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.

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

• Schedule experiment – I’m almost two months into my schedule experiment. It’s no longer an experiment. It’s a habit now. Dedicating more time daily to reading to acquire knowledge led to my realizing that I was approaching reading the wrong way. I spent time learning how to be intentional about reading, and I began implementing a new approach this week. The early results are impressive. This could have a big impact on me going forward.
• Compounding – Most people think about interest and money in connection with compounding. But it applies to much more in life than money.
• Closing windows of opportunity – Some opportunities won’t be around forever. This week was a reminder to make opportunities with expiration dates—in all aspects of life—priorities. I may not know when they’ll expire, but I know they will and that I need to make the most of them while I can.

Week one hundred sixty-nine was a short but productive week. Looking forward to next week!

Bloomberg published an article today entitled Shares of Startups Are Turning Dirt Cheap, Attracting Venture Funds. It contains some insights into the current state of the secondary market for start-ups.

A secondary sale is usually a transaction between two parties to exchange equity in later-stage start-ups. The start-up isn’t involved, except that sometimes it must approve the transaction.

I know a few investors, both individuals and institutions, who bought or sold shares on the secondary market in 2020 and 2021. Usually, it was a way for the buyer to get exposure to a company when they couldn’t become an owner in a funding round. The seller was typically an early employee, angel investor, or seed-stage venture fund. These investments were done at a valuation premium relative to the last funding round.

Things appear to have changed. According to the Bloomberg article, recent secondary sales have been done at steep valuation discounts relative to the most recent funding rounds. And there is increasing appetite by funds to buy on the secondary market and increasing desire by institutions such as pensions to sell private investments on the secondary market.

As more institutional investors, venture capital funds, and start-up employees seek liquidity when an IPO isn’t an option, I’m curious to see how secondary markets evolve.

People emulate the habits of successful people. I think this is a good approach because consistent positive habits increase the likelihood of positive outcomes. But going deeper is even better. Understanding what actions led to success is helpful, but understanding why successful people consistently took those actions can be even more valuable. If you emulate actions without understand why, you might not get as much value from them because you don’t know what you’re looking for.

When I learn about habits that led to success, I now dig to understand the why behind them. Understanding this has helped me maximize the value of those habits I’ve emulated.

A while ago, I listened to an investor share that he keeps a log of all his lessons learned from each investment. (This is different than the investment memo that he writes when he’s evaluating whether he should make the investment.) After the investment is made, he keeps a log of lessons and observations. He started the log to try to minimize making errors more than once. Identifying the lessons, writing them down, and reviewing the log periodically was helpful to his investment process.

I’ve started a similar log, albeit a less formal one. I’ve been keeping a running list in the Notes app on my iPhone and laptop. I recently reviewed the log while considering a new investment and altered my approach to making that investment because of a lesson learned.

I’m a fan of logging my lessons learned. I hope to keep the habit up and compile a single list of lessons learned over many years that I can eventually share.

Today I listened to an investor describe how he prepares mentally for investing. It’s a process of continual learning by being focused and intentional with his reading. He reads with an intent to acquire knowledge on a specific subject. After picking a topic he wants to understand better, he finds books written by people who understand the topic better than he does. He focuses on identifying and understanding the main argument of each book, not consuming every supporting detail. This allows him to consume the most important parts of the books at the rate he deems appropriate (instead of consuming the books—with every detail and example that supports the main argument—at the pace the authors intended). This approach also allows him to compare what he’s reading in various books on the same subject and uncover valuable insights more easily.

There’s more to his approach, but that’s the gist of it. It really got me thinking. I’m going to learn more about it.