Listening to a group discuss interest rates, I noticed something interesting. A gentleman in his 70s said that he’d paid an interest rate of ~20% on his home mortgage in the early 1980s. He views current rates as normal, while younger people in the same conversation think today’s rates are abnormally high.

It was interesting to see two groups of people who are experiencing the same reality view it differently because their life experiences have given them different baselines.

This conversation reminded me that there can be value in understanding the history of a topic instead of just what’s happened in my lifetime. It can affect how I perceive the present.

I’ve been evaluating a potential investment and researching the industry. Today, I spent time with someone in my network who’s worked in that industry for over a decade. It took only an hour’s conversation for me to gain a much better understanding of the industry and its incumbents and get feedback on the value proposition of the company I’m evaluating.

Today was a reminder that you can’t know everything, and it’s helpful to have a network of people who can fill your gaps in various areas. Especially if you’re a generalist investor.

I was chatting with some people about thinking in probabilities when a friend quoted Jeff Bezos, Amazon’s founder. What Bezos said is well known, and people reference it all the time:

Given a ten percent chance of a 100 times payoff, you should take that bet every time.

This statement didn’t sit well with me. I decided to get more context. I found the original shareholder letter in which Bezos said this. Here’s the entire paragraph:

One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

Given the full context, we can see that Bezos is talking about experimentation and the resulting outsize value it can create. He’s thinking about the probability of success and the potential value created when deciding whether to do something experimental.

This isn’t a concept that everyone can grasp. I think his comparison of baseball to business is powerful. The comparison communicates the potential to create value by solving problems in a way everyone can understand.

Creating value for others by solving their problems isn’t easy. It’s a journey of trial and error until you hit upon a solution that will get you a thousand runs.

Howard Marks is a successful billionaire investor who cofounded Oaktree Capital in 1995. As of today, Oaktree has over $170 billion in assets under management, more than 1,000 employees, and offices worldwide.

Marks is known as a shrewd investor and for sharing his insights on financial matters in widely read memos since 1990. It’s said that many notable investors, including Warren Buffett, look forward to reading these memos.

I recently watched an interview in which Marks shared an interesting fact. Between 1990 and 2000, he didn’t receive a single response when he sent out his memos. Utter silence. People didn’t even acknowledge receiving them. But Marks continued to write them. After more than a decade, people began paying attention. Thirty years later, his memos are highly anticipated and widely read.

Marks’s memos are a great reminder that good things don’t always happen overnight. Marks put in consistent work for over a decade before his writing efforts began to pay off.

As an early founder, I thought about when (not whether) things would stop going well at my company. It was a bit of founder paranoia, which sounds crazy but is healthy and common (only the paranoid survive). It didn’t mean my behavior changed. It meant I was aware that continued success was not a given and had to be earned.

As I’ve reflected on this more, I’ve realized that there was something deeper in the back of my mind that was more personal. Since high school, my trajectory had been mostly up and to the right. Most of the things I tried, I succeeded at—some minor hurdles, but no material failures. I was appreciative of but also concerned by this trajectory. I couldn’t put my finger on why, but I can now.

Success isn’t indefinite. It’s cyclical. Anyone who has achieved outsize success has also experienced a setback or major failure. Said differently, they’ve experienced highs and lows, or a cyclical journey.

At CCAW I was pushing for more success, but subconsciously I was bracing for an inevitable setback. As crazy as it sounds, that mindset ended up being helpful.

I didn’t know when failure would happen, but I knew it would happen. So, when I encountered a setback, I wasn’t surprised. Instead, I looked at it as a necessary part of the cyclical journey to success. I wasn’t thrilled by the setback but made sure to look for the positives in the situation. I focused on identifying what I could learn. I tried to figure out how what had happened could position me for a bigger win. That mindset helped me navigate the setback and come out on the other side better positioned for bigger things.

My big takeaway from this is that I can be a serial entrepreneur, but my success will be cyclical. Said differently, serial entrepreneurs have cyclical success. I will try things, and some of them will fail miserably. Instead of thinking I’m winning or losing, I now view it as winning or learning.

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

• Contract details matter – This week was a reminder that details matter in contracts. It’s worth taking time to understand the details before agreeing to a contract.
• Schedule experiment – I’m a few weeks into my schedule experiment. The schedule change has had positive impacts that I didn’t anticipate. It’s led me to adjust what I read, when I read, how I read, and why I read. I’ll dive into the adjustments in another post; for now, I’ll just say that I’m happy with this new habit. I believe it will turbocharge my ability to acquire and compound wisdom. And I also believe it will increase the frequency with which I uncover insights.
• Back to growth – I’ve been talking with early-stage founders and tracking a few public technology companies. Anecdotally, there’s a trend of companies getting things cleaned up and returning to growth mode or discovering how to enter growth mode for the first time. Sentiment for some company leaders is shifting from negative to optimistic, which is a big shift from six months ago.

Week one hundred sixty-seven was an insightful week. Looking forward to next week!

I caught up with a founder who’s been trying to sell his solution to customers for months. It’s gaining traction—but more slowly than he would like. With his current monthly burn rate and cash on hand, he has less than a year of runway. He realized he likely wouldn’t reach breakeven before his runway ends, and raising more capital from investors is far from certain, so he decided to try something different.

At the end of his pitch, he began asking his prospective customers if they would buy his solution if he repurposed it to address a few pain points they’d mentioned. The response has been overwhelmingly positive. The pitch meetings went from maybe we’ll try this to, yes, we want to buy that. In the same meeting.

It’s early, but the response is night-and-day different, according to the founder. He spent months building a solution that sold slowly. Then he began giving out one-pagers on his new solution, and prospective customers are ready to sign up. He went from begging for follow-up meetings to customers asking for follow-up meetings within three days of the initial meeting (two meetings in one week!). He went from trying to convince customers to pay for a solution to customers offering to pay in advance.

It’s early and a lot could happen or not happen, but this founder has likely hit on the painful problem that could lead to product–market fit. Product–market fit is hard to define, but when you have it or are getting close, your customers will let you know with their wallets.

The prospect of running out of money has been scary for this founder, but it looks like it could have been the spark that led his company to early signs of product–market fit. The team is focused on building what customers want instead of what investors want to hear.  

I chatted with a founder who’s thinking about shifting his business back to growth mode. He’s spent the last year or so fine-tuning processes and people to make the company more efficient. His profit margins have increased by 50%, and he’s ready to start growing again.

He shared that he’s thinking about taking on, as a customer, a larger company that needs the services his company provides. It would give him a steady (but not guaranteed) number of new monthly orders, but at a price reduction and with longer payment terms. He’s considering this because it could get the company back to growth mode quickly.

A few things I pointed out to him:

• Margin compression – This agreement will bring in low-margin revenue, which is different than his current revenue. He’ll have to do more top-line revenue to generate the same gross-margin dollars.
• Concentration – He’ll be heavily reliant on this single entity for a material amount of his revenue. This means he won’t have leverage in that relationship, which could work against him if the relationships frays.
• Operational strain – This is a traditional business that requires people to do the work. The additional orders will necessitate adding more staff. But the lower margins on that revenue could put the founder in a tough spot. He might not be able to afford the caliber of staff he’s used to, which could have an impact on quality and team culture.
• Cash flow – The larger company wants preferential payment terms, meaning it wants longer than average to pay. This could dramatically affect cash flow. The founder must pay employees and cover the costs of materials upfront but wait longer than normal to be paid. Running low on cash will be a greater risk. He can probably cover shortfalls with something like a line of credit, but that would incur interest expense, further reducing his margins.

This founder has put in a lot of work to get his business to a great place with high margins, a great team, and a solid culture. I’m not sure what he’ll decide, but these factors are worth including in his decision-making process. Landing a big customer—a big source of revenue—sounds appealing, but second-order effects should be identified and considered.

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.