“Spotter” Entrepreneurs

I recently spent time chatting with an entrepreneur. I wanted to connect with him because he’s in a non-tech sector I’m interested in getting more involved in. As we chatted, I realized that he has his finger on the pulse of what’s happening in a niche corner of his sector. He understands where it’s going, too. He’s been able to spot opportunities earlier than others and create solutions based on those opportunities. The key to his success is being at the ground level of this niche in his sector, spotting an opportunity early, and executing on what he sees.

The conversation helped me realize the scale of success this entrepreneur could have in the future. I wondered if he recognizes the potential and knows what’s keeping him from getting there. As we chatted, he shared that he does recognize the potential in what he’s doing. He explained his vision of where he wants to be and quantified what success looks like for him. Then he shared what’s holding him back:

  • Capital – Executing on the opportunities he identifies requires capital. He’s got some personal capital but needs more to execute on larger opportunities. He doesn’t know how to access investor capital (not venture capital).
  • Structure – He knows how to execute profitably on the opportunities he finds using his own capital. He doesn’t know how to structure deals that involve outside investors. He’s not sure what waterfall (i.e., profit sharing) or other deal mechanics are available to be used or how they should be combined to attract investors.
  • Presentation – He understands why something is a good opportunity because of his positioning at the ground level and is confident executing with his own capital, but he isn’t sure how to present the opportunity to investors who don’t have their boots on the ground like he does.
  • Back-office admin – He hates dealing with accounting, tax filings, entity formation, and a variety of other back-office tasks. It’s a burden that takes time away from finding and executing on opportunities. He does some of this himself and outsources some of it.

He candidly said that in a perfect world, he could get these things taken care of by someone else, focus on doing what he’s great at—finding and executing on opportunities—and take his business to the next level quickly. He realizes that a perfect world isn’t likely to appear. He plans to tackle all of these but realizes it will take time.

This entrepreneur is likely on the cusp of breakout success. I wonder how many other smaller entrepreneurs with “spotter” abilities exist and what solutions are out there to serve the needs of this group.

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Weekly Reflection: Week One Hundred Forty-Eight

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

  • Missing piece – I spent time this week with a rising entrepreneur. He shared what’s holding back his business, and it’s something I’ve heard from other entrepreneurs. He's able to find attractive deals but doesn't know how to structure deals to attract investor capital. I think there’s an opportunity to provide it to him and other founders to help unlock more value.
  • Sentiment – I chatted with investors and entrepreneurs in various sectors (not just tech) this month. There’s a noticeable, albeit slight, uptick in investor and entrepreneur sentiment this month. Tuesday marks the end of the month. I’m curious to see if this slightly positive sentiment continues in February.  
  • I still get things wrong – I made a decision that didn’t pan out the way I planned. It was a mistake. This week was a reminder of a couple of things: (1) I still make mistakes regularly, and (2) I should spend time reflecting on what I learned from a mistake, not dwelling on the fact that I made one.  

Week one hundred forty-eight was a great week. Looking forward to next week!

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I Learn Best by Having Skin in the Game

Over the last few years, I’ve had the opportunity to invest directly in start-ups as an angel investor, invest in venture capital funds as a limited partner, invest directly into start-ups as a Partner at a venture capital firm, and help organizations do their due diligence on direct investments into start-ups with strategic value.

I’ve learned a ton from all of it—but I’ve learned the most from investments when my personal capital has been on the line. This includes investments in funds and start-ups.

I learn best by doing, and in investing, “doing” means investing my own capital.

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More GP Stakes in VC?

A venture capital investor shared this article with me. I won’t go into all the specifics of it, but it says that private equity fund managers are selling pieces of their firms to raise cash. Instead of investing by becoming a limited partner in the firm’s latest fund, some investors are seeking to buy part of the firm to gain exposure to the firm’s current and future investments.  

This isn’t new in private equity. Neuberger Berman started a division in 2010 to focus exclusively on this strategy. That division, Dyal Capital Partners, merged with Owl Rock Capital Group in 2021 to form publicly traded Blue Owl Capital Inc. Blue Owl just announced the closing of Dyal Capital Partners V, a $12.9 billion fund focused on taking ownership stakes in approximately 20 private equity firms.

I’ve been closely watching the world of buying stakes in private equity firms for a few years, and I have some thoughts:

  • It was only a matter of time before this trend reached larger venture capital firms. It’s starting to happen more now, as evidenced by Thrive Capital’s recent news.
  • This approach could provide emerging venture capital fund managers with the runway needed to continually execute on their strategies.
  • Venture capital fund managers early in their firm’s life cycle see selling part of their firm as having a negative connotation. This leads to many VC firm founders having a bootstrap entrepreneur mentality and the industry being a cottage industry (there are other reasons for this too).
  • As more established VC firm founders realize liquidity by selling parts of their firms, more founders of smaller firms will be open to taking capital in exchange for equity so they can grow their firms.
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Personal Growth

I chatted with a founder recently about personal growth and about great founders constantly leveling up as their company grows. He asked a good question: how do I recognize personal growth opportunities?

It’s simple for me—I’ve got one when I’m faced with an important task or challenge that I really don’t want to do. I’ve generally got a list of various things that I need to get done. The one that makes me cringe or that I dread doing is the one that’s likely to lead to personal growth. It’s not 100%, but it happens more often than not when I get that feeling.

I’ve learned to lean into the things I dread with the hope that I’ll grow from them.

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Decade-long Commitment a Turnoff?

It’s often seven or more years before a start-up has a material liquidity event such as an IPO or acquisition. Founders should be comfortable with a journey of that length if they want to pursue entrepreneurship.

I recently had a chat with a venture investor who considered starting his own venture capital firm. One of the main reasons he hasn’t is the realization that it will commit him long-term. It will likely take twelve to twenty-four months to raise the fund. Funds usually have a ten-year life cycle, so once he begins investing that capital into start-ups, he’s committed to managing the fund for a minimum of ten years. That’s an eleven-year-plus commitment he’s not willing to make. Instead of writing larger checks from a VC fund, he plans to write small angel checks. He’s putting more of his own capital at risk, but he wants to preserve flexibility over the next decade.

This investor has deep domain experience and a strong network in a particular sector. Any early-stage founder he works with will get a tremendous amount of help and is more likely to achieve product–market fit.

Listening to this got me thinking. I wonder how many seed-stage venture investors (current or aspiring) who could help companies find product-market fit avoid starting a venture capital fund because of the decade-long commitment.

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CalPERS Commits $1B to Emerging Managers

The California Public Employees’ Retirement System (CalPERS) recently announced a $1 billion commitment to back emerging private equity managers. The goal is to foster more innovation and entrepreneurship in the investment industry by backing the next generation of managers. CalPERS, with around $440 billion of assets as of June 2022, is a juggernaut in the investment industry and can drive change.

The announcement references private equity, but this is a big deal for the venture capital industry. Venture capital is a subset of private equity and should receive some of these dollars.

Many studies have shown that emerging managers generate alpha, and the CIO of CalPERS recognizes this. This quote from her stood out to me:

Its not about a diversity play. . . . It’s about generating alpha in a more thoughtful way, and leveraging partners we will work hand in glove with.

Can’t wait to see the impact that CalPERS’s commitment has on early-stage venture capital.

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Will Tech Layoffs Lead to Wider Distribution of VC Investors?

The rise of remote work led to many people and companies leaving high-cost coastal cities. This redistribution of talent has changed how early-stage venture capital is deployed. Before, investors would invest only in entrepreneurs whom they could meet in person. Many investors preferred to not travel, so founders migrated to cities with a high concentration of venture capital investors. But the pandemic and the redistribution of talented entrepreneurs changed this. Investors now regularly invest in founders whom they’ve met only over Zoom.

I’ve been thinking about the tech layoffs by large companies like Amazon and Google and what they’ll do to the distribution of talent. I suspect that a material number of people laid off by these companies will rethink living in their high-cost cities, especially if their job was the main thing keeping them there.

I could be wrong, but if this does play out, I’m curious about how venture capital will adjust. If a lot of talented founders no longer want to reside in the Bay Area, for example, how will these firms adjust? Will they continue to stay heavily concentrated in places like the Bay Area and do even more investing over Zoom? Or will they rethink where their firms or their firms’ investors live?

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Weekly Reflection: Week One Hundred Forty-Seven

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

  • Tech Layoffs – This week Google announced a 12,000 headcount reduction. Earlier this week Microsoft announced a 10,000 headcount reduction. The layoffs are terrible for those impacted. I believe we’ll see a material uptick in entrepreneurship and more of these people migrating to lower-cost cities like Atlanta.
  • Focus on Simple Ideas I’ve been thinking about this all week. Outsized success is the result of intensity applied to simple ideas.  
  • History Lesson – I had a long conversation with an elder about historical events I wasn’t familiar with that shaped the world in ways I wasn’t aware of. I’ve been thinking about this conversation and learning more about the events he shared with me. I want to start digging into history more to better understand the events that led to today’s society.  

Week one hundred forty-seven was a steady week. Looking forward to next week!

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Closing Windows of Opportunity: Milestone Events

When I finished college, I crowdsourced my transition to corporate America. I asked for advice on a blog and got a lot of great feedback. Recently, I reviewed it. This one stuck out to me:

Never turn down a weekend with friends. Use some of that new hard-earned cash to continue building your friendships from college and maybe rebuild those ones that died while you were away studying.

As a founder I sometimes followed this advice, but I ended up saying no to many social events because I was too busy building a company. I regret saying no to some of those milestone events because they ended up being once-in-a-lifetime opportunities with friends—memories I wasn’t a part of.

I now approach this differently. When close friends or family invite me to something that’s a milestone, I try my hardest to attend and be totally present. The work will always be there, but opportunities to spend time with friends or family at milestone events are closing windows of opportunity that I want to take advantage of before they’re gone.

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