science but an art. Such that buyers and sellers are susceptible to emotional responses to things it’s not rational and the way business schools typically teach it. Mood plays a big role in decisions.[1] In college I interviewed the founder of a super successful Philly Restaurant Supply company (National Products Co.) that was highly profitable. The owner (who started it in 1929) pulled out a drawer of letters from potential buyers saying “we know you don’t want to sell but if you ever do please call us”. At the time he could have sold for a boat load ($50 million in 80’s dollars). Well low and behold (and this was before the restaurant renaissance) the founder died a few years later and his heirs took on the business and got distracted with other things. In the end I think they had a liquidation of the business because it was in no condition to sell and a local competitor became the big fish distributor (by leveraging casino customers which had just started to come up). Who could have predicted?My point is things change. Even the most promising situation can change over night. I have other examples like this, not the only one.

    1. Richard


  11. LE

    I explained that first and foremost, we generally don’t make that call. The entrepreneur and her management team generally makes that call and the board is asked to ratify it.I would think that that would bother any old timer or person schooled in traditional business. The idea of not controlling things (at least somewhat) to me seems totally distonic to traditional business behavior. Not because people don’t do that (Henry Kravis or Warren Buffet do this) but the people that you are investing in are typically more unseasoned and in a highly volatile environment. Of if they have had success it’s been in something less than grind it out in the school of hard knocks. This isn’t like buying a jet engine manufacturer that is established and run by a mature team (like you used to see in those printed annual reports). All seasoned with just the right amount of gray hair and the wife at home who takes care of and allows the husband to just do his job. [1][1] Fun fact: Companies used to interview the wife-y to make sure she was on board with being subservient to the husband and to make sure she didn’t get in the way of him fully serving in the best interests of the company.

    1. PhilipSugar

      I think that just like interviewing the “wife-y” (actually never heard of that) the world has changed.If you have the reputation for blocking exits….getting the best deals gets much harder.The one thing I left out in my above post is that I truly believe Fred has the ability to “pattern match” better then the entrepreneurs when it comes to how things are going, and does want them to get out early if they are a “weaker” investment.That is the case where going while the going is good is much better than the alternative.

      1. LE

        I mean wife e or wifee.Like it’s the 1960’s and you are hiring someone at your company. You have a choice of many qualified people. So you want to meet the wives so you can tell which ones will whine if the husband spends 6 months traveling and which ones will say “he knows best and I want him to succeed”. Also the ones that are more money hungry, they will be pushing hubby to make quota and close deals and not care about whether he helps out around the house or not. You can tell that just by visiting the house and having a chat.Has the world changed? For sure. The men in white shirts and ties that put the man on the moon had it totally different then men today in their home life. I mean even when I graduated college it was not typical for a man to help with the dishes. (I remember when I saw someone doing that how strange it was..)

  12. Frank W. Miller

    You may recall that I’ve stated I think Twitter is a fad and you responded saying you thought the recent performance of the company had convinced you that it was not. While I agree that their recent performance is hard to argue against, my view is that the type of user interaction you see with Twitter has limits and will ultimately cause Twitter to be limited and then fade to its niche on the Internet. The reason I bring this up is this. While Twitter may or may not ultimately end up being a fad, the question is how do YOU recognize a fad. It seems to me that seeing the peak of the fad would be the best time to get out. Any insights on that from your years of experience?

    1. LE

      A good question whether something has legs or is a fad. A fad tends to grow quickly and then burst (like CB Radios). Of course they are still around but only with truckers.Electric guitars have legs and iirc didn’t have a fad stage, right? (You would know better than I would).My dad made money off a game in the 70’s that was a fad (rummikub). He knew the guy who made money off the happy button. At the time you might have concluded the happy button was a fad but the game was not (it was). It had to do with how quickly it became adapted. If something goes typically overnight it is more likely to be a fad.Best way to look at all of this is with “live by the sword, die by the sword”. If twitter came up in the ranks quickly it can just as easily fall. (Like cupcake craze that lead to a recent bankruptcy). Something stable tends to build slowly over time and get adopted. Maybe has it’s root (like sushi) in a particular niche but then gets recognized by the mainstream.

    2. sigmaalgebra

      On Twitter, careful there. Why? By now a LOT of people REALLY like Twitter. I.e., they are heavily “engaged”. They have collections of tweets, followers, and people they are following, and they don’t want to give those up.Yes, in various ways, Twitter is silly. Or, as in a song, “It’s foolish but it’s fun.” (extra credit for knowing the source).So, to make Twitter a little less foolish, grow it, say, to permit images; right, they did that. Then, carefully, very carefully, grow it for more. Let become part of people’s lives, i.e., a ‘tradition’, that is, something that gives ’emotional security’ because it promises to be there tomorrow, next week, year, decade, i.e., promises to last.A person’s collections of tweets, followers, and ones following can become a major part of their identity, themselves, that is, something they don’t want to lose. So, we’re talking not just ‘engaged’ but ‘devoted’.Telephones are still around and, fundamentally, are still, after roughly 100 years, not much different than old POPS with short, black, cotton covered cords and dials. Similarly, Twitter might still be going strong 20 years from now. Ah, Twitter IDs might get passed down to the children and grandchildren!I would guess that a bigger threat to Twitter would be other services that cover the Twitter utility, etc. just as a small thing and that then Twitter users gravitate to to get the other services and, then, just neglect Twitter.That Twitter is trivial, foolish but fun, fooled me; I don’t want to be fooled again. RIP for Twitter is a bit premature.

  13. LE

    There you go. See it’s really is just this simple!According The New York Times’ David Gelles, CEO Larry Page uses the “toothbrush test” to determine whether a company is worth buying. He’ll ask, “Is this something you will use once or twice a day, and does it make your life better?” Instead of diving into the nitty-gritty of cash flow and earnings, Page cares about usefulness and long-term investment and benefits.http://dealbook.nytimes.com…Here is the still wet author of the source article:…Essentially a newly hatched writer (< 10 years) who hasn’t been around enough to understand the difference between a simplistic sound bite and reality.I was thinking about this when reading the WSJ article yesterday about P&G. They completely bought the PR piece hook line and sinker from P&G without evening considering the obvious case of P&G selling the brand or using the free publicity to help market the brand.

  14. rothbriele

    You may remember that I’ve mentioned I think Tweets is a fad and you reacted saying you believed the latest efficiency of the organization had assured you that it was not. While I believe the fact that their latest efficiency is difficult to claim against, my perspective is that the kind of customer connections you see with Tweets has boundaries and will eventually cause Tweets to be restricted and then reduce to its market on the Online. The purpose I carry this up is this. While Tweets may or may not eventually end up being a fad, the query is how do YOU identify a fad. It seems to me that seeing the optimum of the fad would be the perfect a chance to get out. Any ideas on that from your decades of experience?Dukan Diät Plan