Recognizing that top companies compound long after going public, Sequoia created the "Sequoia Capital Fund." Instead of distributing shares to LPs who often sell immediately, this vehicle holds positions in their best public companies. This strategy has generated an additional $6.7 billion in gains simply through patience.
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The traditional IPO exit is being replaced by a perpetual secondary market for elite private companies. This new paradigm provides liquidity for investors and employees without the high costs and regulatory burdens of going public. This shift fundamentally alters the venture capital lifecycle, enabling longer private holding periods.
Contrary to the instinct to sell a big winner, top fund managers often hold onto their best-performing companies. The initial 10x return is a strong signal of a best-in-class product, team, and market, indicating potential for continued exponential growth rather than a peak.
Company investor relations teams want stable, long-term shareholders. Funds known for 5-10 year holding periods become preferred partners for management, providing deeper insights and a research edge unavailable to short-term hedge funds or index funds.
The default VC practice of distributing shares after an IPO lockup can leave massive gains on the table. Missing a multi-billion dollar run-up suggests a more nuanced, case-by-case discussion with LPs is needed, as holding can be the difference between a 5x and a 15x fund.
The standard VC practice of distributing shares to LPs immediately after a lockup expires can be a multi-billion dollar error. The case of selling Reddit at a $9B valuation, only to see it rise much higher, highlights that VCs may need to evolve into holding public positions longer, challenging the traditional model.
The independent sponsor model allows for longer hold periods, focusing on maximizing a single asset's value. This avoids the fund-driven temptation to sell successful companies prematurely to show a high IRR to LPs for the next fundraising round, capturing more value in the later years of an investment.
In today's market, 90% of VCs chase signals, while the top 10% (like Sequoia or Founders Fund) *are* the signal. Their investment creates a powerful self-reinforcing dynamic, attracting the best talent, customers, and follow-on capital to their portfolio companies.
By staying private longer, elite companies like SpaceX allow venture and growth funds to capture compounding returns previously reserved for public markets. This extended "growth super cycle" has become the most profitable strategy for late-stage private investors.
In a market dominated by short-term traders and passive indexers, companies crave long-duration shareholders. Firms that hold positions for 5-10 years and focus on long-term strategy gain a competitive edge through better access to management, as companies are incentivized to engage with stable partners over transient capital.
When a portfolio company is public, liquid, and highly appreciated, some VCs distribute shares directly to their Limited Partners (LPs). This tactic returns value while allowing each LP to decide whether to hold for further upside or sell for immediate cash, effectively offloading the hold/sell decision.