When I decide to take an action and it doesn’t turn out as I’d wanted, I reflect on it. I try to identify what caused the outcome (a bad decision on my part, or bad luck?) and take those lessons forward. As I began investing and studying successful investors, I started to reflect more on my decisions that resulted in missed opportunities. It’s not something most people think about, but the actions you don’t take can have a bigger impact on your trajectory than the actions you do take.

For example, if I make an investment and it goes bad, the most I can lose is the amount of capital I invested (assuming I didn’t use leverage). If I decide not to invest in an opportunity and it ends up returning 10x, not acting was a bigger error. Let’s quantify this:

Decision A: Invest

Investment: $10

Return: –100% (lose everything)

Capital returned: $0

Loss: $10

Decision B: Don’t Invest

Investment: $10

Return: 1000%

Capital returned: $110

Loss: $100 ($110 capital returned – $10 investment)

The decision to not invest was 10x more costly than the decision to invest. Of course, these are made-up round numbers—the extremes of both decisions—that I’m using as examples. Naturally, you won’t miss a 10x return every time you don’t invest, and every investment won’t go to zero.

The big takeaway is that missing an opportunity can be as important, and sometimes a bigger mistake, than the opportunities you take advantage of but get wrong. I used the example of investing to quantity this concept, but it applies in many other aspects of life too.

In David Cummings’s blog post yesterday, Customer Value Financing Example, he referenced David Skok’s SaaS Economics posts (part 1 and part 2). I hadn’t heard of Skok or those posts, so I took a look today. They’re older posts from 2010, but their wisdom is still relevant. They do a great job of explaining the cash-flow trough of recurring-revenue businesses and how cash flow is impacted when companies scale by increasing sales and marketing spend.

I’ve spent today going through part 1 and will dive into part 2 over the holiday. This post contains wisdom that founders building recurring-revenue businesses need.

I first heard about customer value financing a few weeks ago when I read a blog post by David Cummings, a successful Atlanta-based entrepreneur and investor. The concept intrigued me. The idea, as I understand it, is to finance growth of a company by providing a loan to fund the cost of acquiring new customers. Think sales, marketing, and other costs incurred to convert people into paying customers. The expenses of acquiring customers are paid upfront, and recouping those costs (and eventually making a profit) from revenue from customers can take time. This creates a drain on cash flow and can hamper growth if capital isn’t available.

Customer value financing sounded great in principle, but I wanted to see it in practice. This week, General Catalyst and Lemonade Inc. announced a $150 million customer value financing deal. This caught my attention because Lemonade is publicly traded, so more details of this deal and the outcome will be available than if it were private. I figured this would be a great opportunity to understand customer value financing.

Lemonade filed its form 8K with SEC with high-level deal details. It also published a blog post outlining the deal rationale and shared metrics and projections to support the rationale. This is great information for better understanding this deal and how it adds value to the company. David, who understands customer value financing, published a great blog post today with his thoughts on this deal. I’ll defer to his post to interpret the above-mentioned posts.

Lemonade’s total 2022 revenue was $256 million, making it a late-stage start-up that happens to be public. For the last decade or so, most companies at this stage in their life cycle have been private, so details about them (including growth strategies) were closely guarded secrets. For those interested in understanding customer value financing, I think this deal is an opportunity to understand and track the outcome of a new (to me at least) growth strategy available to entrepreneurs.

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

• Entrepreneurial swings – I caught up with an entrepreneur friend. Two years ago, things didn’t look good, and he wasn’t sure his company would survive. Today it’s thriving and kicking off more cash than he knows what to do with. Things can swing from one pole to another fairly quickly for entrepreneurs. The key is to persevere.
• Q2 – The quarter is officially over. It went by quickly. Hard to believe we’re halfway through the year. Looking forward to the second half of 2023.
• Workflow management – I’m optimistic about workflow management technology. Companies can’t just throw people at problems anymore and will actively be seeking software solutions. Many companies’ focus on efficiency is blowing up a strong tailwind for start-ups solving painful workflow management problems. These are B2B companies solving unsexy problems, which is a combination that can create a great foundation for a business.
• July 4th – Next Tuesday is a holiday. Looking forward to spending time with family and friends and reading a few new books.

Week one hundred seventy was a steady week. Looking forward to next week!

I listened to an interview of Scooter Braun recently. Scooter has had a wildly successful career in the entertainment industry. He’s credited with discovering Justin Bieber, and he managed several other top entertainers. He recently sold his firm, Ithaca Holdings, for $1 billion and acquired Quality Control, one of the most successful rap labels—which happens to be in Atlanta—for around $250 million.  

Braun shared advice he’d received from Jeff Bezos, founder of Amazon.com, on work–life balance. Bezos thinks you shouldn’t have to balance two things you love and that harmonizing them makes more sense. To do this, he communicates to people in his personal life how much he loves what he’s doing at work and what the latest developments there are. At work, his team knows how much he loves his children and what’s going on with them. The idea is to integrate and harmonize your work life and home life by making everyone feel in the loop, part of what’s going on in the parts of your life they can’t see. If you must miss a work event because of something child-related, everyone understands because they’re in the loop and know your children take priority.

Braun went on to share that for many years he kept his work and personal lives very separate but cared deeply about both. This ultimately created issues in his life because, as he put it, “it was like being married to two different people,” which wasn’t fair to the important people in his life.

I’ve been more of a balance person historically—I tend to try to keep work and my personal life separate. Sometimes it’s worked and sometimes it hasn’t. The advice Braun received from Bezos definitely resonated with me. It has me thinking about sharing more about the important parts of my life with people who are important to me. I’m naturally a private person, so I want to harmonize in a way that feels comfortable, given that trait.

Here’s the clip of Braun sharing what he learned from Bezos and how it affected him.

I caught up with a venture capital investor this week who shared that he’s raised a new fund in the last six months that’s over $1 billion, but he hasn’t started deploying it yet. He’s still deploying from his last fund. As he put it, the new fund is “on the shelf” for now. This got me thinking about the amount of dry powder venture firms are sitting on and how this dynamic affects the cycle of the venture capital business.

I went and found an old interview of Bill Gurley. Gurley said Howard Marks told him that venture capital can’t avoid cyclicality and is a boom-and-bust business model. Here are the reasons Gurley listed:

• A fund’s life cycle lasts a decade. Capital is committed, invested, and returned over in that period.
• The business has low barriers to entry and high barriers to exit.
• As markets begin to boom, capital floods in quickly.
• As the market breaks, capital can’t go away quickly. It’s stuck because it’s been committed for a decade.
• The vast majority of returns occur right at the end of the cycle.

VC is a boom-and-bust business model because of the way funds are structured. A boom is likely behind us. I wonder if the industry is ready for what comes next.

A few years ago, I shared the following thoughts in a post:

During economic expansions most entrepreneurs accept a certain level of inefficiency in the name of growth. They’re trying to move as much water as possible from point A to point B. They know water is slopping out of the buckets because they’re moving fast, but as long as more water is pouring into the tanks at point A, it doesn’t matter. But during economic contractions, the same entrepreneurs embrace efficiency. The water source dries up, so they put lids on the buckets and carry them slowly to make the most of the water they have.

Companies of all sizes have gone from making their priority growth (sometimes at all costs) to making it free cash flow (or a path to it). Growth is still important, but at a more measured rate that minimizes water slopping out of the buckets. This signifies a shift to an efficiency mindset.

Many companies can’t magically start operating efficiently. They need help getting there and will search for solutions to help them. Software that empowers them to do things they can’t do manually or to do things more consistently and efficiently will be in demand.

I see demand for workflow management software increasing and entrepreneurs building these solutions. Solutions that solve painful efficiency problems in the right way could be poised for explosive growth.

I have regular conversations with friends about real estate. It’s an asset class that’s always been interesting to me, and I’ve watched it from afar for years. Over the last few years, home prices have climbed rapidly.

Atlanta’s market is one of a few that I watch closely. One way I keep tabs on it is by looking at Federal Reserve Economic Data (FRED), a database of various data that’s often shown in simple graphs. One data point it includes is the House Price Index (HPI), which tracks the price trajectory of single-family homes.

The All-Transactions House Price Index for Atlanta (Metro) was 230.11 in Q1 of 2020. As of Q1 of 2023, the index was 346. That’s an increase of 50.36% in three years. You can see a graph of the index change in Atlanta from 1980 through today here.

A 50% increase in a relatively short period is a material increase. Lots of things happened in that period that drove the increase, which I won’t get into here. Nor will I talk about how this compares to other markets. I just found this data point interesting.

I’m really curious to track this index over the next few quarters.

I’ve spent time working on understanding the journey of emerging investment managers. These people start companies that make money by investing capital. I think of them as entrepreneurs who happen to be investors, or “investor entrepreneurs.” I’ve been curious to learn how the most successful emerging managers are wired, so I started studying managers who’ve had outsize success over a decade or more. This means they’ve been able to compound their capital at an annual rate that exceeds benchmarks like the S&P 500. I started with venture capital fund managers but expanded to studying managers in private equity, real estate, hedge funds, value investing, and other areas.

Studying several managers who’ve compounded their capital at above-average rates in various ways has been enlightening. It’s shown me that the ways to have success as an investor vary widely. But I’ve noticed a trait that these successful managers have in common: a burning desire to approach investing in their own unique way as opposed to a way mandated by someone else. They wanted to develop, test, and refine their own investment approach. They saw starting their own firm as the best path. A few worked for other people, but that was never the goal—it was a stepping-stone. The goal was always to invest using a unique insight and control their own destiny as an investor.

When I started posting daily in 2020, I had a decade-plus of entrepreneurial experience from building a company. I thought about those experiences and identified insights about entrepreneurship. Then I shared my insights in a way that people could understand (and hopefully find useful).

Lately, I haven’t been getting as much from the process of creating my posts. I thought about why I feel this way and concluded that I haven’t been as consistent in sharing insights in my posts. More of my posts have contained information but not shared deep understandings. I realized that the process of gaining an understanding of a topic and then distilling and sharing it concisely is fulfilling. It isn’t always easy to come up with insights and communicate them, but I’ve enjoyed it when I have.

I want to get back to writing more insightful posts. To do so, I’ll need to accelerate the rate at which I acquire knowledge on certain topics and come to understand them.