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.

When someone says a company is a Fortune 500 company, people know it’s a large company. But what does that mean exactly? I decided to find out. Apple is the most valuable public US company and has a market cap (i.e., valuation) of $2.42 trillion as of today, so I assumed it would be ranked first on the Fortune 500 list. To my surprise, it was third. Walmart was ranked first and Amazon second. See the complete Fortune 500 list for 2022 list here.

I looked up Fortune’s methodology and learned that it uses total revenue to determine the rankings. Not market cap (i.e., valuation) or profitability. Just top-line revenue. It ranks on how many dollars customers gave a company (revenue) in a year, not how many of those dollars the company kept (profit) or what the market says the company is worth (market cap). Here’s the top three Fortune 500 companies (with 2022 revenue for context):

• Walmart – $573 billion
• Amazon – $514 billion
• Apple – $394 billion

Conversely, the S&P 500 is an index of the largest publicly traded companies listed in the United States. The S&P 500 doesn’t rank companies directly. Instead, each company makes up a certain percentage of the overall index, which is called its index weight. The weight calculation isn’t as simple as Fortune’s revenue methodology, but it is mostly based on market cap. The larger a company’s market cap, the more weight that company carries in the index. Full weighting methodology here.

Here are the companies with the biggest index weights (with market cap as of today for context):

• Apple Inc. – $2.42 trillion
• Microsoft Corp. – $1.89 trillion
• Alphabet Inc. – $1.21 trillion
• Amazon.com Inc. – $962 billion
• Berkshire Hathaway – $684 billion
• Nvidia Corp. – $597 billion
• Tesla, Inc. – $570 billion
• Exxon Mobil Corp. – $447 billion
• UnitedHealth Group Inc. – $439 billion

Interestingly, Walmart is an S&P 500 company, but it has a lower weight in the index than the above-listed companies. It has a market cap of $372 billion as of today.

Interesting to see how Fortune and S&P 500 both seek to identify the largest companies, but their rankings differ because they’re measuring different things.

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I recently caught up with an early-stage founder who’s building an interesting business. He had a setback recently and, understandably, is frustrated. Unfortunately, he publicly communicated his frustration with his business partner on social media. The partner was not pleased. The business is at a standstill.

Building a company is harder than most people realize. Setbacks are inevitable. Founders, like everybody else, react to setbacks emotionally—with anger, frustration, fear, etc. But those emotions can’t get in the way of the founder accomplishing their mission. Founders must figure out how to work around or through setbacks.

Over the years, I learned to acknowledge how I was feeling when I experienced setbacks. If I was especially worked up, I made a point of doing my best to avoid taking action until I’d calmed down. I found that talking the situation over with another entrepreneur—someone credible and level-headed—often helped, especially if they’d been in a similar situation.

This founder has put himself in a position where his mission could be jeopardized. His uncontrolled emotional reaction fractured a critical relationship. The emotion has dissipated and he regrets what he did, but he can’t take it back. He’s aware of that, and he’s trying to repair the relationship and overcome the setback. I’m sure he’ll figure things out, but this incident might materially slow down his execution and may have permanently weakened an important relationship.

Last week I wrote about two of my takeaways (see here and here) from an interview with the founder of Carlyle Group, David Rubenstein. David shared a lot of great nuggets, including some that would otherwise take people a lifetime to figure out. In addition to being a founder, David also hosts The David Rubenstein Show: Peer to Peer Conversations. He’s had the opportunity to interview over two hundred people, some of whom are investors, on his show and work with numerous investors over his many-decades-long career.

Over the years, David has noticed a few traits that great investors have in common:

• Well educated – They aren’t high school dropouts.  
• Good at math – Their math skills are above average.
• From an average family – They were raised in a blue-collar or middle-class family.
• Willing to own mistakes – They’re willing to recognize a mistake, admit it, and get out quickly.
• Generous – They’re willing to share credit for good things.
• Accepting of accountability – They’re willing to take the blame when things don’t go as planned.
• Avid readers – They have a strong appetite for learning and knowledge. They’re constantly reading. I noticed something similar.
• Gratified by the act of investing – The challenge of investing—not just the money—is interesting to them. It’s a matter of mental sharpness and challenge.
• Contrarian – They’re comfortable going against the grain instead of following the path of least resistance.
• Philanthropic – They enjoy promoting the welfare of others.

This is an interesting list. Some of the items I wouldn’t expect. I’m going to think about this list and see if it holds true for the investors I know.

Take a listen to David’s comments on great investors here.

I met with someone recently who’s a self-described contrarian. Contrarians go against popular beliefs, so I was curious to hear his views. As we chatted, I realized he takes the opposite side on most topics. He doesn’t have a strong belief in his positions; rather, he strongly values doing the opposite of what everyone else is doing.

Being contrarian—in a positive way—isn’t about doing the opposite of what everyone else is doing for the sake of being different. Just because everyone isn’t jumping off a bridge, that doesn’t mean you should.

The contrarians I admire go deeper. They understand what others are doing, but they don’t stop there. They try to understand why others are doing what they’re doing. Then they develop an informed position on what’s wrong with the action others are taking (i.e., why it’s incorrect). Then they figure out if there’s a better way. If they find a better way, they take that path, and they have conviction about their position because of the process they’ve followed, as just described.