In a bull market, it's hard to tell if a GP is skilled or just lucky. A downturn reveals their true discipline regarding valuations, capital deployment speed, and how they support founders through down rounds, providing LPs with robust underwriting data.

The market's liquidity crisis is driven by a fundamental disagreement. Limited Partners (LPs) suspect that long-held assets are overvalued, while General Partners (GPs) refuse to sell at a discount, fearing it will damage their track record (IRR/MOIC) and future fundraising ability. This creates a deadlock.

During hype cycles, massive venture funding allows startups to offer products below cost to capture market share. If the company fails to achieve a high-value exit, the Limited Partner's capital has effectively been transferred to consumers in the form of discounts, without generating a financial return for the investors.

In a market crisis, liquidating positions isn't just about stopping losses. It's a strategic choice to create a clean slate. This allows a firm to go on offense and deploy fresh capital into new, cheap opportunities once volatility subsides, while competitors are still nursing their old, underwater positions.

Sequoia's internal philosophy dictates that venture capital is not a downside minimization game. A fund with a write-off rate below 40% is seen as not taking enough risk to generate outlier returns. This counter-intuitive metric prioritizes bold bets over preserving capital on every deal.

While investing (buying) gets the attention, the actual job of a VC is disciplined selling to return capital to LPs. This requires constantly re-underwriting positions to determine if they can still meet the fund's target returns from their current valuation, rather than holding on indefinitely.

During the decade of low interest rates, Triton resisted industry pressure to accelerate deployment. Seeing overpriced assets, they extended their Triton V fund's investment period to six years—double the industry average—maintaining discipline while others chased deals.

In frothy markets with multi-billion dollar valuations, a key learned behavior from 2021 is for VCs to sell 10-20% of their stake during a large funding round. This provides early liquidity and distributions (DPI) to LPs, who are grateful for the cash back, and de-risks the fund's position.

GPs are caught between two conflicting goals. They can hold assets longer, hoping valuations rise to meet their paper marks and maximize returns. Or, they can sell now at a potential discount to satisfy LPs' urgent need for liquidity, thereby securing goodwill for future fundraises. This tension defines the current market.