Hold While The Prospects Brighten
Hold while tomorrow looks brighter than today, then distribute shares, not decisions.
- Difficulty
- Moderate
- Time to result
- ~ongoing to results
- Steps
- 6
- Confidence
- 78%
The rule reduces the exit decision to a single question: does the company have brighter prospects in the future than it does today? If yes, keep holding. Sequoia explicitly does not think about distributions from an IRR or money-on-money perspective, even though the fund is measured that way, and is proud that its as-held multiples exceed its net distributed multiples — a deliberate outcome, not a coincidence. It follows from picking founders who want to build long-lasting companies and then helping them focus on what is enduring. When fund life eventually forces a distribution, the firm distributes shares rather than selling stock, pushing the timing decision to the limited partners. The underlying reason is compounding: humans like linear projections, the early years of a compounding curve genuinely look linear, and at any point along it the tangent looks linear too — so the exponential is almost always only obvious after the fact.
Origin
Alfred Lin frames it against Sequoia's own history — the early pre-IPO Apple position, sold for roughly six million dollars of net profit, which in the long run served the firm far less well than it could have.
Core principles
- 01The sell decision has one input: are the prospects ahead brighter than today's?
- 02Buying low and selling high is the wrong frame for a business built on compounding.
- 03As-held multiples above net multiples is evidence of the strategy working, not an accident.
- 04Distributing shares hands the timing decision to the person who owns the risk.
- 05Most of the area under a compounding curve sits in the later years.
- 06Humans project linearly, so compounding is misjudged at both the beginning and the end.
How to run it
- 1
Reduce the sell question to one input
At each review, ask only whether the company's prospects are brighter in the future than they are today. Do not introduce price, multiple or holding period into that question.
Pro tip Write the answer down each period so you can see when your view actually changed.
- 2
Refuse IRR as an input
Accept that you will still be measured on IRR and money-on-money while declining to let those measures drive the decision. The two can coexist.
Watch out IRR mathematically rewards early exits, so it will always argue against holding a compounder.
- 3
Build the position for enduring value
The hold only pays if the underlying company is built to last, which means backing founders who want long-lasting companies and helping them focus on what is enduring in the business.
Pro tip Focusing on the long run beats reacting to short-run swings in the market, up or down.
- 4
Track as-held versus net multiples
Measure what the positions would have been worth had you held them against what you actually distributed. A persistent gap in the right direction is your scoreboard.
Pro tip Publish the gap internally; it disciplines the next exit conversation.
- 5
Distribute shares, not cash
When fund life forces the issue, send the shares out and let holders decide whether to sell. Ideally the company still has much longer prospects on the day the shares are distributed.
Watch out Selling on the fund's schedule imposes your timing constraint on someone with a different horizon.
- 6
Correct for linear intuition
Actively check whether you are extrapolating a straight line through a compounding process. The early years look linear, and at any single point the tangent looks linear too.
Pro tip If a position keeps outstripping everyone's expectations round after round, treat that as evidence rather than as luck.
Watch out Compounding is misjudged at both ends — the beginning and the end — so the error is not a one-time correction.
In the wild
Sequoia's pre-IPO Apple investment is the counter-example the hosts raise directly: the firm made roughly six million dollars in net profit on it, an early instance of buying low and selling high that in the long run probably served Sequoia far less well than holding would have. Alfred Lin's framing today is the inverse — the firm does not really think about buying low and selling high, it thinks about helping founders reach their full potential and bringing the future they envision to reality. The Apple exit is the price of the older frame.
→ A profitable exit that, measured against what the position became, was a large opportunity cost.
The hosts cite a statistic raised on the show that Amazon made as much or more money in its twenty-first year after IPO than in the entire twenty years before it. The point is structural rather than about any one company: the opportunity to invest comes early, but the real returns come much, much later, because so much of the area under a compounding curve sits in the later years. That is the arithmetic reason a long-run orientation is not merely a nice sentiment but a measurably better strategy.
→ The holding rule is justified by the shape of the curve, not by optimism about any individual company.
Common mistakes
Letting fund mechanics set the exit
End-of-fund-life is a reason to distribute, not a reason to sell. Distributing shares preserves the compounding for whoever wants it.
Drawing the line wrong
Early compounding genuinely looks linear, and the tangent at any point looks linear too. Extrapolating that line understates the position and triggers premature exits.
Optimising the metric you are graded on
IRR rewards early realisations, so managing to it systematically cuts the winners. Being measured by something is not a reason to be governed by it.
Is it for you?
Best for
Long-horizon investors and fund managers holding positions in businesses whose returns concentrate in the later years.
Not ideal for
Strategies with hard mandate-driven exit dates, or positions where the future genuinely looks worse than the present.
From the transcript
“We we think about whether the company has brighter prospects in the future than they do today. And if that's the case, then we continue…”
“We distribute shares and let our LPs decide whether they want to sell or not. We generally don't sell the stock.”
“You know, you're just a lot better off focusing on the long run than on any short run swings up or down in the market.”
From the episode
Special: Sequoia Capital's Investment Playbook (with Alfred Lin)