A few days ago, I chatted with a founder in the medical field who turned down a private equity offer to acquire his business. Today, a founder of an automotive business reached out to me and shared that someone in private equity inquired about buying his firm. Neither of these founders had their companies up for sale. The private equity firms found them.

These two stories are anecdotal, but they align with what I’ve been hearing from other investors. Large pools of capital have been raised by private equity to buy relatively small, profitable businesses.

Small businesses represent a great investment opportunity. Their size, usually $10m in annual revenue or less, means there’s ample room to grow revenue if their market is big. Their operations may not be very efficient and may rely heavily on the owner, so technology and better processes can enable these businesses to grow while increasing profit margins. Last, because these businesses are small, valuations are low because there are (or were) fewer potential buyers (i.e., less competition).

I’m a big fan of communities. I recently had a conversation with someone about them and was asked what’s been most valuable to me about the communities I’ve been a part of. After reflection, here’s my answer:

Connecting with people trying to solve the same problems I’m trying to solve.

Being around people who have similar interests is okay. But being around people actively trying to solve for the same thing I am is when I’ve received the most from communities and contributed the most to them. In my experience, sharing and learning from one another builds deeper connections.

Communities of people actively trying to solve the same problem have the most passionate members because those members receive immense value from being part of those communities.

I chatted with an entrepreneur in the medical field who has built a business doing seven figures in annual revenue. He built the company from the ground up over the last decade and was recently approached by a private equity firm about acquiring his business.

He wasn’t looking to sell but decided to go through the process of having the private equity firm evaluate his business. In the end, the firm gave him a thorough analysis of his company and an offer to buy the entire company. He would have had to stay on, with a high salary, to continue running the company.

The founder did his own analysis and declined the offer. His business is generating a material annual free-cash flow. He concluded he’d rather own the business for the long haul than sell for a lump sum today because he’s built an asset that’s giving him an above-average return that probably will improve over time. He’d rather own a cash-flowing asset he controls with potential for increasing returns than take a lump sum and find other assets to invest in that will likely pay a lower return.

I enjoyed talking to this founder and hearing his thought process. I like the way he views his company as a cash-flowing asset and how he factored returns of his two options into his decision-making.

Yesterday I was at a social gathering. The topic of markets and investing came up because a few of the people there make relatively small personal investments in their spare time. The gathering included people from various backgrounds, locations, and professions, so I was very curious to hear what everyone had to say. I observed three notable points:

1. Negative sentiment – These people are interested in investing only in traditional cash-flowing businesses. This wasn’t surprising; I’ve heard the same from other investors and entrepreneurs. What stood out was the negative sentiment my friends had about start‑ups, technology companies, and to a lesser degree public equities. Their views applied to all start-ups and technology companies (excluding mega caps such as Google).
2. Historical trends – They expect certain asset classes, including real estate, to continue to perform well even in the current interest-rate environment.
3. Debt – They’re still embracing the use of debt to purchase physical assets.

Here are my thoughts on each point:

1. Sentiment about start-ups and technology companies may have swung from too optimistic to too pessimistic.
2. Understanding why a trend occurred in the first place is important. Then you can assess whether the same conditions still exist and gauge the probability of the trend continuing.
3. Everyone must make the decision that’s appropriate for their personal situation when considering whether to assume debt.

I enjoy going to social events that include people from various backgrounds and perspectives. I get a lot out of conversations at these events. It’s a great opportunity for me to understand how different people think about things.

This is my one-hundred-sixty-sixth weekly reflection. Here are my takeaways from this week:

• May – May went by quickly. We’re now ~40% through 2023. In the first few months of the year, we’ve seen unexpected events like bank failures. I suspect that more surprises await as the year unfolds—hopefully positive ones.
• Successful investing – I listened to a successful investor share why he continues to invest after several decades. He’s doesn’t do it for the money—he’s wealthy. Rather, he likes the fact that to continue being successful he must continuously learn because the investing landscape evolves continuously. The mental stimulation and motivation to stay curious are enjoyable to him.

Week one hundred sixty-six was a productive week. Looking forward to next week!

Over the last year, I’ve watched a number of founders I’m close to go from “what traction do I need to show to raise my next round” to “how can I get to breakeven?” The time it’s taken to make this mental shift has varied, usually based on how much cash they had in the bank. The less cash, the quicker the realization.

I’m a fan of this mindset change. Focusing on reducing cash burn can change a culture in a positive way. The team realizes that resources are scarce and becomes more efficient in using them. People stop throwing money at problems and start coming up with creative, out-of-the-box solutions and ideas. All of this increases the probability that the company will create a solution that customers want and will pay for continually.

One of my closest friends put it best: “I’ve done my best work when running out of money was a real possibility.”

In the last few years, there’s been a push to acquire small retail brands that sell on marketplaces like Amazon. Fueled by the pandemic-induced surge in e-commerce growth, aggregators raised billions of dollars to acquire Amazon.

Aggregators remind me of private equity—but more focused. They build a scalable platform that allows acquired companies to benefit from economies of scale. They acquire a number of tiny retail brands and plug them into their platform. The idea is that these small brands can scale more rapidly as part of a platform. From what I’ve read, many acquisitions are teams of five or fewer people doing $1 to $5 million in annual revenue.

Many aggregators raised billions in debt to fund their acquisitions when interest rates were low in 2020 and 2021. Now, for a variety of reasons, they’re beginning to experience some pain. First, e-commerce growth rates in 2020 and 2021 have not held up. E-commerce is still growing, but at a rate much closer to historical averages because people are shopping in person again. This means that the growth projections of companies acquired in 2020 and 2021 aren’t being met, which in turn means that cash flow projections aren’t being met. Second, inflation has increased costs substantially. Costs for producing, packaging, and shipping physical goods are materially higher. High costs (absent offsetting price increases) translate into lower profit margins and cash flow. Third, interest rates have increased substantially since 2021. The debt service on some of these loans is an issue. When debt needs to be refinanced, it can be hard to demonstrate how you’ll repay the debt—especially when sales, margins, and cash flow aren’t meeting projections.

According to a Bloomberg article earlier this month, the Amazon aggregator industry is in trouble and may begin consolidating. Based on my e-commerce experience, I agree. But where there’s pain, there’s also opportunity. I can see sophisticated investors who are experienced in e‑commerce purchasing some of these assets at very distressed prices, turning operations around, and transforming these brands into assets that generate great returns.

Today I got together with a friend who happens to also be a former founder. We wanted to catch up, get and give feedback on our ideas, and talk investing. Instead of meeting in a coffee shop or office, we decided to go for a walk.

We ended up walking for an hour. During that time, we checked all the boxes for what we wanted to discuss, but we also got some good physical activity. We killed two birds with one stone.

The fresh air, sun, and movement felt great and enhanced our conversation. At the end, we both said we want to do this more often. I can’t do walking meetings year-round given the seasons in Atlanta, but I’m going to try to do more of them.

I hope everyone had a safe Memorial Day with friends and family!

Last night I watched the Miami Heat vs. Boston Celtics Eastern Conference playoff game. The series is a best of seven, meaning whichever team wins four games wins the series. Miami won the first three games, so the probability of Miami winning the series was high. Boston then won two consecutive games and was looking to win a third last night, tie the series, and force the series-deciding game seven. The game was played in Miami, and forcing a game seven in that environment wasn’t an easy task.

In the fourth quarter with three seconds left, Miami was ahead 103–102. Boston shot the ball, which rimmed out. With two-tenths of a second remaining, Boston’s Derrick White tipped the ball into the net. Game over. Boston has won and forced a game seven against seemingly impossible odds with three seconds left. The entire arena is stunned. It was the craziest ending of a game I’ve seen in a long time.

The last three seconds of last night’s game were a great example of what can happen if you don’t give up. The Celtics could have let the probabilities of scoring in three seconds deflate them and given a half-hearted effort. But that didn’t happen. They came out and gave their all for those last three seconds and pushed for the outcome they wanted until the clock read zero. Of course, the ball bouncing into White’s hands was a stroke of luck, but had he not hustled to be in that position under the goal he wouldn’t have gotten the lucky break.  

My takeaway is to never give up prematurely. Keep fighting until the clock reads zero. If you give up too early, you could be out of position and miss your lucky break.