Weekly Reflection: Week One Hundred Ninety-Three
This is my one-hundred-ninety-third weekly reflection. Here are my takeaways from this week:
- Fundraising – I chatted this week with two founders who are finalizing fundraising rounds. They’re wrapping up diligence and have target close dates in the next week or so. I suspect most investors and lawyers are aiming to get most deals done by December 15.
- Serendipity – I ran into someone I haven’t talked to in years. We caught up, and I learned that he has expertise that will be helpful with something I’m actively working on. He even offered to help. I’ve benefited from serendipity many times, but I’m still surprised by its power.
Week one hundred ninety-three was another week of learning. Looking forward to next week!
Reading Hack: Follow Your Finger
I want to improve how efficiently I learn—specifically, how efficiently I read. To answer the question of how I can improve my ability to learn through reading, I sought out a few books and experts on the topic. From these sources, I’ve learned a few ways to read faster with better comprehension. One suggestion that I heard consistently was simple but effective: underline the words you’re reading with something (e.g., your finger or a pen).
A few observations on why this technique works:
- Speed – The pointer acts as a visual pacer: your eyes will move as fast as it does. If you want to increase your reading speed, you can move the pointer faster. This is a good way to practice improving your reading speed.
- Comprehension – Your eyes focus on what you’re pointing to. You’re less likely to daydream or be distracted by things happening around you. With the power of focus, your understanding of what you’re reading improves.
I’ve tried this hack, and I must admit, it works when it’s applied consistently. If you want to improve your reading speed and comprehension, consider following your finger.
Deciding What Size Company to Buy
I caught up with an entrepreneur friend considering his next thing. He sold his first company and wants to buy a company he can optimize for cash flow. The dilemma he’s working through now is what size company to buy.
If he buys a company that’s over $1 million in annual EBITDA, the multiple paid on EBITDA will be higher. Translation: it will be a much more expensive purchase price, and the yield on the investment likely will be lower than he would like. On the other hand, the company will likely have more people with institutional knowledge of how the business operates. That will minimize the chances of the business rapidly declining if the CEO transitions out. The purchase price will be higher and the yield could be lower, but the business is more likely to run on its own without much intervention from my friend. He could be a passive owner.
If he buys a company with less than $1 million in annual EBITDA, it’s the opposite. The multiple will be lower and the potential yield higher. But there’s key-man risk. The CEO is likely the glue holding it all together. My friend will likely have to become CEO or work closely with the CEO so he can learn the business and minimize the chances of a rapid decline if a CEO transition happens. The purchase price is lower and the yield may be higher, but my friend will likely need to be a very active owner.
Both approaches have pros and cons. I’m curious to see which path my friend chooses.
Apple Card Partnership in Trouble?
I’ve been watching Apple’s push into financial services over the last few years. Financial services for consumers and small businesses is a large enough market to move the needle for a company of Apple’s size. Consumers shifting from in-person to digital banking and the slow pace of innovation by banks make it ripe for disruption.
Apple partnered with Goldman Sachs to offer credit card and high-yield savings account products. But it’s been reported that Goldman Sachs has been trying to get out of the credit card business, and Apple offered the bank a way out of their credit card arrangement. The article doesn’t include specific details about why the bank wants out.
I’m a fan of Apple’s push into financial services. I’m curious about why this partnership isn’t working, how this change will affect Apple Card customers, and what impact it will have on other financial products Apple offers. I hope we’re looking at a bump in the road and not a major setback for the tech giant.
Serial Cash-Flow Entrepreneurs
I recently had a conversation with an entrepreneur who’s started several successful businesses in various industries. He was telling me about the latest company he’s working on. It’s a waste management space, and the company will remove trash from residential homes. He doesn’t have experience in this industry, so how did he decide to start this, I wondered. The story was that he heard from a friend about the opportunity to obtain a contract (i.e., recurring revenue), investigated it, and decided it could be profitable. He went to work finding a cofounder and developing a strategy to execute the work.
During our chat, I realized a few things:
- This isn’t a space this founder is passionate about; he just saw an opportunity he couldn’t pass up.
- He isn’t planning to scale this company. He just wants to have a few reliable customers and build a small, reliable team to execute the work.
- This is a small (and tough) market, so there isn’t an opportunity to create large amounts of value for others and recognize that value through appreciation of the company's value. Rather, it’s an opportunity to create a steady stream of cash flow by providing a service that people don’t want to do, but also don’t highly value.
During my conversation with this entrepreneur, I realized something. Some entrepreneurs are gifted at creating small companies that essentially exist to generate cash flow for the owner. And they do this repeatedly. They’re great at taking a company from zero to one—to getting the machine started—but rarely think about the problem’s market size or how big the company could be. They focus on getting the company to the point where it can distribute a certain amount of cash to them, and when it does, they’re happy. The idea of reinvesting cash into growth opportunities to scale the company doesn’t cross their mind and doesn’t interest them when it’s brought to their attention.
I think of these gifted people as serial cash-flow entrepreneurs.
This week I had the opportunity to attend a holiday party. As I mingled and chatted, I noticed that no one was talking about work. I heard conversations about life, family, fun experiences, and funny stories. After the party, a group of us went to dinner, where we learned more about each other and our significant others.
The party was wildly successful. I watched people enhance existing work relationships, making them deeper and more personal. And I watched people establish new relationships with others they didn’t know they had things in common with.
My takeaway is that I’m a fan of holiday parties. It’s a great time for people to connect outside work and build deeper relationships based on who they are, not the work they do.
A CEO with No Problem to Solve
I chatted with an aspiring founder recently. He’s a senior software engineer at a start-up valued at a few billion dollars. He’s been there for several years. He joined when they were a team of one hundred—it’s now one thousand. His equity is fully vested, and he’s excited about leaving to start his own company.
He’s currently in search of the problem he wants to solve. He’s investigated a few problems and done discovery, but none panned out. He’s also looking for someone to join him. Specifically, he’s been looking for someone technical. This stuck out to me, and I asked why. His response was simple: I want to be CEO and need someone to build the product.
As we chatted, I shared my learnings as (1) a nontechnical founder who regretted not having a technical cofounder and (2) an investor who’s talked with countless aspiring nontechnical founders who deeply understand a problem and have an idea of how to solve it but lack the technical skills necessary to build a solution:
- The problem is where it all starts. The more painful it is and the more people who experience the pain, the better. If you haven’t found the problem you want to solve, there’s nothing wrong with listening to the problems other aspiring founders want to solve. Nontechnical aspiring founders with deep understanding of a problem (i.e., founder–market fit) are always looking to connect with aspiring technical founders.
- Building a team best suited to solve a particular problem is the goal. Great team members have complementary, not overlapping, skills. Hiring people to do what you don’t want to do will likely lead to overlapping skills and team gaps (in his situation, great technical abilities but no deep understanding of a problem—or no problem at all).
- Titles don’t mean much in early-stage companies and often change. Having the CEO title is great for the ego, but it isn’t worth missing out on solving a great problem or working with a strong team.
These points resonated with this aspiring founder. He’d recently realized he was limiting his cofounder prospects by focusing only on people with technical skills and had been thinking about changing his approach. What I said about my experience confirmed some of what he was already thinking.
This founder is super smart and has the drive to build an amazing business. I can’t wait to see where his entrepreneurial journey takes him!
Weekly Reflection: Week One Hundred Ninety-Two
This is my one-hundred-ninety-second weekly reflection. Here are my takeaways from this week:
- Home stretch – It’s December. We’re in the last leg of the year. I want to make these last few weeks count. My intention is to focus on only the highest-priority things for the rest of the year.
- Daily habit – I’ve been intentional this year about learning something new every day. This week I noticed that I felt unsettled one day when I hadn’t learned anything new. It was a welcome feeling because it meant this habit had been formed and my mind was expecting something new. Before the day was over, I cracked open a book on a topic I’m interested in.
Week one hundred ninety-two was another week of learning. Looking forward to next week!
How an Emerging VC Manager Reached First Close
This week, I caught up with an emerging venture capital manager who’d held the first close on his $100 million fund, which is the firm’s second fund. They closed on $33 million and are actively working on closing the remainder—they have a line of sight to the full $100 million. As expected, he said fundraising has been harder than anticipated, but he did share a few things that have helped him get to the fund’s first close:
- Exits – His first fund has had three portfolio companies exit. Another pending exit of a portfolio company to a large publicly traded technology company is closing soon. These exits have demonstrated to potential LPs that he can find promising companies early and return cash to LPs.
- Thesis – Fund I was a generalist fund. He realized his team is best suited to invest in specific areas given their backgrounds—and that other funds generally struggle to invest successfully in those areas because they lack the relationships and deep understanding to properly do their due diligence. Fund II now has a thesis around these areas, which has resonated well with potential LPs.
- Team – The team he put together has a stellar track record in the roles they held before joining his firm. They have deep domain expertise and relationships in the areas they invest in.
- Hustle – He leaves no stone unturned and stays hungry. He’s diligent about follow-up, asking for intros, and delivering what he committed to on time.
My big takeaway from our chat was that his success has been driven by his tenacity, reflection, and willingness to continually learn and evolve throughout the fundraising process. I’m excited for this manager and looking forward to following his journey.
Winning a Small Market by Being Low Tech
I love talking shop with entrepreneurs. Today I was at a social gathering where an established entrepreneur told me about his approach to acquiring new customers. He runs his business out of Atlanta, but there’s heavy competition (i.e., low margins) in Atlanta. He’s from a smaller city three hours from Atlanta. The people in that community don’t have access to the caliber of products his company sells. They’re used to paying top dollar for low to medium quality and driving an hour to do so.
He devised a simple marketing strategy. He’s an alum and former athlete at the local high, so he sponsors the football and basketball teams. His company logo is painted on the football field, and every time the home team scores, the announcer reminds the fans that his company backs the team. He bought the scoreboard for the basketball team with his logo displayed front and center. His goal is to stay top of mind with the people in the community, and it works. When they’re ready to buy, they think of him. He makes the sales process electronic, simple, and smooth. He arranges for purchases to be delivered to their door. They get a better product at a fair price and support a business that supports the community. This strategy is highly effective. He gets a steady stream of customers from this low-tech approach, and his average cost to acquire a customer is ridiculously low.
What this entrepreneur realized was that there’s an underserved customer niche that he understands better than most. He focuses narrowly on them. He markets to them in a way that resonates with them and that has the dual benefit of doing good in the community. He made the sales process something they could do from their home, which they weren’t used to. The end result is that he’s built a thriving business and is the market leader in that city using a very low-tech and inexpensive marketing and sales strategy.