Seed Investor Exits: Why Winners Are Being Sold Earlier

Shifting Dynamics in Seed Investing: A New Focus on Liquidity

Charles Hudson, of Precursor Ventures, recently completed raising a $66 million fund when a limited partner posed a challenging question. The inquiry centered on potential returns had Hudson divested portfolio companies at various funding stages – Series A, B, and C.

The Changing Landscape of Venture Capital

This question wasn’t merely theoretical. After two decades in venture capital, Hudson has observed a fundamental shift in the economics of seed investing. Limited partners, historically accustomed to seven-to-eight-year investment horizons, are now increasingly focused on achieving interim liquidity.

Hudson notes that a seven or eight-year timeframe, while standard, now “feels like a really long time” to LPs. This perception stems from a recent decline in consistent venture returns, which previously justified extended hold periods.

The reduced flow of returns, combined with the availability of more liquid investment alternatives, is prompting backers of early-stage ventures to seek a revised strategy.

Analyzing Portfolio Liquidation Strategies

Hudson’s analysis revealed that selling all holdings at the Series A stage proved suboptimal. The benefits of continued investment in top-performing companies outweighed the advantages of early loss mitigation.

However, a different outcome emerged when considering Series B. “You could have a north of 3x fund if you sold everything at the B,” Hudson found, acknowledging the potential for substantial returns.

Portfolio Management Evolution

This realization is influencing Hudson’s portfolio management approach in 2025. He observes that investors in young companies are increasingly compelled to adopt strategies akin to those employed by private equity firms, prioritizing cash returns alongside the pursuit of exceptional growth opportunities.

This transition requires a significant mindset shift. “The companies where there’s the most secondary interest are also the set of companies where I have the greatest expectations for the future,” Hudson explains.

Industry-Wide Trends

Hudson’s perspective mirrors broader pressures reshaping the venture capital ecosystem. Hans Swildens, founder of Industry Ventures, reported to TechCrunch that venture funds are becoming “savvier about what they need to do to generate liquidity.”

Indeed, Swildens has noted venture funds dedicating resources – even hiring full-time staff – to explore alternative liquidity options, with some seed managers actively “manufacturing liquidity from their funds.”

Challenges for Smaller Funds

While this trend impacts the entire industry, it presents particular challenges for smaller funds like Precursor. These funds, focused on seed-stage investments and unconventional founders, require more tactical approaches to return harvesting compared to larger firms with substantial capital reserves.

LP Concerns and Illiquidity

The shift is also visible in Hudson’s interactions with limited partners. University endowments, traditionally highly sought-after LPs, are now facing unforeseen challenges, including scrutiny from the government.

Hudson states that LPs within these organizations express strong belief in venture capital’s potential, yet simultaneously exhibit increased reluctance towards long-term, illiquid commitments.

Balancing Competing LP Demands

This creates a complex LP landscape with divergent needs. Some prioritize rapid capital repatriation, even if it compromises long-term gains, while others favor holding investments to maturity to maximize returns.

Successfully navigating these demands necessitates a level of portfolio management sophistication not traditionally required of seed investors, a development Hudson views with some reservation.

Venture Capital as a Finance Sub-Asset Class

Venture, he suggests, is beginning to resemble other financial sub-asset classes more than an art form, “feels a lot more like some of these other sub-asset classes in finance.”

Despite these changes, Hudson remains optimistic, acknowledging both the evolving landscape and the opportunities it presents.

The Rise of Algorithmic Investing

As funds grow and deploy more capital, they are becoming increasingly reliant on algorithmic approaches, seeking “companies in these categories, with founders from these schools with these academic backgrounds who worked at these companies.”

While efficient for large-scale capital deployment, this approach risks overlooking the “weird and wonderful” companies that have historically driven Hudson’s best returns.

The Importance of Human Evaluation

“If you’re going to hire people just off a resume screener tool,” he cautions, “you’re going to miss people who maybe have really relevant experiences that the algorithm doesn’t catch.”

For a more in-depth discussion, listen to our full interview with Hudson on TechCrunch’s StrictlyVC Download podcast, with new episodes released every Tuesday.

Correction: This story originally listed ByHeart as a Precursor portfolio company; the organic baby formula maker it has backed is Bobbie.