The new math: why seed investors are selling their winners earlier

Summary

Charles Hudson had just closed his fifth fund several months ago – $66 million for Precursor Ventures – when one of his limited partners asked him to run an exercise. What would have happened, the LP wondered, if Hudson had sold all his portfolio companies at Series A? What about Series B? Or Series C? The question wasn’t academic. After two decades in venture capital, Hudson has been watching the math of seed investing change, maybe permanently. LPs who’ve previously been patient with seven-to-eight-year hold periods are suddenly asking questions about interim liquidity. “Seven or eight years feels like a really long time” to LPs right now, says Hudson, even though “it’s always been seven or eight years.” The reason: a steady stream of venture returns in recent years — returns that made long hold periods acceptable — has largely dried up. Coupled with the availability of other, more liquid investment options, many backers of very early-stage VC are demanding a new approach. The analysis his LP requested revealed an uncomfortable truth, says Hudson. Selling everything at the Series A stage didn’t work; the compounding effect of staying in the best companies outweighed any benefits from cutting losses early. But Series B was different. “You could have a north of 3x fund if you sold everything at the B,” Hudson discovered. “And I’m like, ‘Well, that’s pretty good.’” Beyond pretty good, that realization is reshaping how Hudson thinks about portfolio management in 2025. Though now a veteran investor – Hudson has spent 22 years in VC between Precursor, an eight-year run at Uncork Capital and another four years at In-Q-Tel earlier in his career – he says investors in very young companies are being forced to think like private equity managers, optimizing for cash returns alongside the home runs that, if they’re lucky, define their careers. It’s not an easy mental change to make. “The companies where there’s the most secondary interest are also the set of companies where I ...