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Winners get sold too early
Why winners surprise
Failures never surprise, because they were always one of the scenarios on the table. The winners are the ones nobody sizes right. Great companies like Nvidia, Google, and Meta have kept compounding for twenty years after their IPOs, and a five billion dollar gain held long enough can turn into fifty billion.
Cisco and ServiceNow
Sequoia once owned a quarter of Cisco Systems and sold the shares for cash, for a total gain of ninety million dollars. Cisco's market cap at its height might have been half a trillion. Doug Leone also pushed for distributions at ServiceNow that left a 10x on the table, and across the venture industry billions upon billions of dollars were left behind the same way.
The few worth holding
Most companies held too long do go away, because technology changes. A few arrive in each cycle that reward holding for twenty or twenty-five years, and for anyone who spots one there is nothing else left to do in life.
How did Cisco's rise leave gains behind?
Cisco went public in 1990 and rode the growth of the internet's networking equipment. In March 2000 it briefly passed Microsoft as the most valuable company in the world, with a market value above half a trillion dollars. Its stock then fell roughly eighty percent by 2002, which is why the decision to hold or sell looked so different depending on the year.
Why do a few winners drive venture returns?
A venture investor's loss on any one company is capped at the money put in, while a winning stake has no ceiling. A single stake that grows a hundredfold can therefore outweigh many failures put together. Venture funds are built around the expectation that most investments return less than the money invested.
Why do investors sell winners too soon?
Economists Hersh Shefrin and Meir Statman named this the disposition effect in 1985, the tendency to sell winners quickly and hold on to losers. In a 1998 study in the Journal of Finance, Terrance Odean analyzed thousands of brokerage accounts and found investors were more likely to sell a stock that had risen than one that had fallen. Locking in a gain feels like a sure win, while a stock that keeps climbing carries no such certainty.
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