Many will disagree with me on this. I’ve said that VC is not an asset class. It’s not investing (it’s a great discovery mechanism. At later stages, with more data, it's investing. So some have described VC portfolio as basket of options. Have some thoughts on this…

I dislike this way of thinking about venture backed companies (as options). They are real co’s with dedicated people working so hard to make it work (turn it into a real business that has real value). But before they create value, are they just options?

Options can pay off or they can expire worthless. IMO, this way of thinking is what leads to so many problems in the venture business (what I jokingly called Venture Lotto back in 2006. https://altos.vc/blog/venture-lotto)

VC investments that pay off in a big way may look like lottery tickets that paid off. But the reality is that it takes decades to build massive value and most people fail to realize it because so few hold stocks for decades, except maybe a few founders.

In my first VC job 30+ years ago, our best company at the time was $SBUX. Quick 15x in less than 3 years and distributed or sold all stock in 1991, shortly after lock up expired. Starbucks had less than 200 stores. Missed the next 300x in gains.

Where the mental model of options that pay off in a big way is apt is when describing a big strategic exit or a well orchestrated pump and dump. If the company is great (which is so rare), then the last thing you’d want to do is exit.

Some ask, what about LPs who need a return? You all have to cash out at some point don’t you? Well, actually NO. Why not? Because if you have a great company, you can get liquidity in many ways. Let me count the ways…

Everyone knows this about public companies but even privates can pay dividends and do buybacks (via tender offer). Can also sell via secondary (if the biz is great, people line up to buy). There are always ways to get liquidity without exiting the entire business.

The key is to build real value. Then you can always choose to get partial or full liquidity at anytime you need the money. The goal should be to create and build enduring (and compounding) value, not to exit.

That said, if you do own an amazing business and you do want to exit, retire and do something else with life, go for it. Just be mindful that the great businesses are truly rare.

In our experience, the truly great companies are built by people whose life’s mission and work revolves around their company. Some do it to the very end (like Sam Walton or Steve Jobs) others do it for a few decades. Either way, we call them hedgehogs. https://altos.vc/blog/foxes-and-hedgehogs