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

During a recent interview at the University of Chicago, Howard shared his interesting thoughts about a trait he believes leads to investing success: second-level thinking. He defines it as thinking deeply, differently than the herd, and better than others. Second-level thinking is about insights, he said.

I believe second-level thinking is a key to outsize success in general, not just in investing. You can’t do what everyone else is doing and achieve outsize success. Second-level thinking means taking in information and forming your own conclusions instead of easily agreeing with others. Part of that process is connecting the dots between seemingly unrelated information to produce insights others haven’t had. Those unique insights lead to conclusions and actions that differ from those of the masses. The result is outsize outcomes.

Second-level thinking is important, as it’s the intellectual process that leads to unique insights.

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

• Geographic diversity – I’ve been thinking about my takeaways from a chat with a16z Partner Scott Kupor. I believe network distance is the biggest obstacle to achieving geographic diversity for VC investments, but many people may not understand this.
• Patience – I had a great chat with a friend who reminded me of the value of patience. Sometimes the best things take more time than expected to play out.

Week one hundred fifty-five was a busy week. Looking forward to next week!

I had a conversation today about negotiations—something everyone will encounter in their life. They can be as complicated as working out deal terms for a large investment in a company or as simple as a child trying to convince their parents they should have a later bedtime. The most common example I heard people talk about today was negotiating salary with an employer.

Books and strategies on negotiating abound. I don’t think there’s a right or wrong approach, only what’s ideal for the personality of the person doing the negotiating. (Note: there are some things everyone should avoid!)

Understanding the person you’re negotiating with is important. Understanding their negotiating style can inform how you negotiate. But it isn’t always easy to understand someone’s style. One of the people I chatted with shared a straightforward approach to quickly understanding someone’s style: at the beginning of the conversation, ask them: “What’s your negotiating style?” In his experience, most people will be caught off guard. Either they’ll tell you how they negotiate, or their response will give you clues about their style. For example, someone will say they’re a straight shooter. Someone else, to keep from showing their hand, won’t give you clear answers. Either way, you’ve learned something about their negotiating style that’s useful.

I like this direct approach and plan to use it when I negotiate with someone for the first time.

Today I was part of a group that chatted with Scott Kupor, Managing Partner and employee number one at Andreessen Horowitz. a16z, as the firm is known, is a well-known venture capital firm that helped start the trend of having a large operating team of specialized people support the needs of portfolio companies. As Managing Partner, Scott has helped steer the firm from $300 million in assets under management (AUM) to over $30 billion in AUM since 2009.

Scott had a lot of great things to share, but one thing especially stood out to me. He talked about the need for geographic diversity of VC investments. The Bay Area has historically been the center of the industry. This has created a challenging dynamic.

• Founders outside the Bay Area have a hard time getting funding. This means that founders working on problems experienced by broader society but not so much in the Bay Area are less likely to receive the capital needed to solve them. Said differently, some of society’s big problems go unsolved.
• Lots of people fishing in the same pond creates an interesting dynamic for return on venture capital investment. It becomes increasingly competitive as abundant capital chases scarce opportunities to invest in an exceptional founder solving a big problem. As the competition increases, the valuation increases. As the valuation increases, the potential return on the investment is reduced.

I totally agree with these points and all the other great ones that Scott made. He made a strong case for geographic diversity of venture capital investment. Hopefully Scott and the a16z team will spend more time getting to know Atlanta and its start-up ecosystem and learn for themselves why Atlanta is ranked the best place to live in the U.S.

Some founders seed their companies with their personal capital in the early days. There are a variety of ways to handle this, with a loan from the founder as a shareholder being the one I’ve seen most. When a founder plans to grow their company quickly and raise venture capital, they have another option: they can classify their capital as an investment in the company. The easiest way to do this is through a convertible note or simple agreement for future equity (SAFE).

Why would a founder want to do this? For many reasons. One is that it helps to separate sweat equity from financial equity. If a founder must leave the company for some reason and their equity as a founder doesn’t vest, they still have their financial equity. The founder will own a percentage of the company based on their investment, regardless of what happens with the equity tied to their employment.

There are other benefits too, such as owning—for the financial equity—preferred equity versus common equity.

I listened to a spotter entrepreneur tell his story about his early days. He found someone who had potential and invested in developing that person. The spotter bankrolled everything himself. Things didn’t go well. He was down to his last two months of cash and starting to panic. If he ran out of cash, he’d have to fire everyone. He knew his reputation would take a blow.

He decided to stick with his plan and keep fighting. Then things started to work well, and his investment in the other person paid off handsomely. His big takeaway from that experience was this: success and failure live next door to each other. If you can still wake up and act, don’t give up. You’re closer to success than you know. The separation between success and failure can be smaller than you realize. Your chances of success increase when you keep fighting. Said differently, don’t give up. Keep going!

I’ve been thinking about “Spotter” entrepreneurs lately. I’ve been talking to them and trying to understand what traits make someone a spotter and especially what traits the top 1% of them have. So far, I’ve learned that spotters are gifted at discovery, thinking in probabilities, and evaluating risk and return.

Another trait is a burning desire to create their own path. Spotters are intelligent, and they work hard. This combination means that they usually have available a variety of paths for working for others. Sometimes they will work for others, but it’s usually to learn, establish relationships, etc. Great spotters ultimately want to build their own companies and blaze their own trails. Even if that means taking on more uncertainty and less pay. They know they can build a company that creates value for others and wealth for themselves. They’re willing to forgo the stable income they’d get working for someone else for the potential outsize outcome that awaits if they’re successful. Said differently, spotters want to bet on themselves.

Sidenote: Some top-1% spotters have ties to Atlanta or live in Atlanta. One prominent spotter who sold his company for over $1 billion got his start in Atlanta. More on this later.

This week’s Silicon Valley Bank (SVB) failure was unexpected and happened in less than 48 hours. I’ve chatted with a few founders and venture capitalists whose companies have assets with SVB. As of Friday afternoon, SVB accounts were frozen, meaning customers couldn’t add or withdraw any funds. Most of the people I talked with were busy establishing relationships with other banks in anticipation of being able to move their funds. The venture capital firms were assessing their own exposure and the exposure of their portfolio companies and updating limited partners on the situation.

The FDIC insures deposits up to $250 thousand. Insured deposits will be available Monday morning. Anything above $250 thousand likely won’t be available until the FDIC sorts through everything, which could take time. My gut tells me that SVB customers will likely get most of their money back, but when that will happen isn’t clear. The longer it takes, the more difficult decisions there will be for SVB customers to make.

I’ll be watching this closely as it unfolds.

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

• SVB – Silicon Valley Bank’s failure this week was a surprise. I’m curious to see how this failure will impact venture capital and banking more broadly. As of today, I know a few VC funds and start-ups with frozen accounts at the bank.
• New community – I joined a new community full of accomplished people this week. I’m excited to get to know them.  
• Young companies – Some of the largest companies in the US haven’t been around that long relative to their market cap (i.e., valuation). For example, Alphabet Inc. (Google) was started in 1998. Twenty-five years ago. It has a market cap of over $1 trillion. That’s a staggering rate of compounding and wealth creation.

Week one hundred fifty-four was a crazy week. Looking forward to next week!

I met with a “spotter” entrepreneur this week. I was curious to hear about the next opportunity he’s identified. As we chatted, I realized a few things about him:

• Discovery – He’s gifted at finding opportunities others haven’t found. He looks where others don’t look. He sees value in things others have written off by thinking about them differently. He’s good at keeping his finger on the pulse of what’s going on, broadly, to spot trends early.
• Odds – He understands that what he’s trying to do is very difficult and it’s not a sure thing. At the same time, he’s aware that the odds of success are in his favor because the dynamics of the market he’s entering favor him. He doesn’t realize it, but he’s thinking in probabilities.
• Risk and return – He’s done simple math sufficient to understand that the return could be material if he’s successful. He’s considered the return relative to the risk he’s taking on. And he’s thought about how to lower the risk but still realize a material return if all goes well.

This entrepreneur isn’t from a fancy school or anything like that. He’s just a hustler gifted with the above-listed abilities and a great work ethic. I think a lot of this type of entrepreneurs are out there. The top 1% of these spotter entrepreneurs have the potential to build large non-consensus businesses.

I want to continue talking to spotters to understand what traits the 1% have.