You’re unlikely to build a big company in a small market. The solution may be great, but if there aren’t enough people with the problem, the company’s upside potential is limited. Today I read a blog post from Bling Capital that provides a simple framework for quickly sizing a market. Here are a few takeaways:

• Bottoms up – Don’t take a top-down approach that focuses on getting a percentage of a known market. That can severely underestimate a market. An NYU professor made this mistake when he claimed that Uber was overvalued. A bottoms-up approach that also considers new use cases enabled by a superior solution is better.
• Customer segmentation – All customers aren’t equal. Different customers will require different go-to-market strategies.
• Penetration rates – Be realistic about how much of the market you’ll capture. Fifty percent isn’t realistic for most companies, but 5% is. Penetration may vary by customer type (e.g. urban vs. rural).
• Gross profit – The cost of delivering a solution matters a lot. It’s an indication of whether the company can become profitable. Growing revenue or GMV quickly but with low gross profitability makes the path to turning a profit much harder.

Every market is different and founders should consider the nuances of their market when sizing it, but this framework is a good starting point.

Today I had a chat with a friend who made a comment that stuck with me.

I’m not a start-from-scratch kind of person. It’s not my strong suit. I need there to be something in place already that I can improve and scale.

My friend, over an accomplished career, has learned this about himself. He isn’t a blank-canvas person. He has no desire to start a company. He needs there to be pre-drawn lines to a bigger picture or vision. He can then work within the outline of that picture to turn it into something amazing. He considers only opportunities that align with this criterion. His skill set makes him well suited to be the right-hand man of a big-picture entrepreneur who knows exactly how he or she wants to solve a particular problem.

As a former founder, I’m comfortable starting from scratch. A blank canvas is attractive to me. I enjoy the process of coming to understand a problem and creating a solution from nothing. Once I know what needs to be built, I can draw the lines on the canvas and start building a masterpiece.

For anyone who wants to be a founder, a comfort level with a blank canvas is necessary.

I read a quote that’s stuck with me:

I hear and I forget. I see and I remember. I do and I understand.

                                                                                  ~ Unknown

Seeing something being done is helpful, especially if you have a blank canvas and don’t know where to start. You’ll remember what you saw, but that doesn’t guarantee you’ll understand why it was successful or unsuccessful. When you try to replicate what you saw, that’s when it starts to click and make sense. The true learning and understanding happen by doing. We learn what we do (or attempt to do).

I spent time explaining to a friend how management fee recycling works for venture capital funds. Funds that recycle management fees can reinvest cash distributed to the fund into new start-ups. The alternative would be to distribute all cash back to their limited partners. For example, let’s say a fund invested $1 million into a start-up and received $1.5 million back after the company was sold. Depending on a variety of factors, a fund that recycles fees could deploy some or all the $1.5 million into a new start-up instead of returning it back to limited partners. If they don’t recycle, the entire $1.5 million would likely go back to limited partners.

Most funds have a ten-year life, meaning the goal is to deploy capital and return profits to limited partners within a ten-year window. And most funds have a management fee. This fee provides cash flow to pay operating expenses of the fund, such as salaries. The management fee is charged yearly, usually as a percentage of capital committed from limited partners. Two percent is what I’ve seen most funds charge, but it can be higher or lower. Two percent charged annually for a decade means that 20% of the capital committed by limited partners won’t be invested in start-ups.

The other venture fund fee is called carried interest. That’s a fancy way of saying profit sharing. The people managing the venture fund (general partners) split any profits generated with the limited partners. Twenty percent carry is what I’ve seen for most funds focused on investing directly into start-ups, but it can be higher or lower. Twenty percent carry means general partners get 20% of any profits earned. It’s important to understand that carry is usually earned after the initial capital is returned to limited partners. If the fund is a $10 fund, the general partners must return all $10 first; then any capital above that is eligible for carry. Said differently, the fund must be returned in its entirety before carry can be earned.

Let’s look at a hypothetical $100 million venture fund with a 10-year life cycle and a 2% management fee:

• Capital invested in companies: $80 million
• Capital to manage the fund: $20 million

Most funds aim to generate a 3x return (we’ll assume gross for simplicity) for their investors—$300 million for this hypothetical fund. Let’s run a few scenarios:

• If this fund doesn’t recycle fees, it must turn $80 million into $300 million. That means the general partners need a return of 3.75x the $80 million they invested into companies to achieve their 3x return target.
• If this fund recycles fees, they could end up deploying the full $100 million and need to triple the capital invested to achieve their target (3x) $300 million return.
• It’s possible to recycle to the point where the fund invests more capital into companies than was committed by limited partners. Imagine that the fund recycled enough to invest $115 million into companies. That’s $15 million more than limited partners invested in the fund. To achieve their 3x return target, they need to achieve a return of 2.6x the $115 million capital invested into companies.

From these three scenarios, you can see a range of 3.75x to 2.6x return on invested capital needed to achieve the same $300 million—3x return for a $100 million fund. That’s a big difference.

Venture capital is a power law business where one or two companies can generate a large portion of a fund’s returns. Recycling can allow general partners to place more bets on a single fund.

Fee recycling involves lots of nuances and details that I didn’t get into, but this is an important concept for fund managers (and even founders) to understand.

Today I was thinking about names for a new business idea. I’m not great at marketing or branding, so I was curious about what tools exist that could help. I found a few of them and ended up exploring Namelix.

This tool is a name generator. Using AI, it helps create short, brandable business names. I wasn’t sure what to expect, so I spent time playing with it. It allows you to enter a few words or phrases that describe the business. You choose the naming style (i.e., non-English words, compound words, etc.) and creativity level. You then get a list of names presented as simple logos.

If you’re thinking about what to name a new venture, consider Namelix.

An investor shared details of a deal he’s been evaluating. He loves the sector, loves the founder, and loves the product. He hasn’t done the deal because he has concerns around the cap table—specifically, how much capital has been raised from investors in previous rounds and how much is being raised in the current round. The company has an enormous burn rate of around $400 thousand monthly, hasn’t achieved product–market fit yet, and doesn’t have much revenue from customers. Yet, it’s raising a third multimillion-dollar round of capital.

The major concern of this investor is the amount of dilution at such an early stage. The CEO-founder will own less than 20% of the company after the current raise. If the company can raise the current round, find product–market fit, and raise additional rounds of capital at later stages, the CEO-founder could have a small ownership stake in the company. This investor sees the CEO owning less than 10% as a real possibility. If that happens, it will take an enormous outcome and many more years for the CEO’s small equity position to have a major financial impact on his life. Rather than go down that path, the CEO might leave and pursue something else with a more attractive risk/reward ratio. That wouldn’t be ideal for those who invested in the company.

This isn’t the first time I’ve had an investor tell me this, and it likely won’t be the last time this year. Raising too much capital too early can cause lots of downstream problems if the company can’t achieve significant traction. This story highlights the excessive dilution problem and why investors are hesitant to invest when the founders don’t have material equity ownership in an early-stage company.

If you’re an early-stage founder, keep a close eye on your burn rate relative to company traction. If the traction isn’t there (i.e., you haven’t founder product–market fit), don’t be afraid to adjust the burn rate.

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

• Truth tellers – Some people tell it like it is. They don’t sugarcoat things. They candidly share what they see and think about situations. People like this are valuable because they’ll say what others are often thinking but won’t say.
• Emerging markets – I had a great chat with two emerging venture capital fund managers investing in emerging markets—specifically, LATAM and Africa. I was intrigued and now want to learn more about early-stage entrepreneurship in these markets.
• Outsiders – There’s something to be said for people who’ve accomplished greatness after starting as outsiders. They tend to have fought their way into the position they’re in. They’ve traveled further than others. Their ability to learn faster than other people has usually been key to their outsize success.

Week one hundred fifty was a positive week. Looking forward to next week!

I recently caught up with an angel investor who shared what made a founder stand out in a cold inbound and what made her want to help after their initial meeting. She defines a “cold inbound” as an email she gets without an intro from someone she knows. She’s open to cold inbound and responds to them, but she doesn’t meet with everyone who emails her. Here’s what she told me:

• Research – The founder read about the angel in an online list. Her email showed she’d done her homework and researched the angel investor’s background before emailing her. She cited what she learned about the angel’s background, why it impressed her, and why she wanted to chat.
• Connection – The founder’s research uncovered a connection the two had. She mentioned that they’d gone to the same university.
• Bought, not sold – The founder was enthusiastic about what she was working on. She demonstrated that she was thoughtful in her responses to challenging questions. By the end of the conversation, the angel had bought into trying to help this founder.
• Follow-up – The founder followed up on action items from their initial meeting quickly and was responsive by email. And she showed that she was acting on items from each meeting and building momentum.

This angel was genuinely excited to work with this founder and is now invested in her success. And it all started with a cold email!

I’ve been sharing my views about Apple’s push into financial services since 2021. I believe digital distribution will disrupt banking. I also believe the iPhone has positioned Apple perfectly to benefit from this change and become the financial services partner consumers and small businesses trust. Here are some of the moves I’ve noticed:

• Buy now, pay later in Canada
• Tap to Pay announced
• Apple high-yield savings account
• Pay Later loan product announced

Yesterday it was reported that Apple has expanded testing of its Apple Pay Later service to its employees. This is a big step that shows the company’s getting closer to launching this product widely.

Markets matter a lot. Big outcomes require large markets. Apple is an enormous company worth (i.e., with a market cap of) about $2.4 trillion as of this writing. Any new business that Apple pursues must be—or have the potential to be—a large market. Otherwise, it won’t move the needle for a company as huge as Apple. Consumer and small business financial services is an enormous market, and it’s been primed to be disrupted by changes in how consumers access financial products (digital vs. brick and mortar). This makes it an amazing and high-priority opportunity for Apple.

Don’t be surprised if iBank or Apple Bank dominates consumer and small business financial services within the next five to ten years.

An early-stage founder gave me his pitch recently. He’s just finishing the first version of his product and looking to raise investor capital. One of the things I noticed was that he listed multiple problems he’s trying to solve and multiple types of customers he’s solving problems for (consumers, small businesses, etc.). I wasn’t sure exactly what he’s solving, who he’s solving for, and what exactly his solution does. We talked, and he clarified the main problem, the target customer, and the solution, improving his pitch and my understanding.

Early-stage companies have limited resources. Given this constraint, they can’t be everything to everyone. It’s best to focus, get proficient in your area of focus, and then expand when you have more resources.

Investors, especially early-stage investors, are aware of resource constraints and are less likely to invest in founders who are solving multiple problems for multiple customer types.

For early-stage companies, focus is the name of the game. If you can’t get great at one thing, you likely won’t get great at several things.