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

Yahoo

5 hours ago

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 have the greatest expectations for the future,' says Hudson.
It's not just Hudson; his thinking about secondary sales reflects broader pressures reshaping the venture ecosystem. Hans Swildens is the founder of Industry Ventures, a San Francisco-based fund of funds and direct investment firm with stakes in 700 venture firms, and he told Techrunch in April that venture funds are 'starting to get savvier about what they need to do to generate liquidity.'
In fact, Swildens is seeing venture funds hire full-time staff members specifically to pursue alternative liquidity options, with some seed managers dedicating months to 'manufacturing liquidity from their funds.'
Though this reshuffling of priorities extends far beyond any single fund, the pressure is particularly acute for smaller funds like Precursor, a traditional seed-stage fund that prides itself on backing unconventional founders like Laura Modi of ByHeart baby formula (a solo founder in a regulated industry with no prior experience) and Doktor Gerson of Rad AI (whose previous startup had failed). While firms with mega-funds like Sequoia and General Catalyst can afford to wait for $25 billion outcomes, smaller funds need to be more tactical about when and how they harvest returns.
Perhaps nowhere is the shift more visible than in Hudson's relationships with limited partners. University endowments, once the most coveted LPs in venture, are now grappling with unforeseen challenges from the Trump administration.
Harvard, of course, is the poster child here, with federal investigations into its admissions practices, threats to research funding tied to compliance issues, and ongoing scrutiny of its substantial endowment amid calls for universities to increase their annual spending requirements or face taxation.
Hudson says that based on his conversations with LPs inside these organizations, they've never believed more in the power of venture, yet they've also never felt more hesitant about making 10- to 15-year illiquid commitments.
The result is a more complex LP base with competing needs. Some want 'as much money back as soon as possible, even if that's a suboptimal outcome in the long term,' says Hudson. Others prefer that Hudson 'hold everything to maturity, because that's what's going to maximize my returns.'
Navigating these demands requires the kind of portfolio management sophistication that seed investors haven't traditionally needed, which Hudson views with some ambivalence. Venture, he says, is starting to feel a lot less like an art and something that 'feels a lot more like some of these other sub-asset classes in finance.'
Hudson isn't without hope, he adds, but he is clear-eyed about what's changing on the ground, as well as the opportunities those changes create.
As funds grow larger and deploy more capital, they're becoming necessarily more algorithmic, looking for 'companies in these categories, with founders from these schools with these academic backgrounds who worked at these companies,' he says.
The approach works for deploying large amounts of capital efficiently, but it misses the 'weird and wonderful' companies that have defined Hudson's best returns and kept Precursor in the game.
'If you're going to hire people just off a resume screener tool,' he says, 'you're going to miss people who maybe have really relevant experiences that the algorithm doesn't catch.'
You can hear our full interview with Hudson via TechCrunch's StrictlyVC Download podcast. New episodes come out every Tuesday.