Today marks the end of my one-hundred-forty-second week of working from home (mostly). Here are my takeaways from week one hundred forty-two:

• Recession – Discussions with a few friends and more headlines revolved around recession and the tough road ahead in 2023. I assumed that recession was a given for most, but it feels like the reality of it is hitting more and more people the closer we get to 2023.
• Fewer meetings – I was intentional about keeping my calendar clear, so I was more productive and focused. A few unexpected things happened, but they didn’t derail me. I plan to repeat this next week.
• Christmas – One more week until Christmas. This is the final push for the year.  

Week one hundred forty-two was a productive week. Looking forward to next week!

I listened to some folks from a multifamily office explain how they help clients (wealthy families or family offices) invest in tech start-ups. It works like this: The client tells the multifamily office they want to invest in tech start-ups. The multifamily office then talks to various venture capital fund managers that match the client’s parameters (stage, sector, etc.). The multifamily office sends the fund docs to the client for review or sets up meetings between the fund manager and client. If the client likes the manager, they invest and hope to invest with them for a number of funds.

As I was listening to this, I thought about the various layers:

family > multifamily office > venture capital fund manager > start-up

This process to match a tech start-up with the capital from a family seeking to invest in start-ups is inefficient and highly relationship driven. This is just one example based on one conversation, but it’s a good example of the inefficiency endemic to matching capital and start-ups.

I had a conversation with a friend about sleep. She’s reading Why We Sleep: Unlocking the Power of Sleep and Dreams. I haven’t read the book, but I’ve heard good things about it over the years and have it on my to-read list. She shared some of the things she’s learned. The gist of it is that sleep is important to the body and mind (e.g., decision-making). The things we put in our body can affect the quality of our sleep, which has a ripple effect. Changing time zones frequently also isn’t ideal for the body’s circadian rhythms.

When I first started my company, I didn’t make sleep a priority. I pulled all-nighters, functioned on four or five hours of sleep a night, and traveled a lot. I usually felt bad mentally and physically but pushed through it. Over time, I realized that sleeping and taking care of my body are important because they boost my energy level and mental clarity. I embraced an exercise routine and targeted seven to eight hours of sleep. These changes helped me feel better mentally and physically, which no doubt benefited my company too. I now make sleep a priority and have even done research to learn more about the optimal sleep situation for my body.

Working a hundred hours a week and getting minimal sleep is glorified in the start-up world, but the reality is that that’s awful for you mentally and physically. Every so often, when you’re pushing to get something important completed, it makes sense . . . but week in, week out—no. It leads to founder burnout and can lead to a burnout culture where you churn through good people. Let me be clear: I’m not saying you shouldn’t work hard. Hard work is critical to founder success, but hard work doesn’t have to equate to not taking care of yourself. The human body isn’t meant to go without adequate sleep for long periods of time. If it does, that shows up in other ways. I don’t have data on this, but I suspect that people who live this kind of lifestyle for years have success professionally but pay for it with more health challenges than others their age.

People think founders are superhuman, but they aren’t. They’re human. They get only one body just like everyone else. They have to take care of themselves, and sleep is a big part of doing so.

I chatted with someone who used to work at a family office with a real estate background that manages a large investment portfolio across different asset classes. This person shared a few things that stuck with me:

• Opportunities to create value and wealth in real estate won’t look like the past. The return profile will look different. Individuals and families who own real estate will likely keep it and pass it on for a variety of reasons (taxes is a big one). The acquisition prices seen in the last few decades likely won’t be repeated, making it harder for new entrants to create returns like those of people who started thirty or forty years ago.
• Other asset classes, such as public equities, aren’t great for multiplying wealth.
• Venture is the best asset class for value and wealth creation. It’s a great asset class for those looking to multiply wealth, not just preserve it. But it’s one of the hardest asset classes to penetrate if you don’t have a background in it or existing relationships. It’s also hard for family offices to be successful if they don’t have the appropriate risk appetite and portfolio construction strategy (i.e., in relation to check size and stage). Family offices like venture as an asset class but can struggle to have success.

Interesting thoughts. Some of them I’ve heard from people in other family offices I’ve talked with. We’ll see more capital flow toward owning private companies (i.e., private equity), with many family offices and other institutions specifically wanting access to early-stage private companies (i.e., venture capital). Overall, I think this is good for entrepreneurship and founders. I do think we’ll need to see improvements in how that capital (and other resources) are matched to founders. At the early stage (seed and pre-seed), the process is massively inefficient.

I spent today working on a new idea. There were legal questions I couldn’t answer, so I looped in a lawyer. He helped me understand the legal nuances and potential challenges I should be aware of. I also learned that there are a variety of different ways to do what I’m trying to do. I can make it as complex as I want from day one. I made sure to ask what the least complex way to get this idea off the ground is.

Complexity adds time and money. When you’re trying to get something new off the ground, complexity is your enemy. You want to quickly get something out that works, and complexity slows you down. Now, I’m not saying you should put yourself in legal or moral jeopardy. You should always be on the right side of those things, but beyond that, you don’t need complexity to go from zero to one.

After consulting with a lawyer, I’m opting for minimal complexity and a quick start. Once things are launched and I have more data, I can add more complexity if I need to.

Markets are important. They have an outsize impact on a company’s trajectory. A small but growing market with the potential to be large is great. And rapidly growing markets can be good, but only absent cutthroat competition that erodes margins.

When founders are looking in established or growing markets, they should think about white space. In a market that isn’t new and that’s dominated by legacy companies, there may be a segment of the market that the incumbents aren’t worried about. It could be too small, perceived as having too-low margins, etc. Whatever the reason, the incumbents are happy to let smaller start-ups take the business. The flaw in the incumbents’ approach is the failure to realize what’s possible. Can this small white space become massive? Can a growing trend overtake and upend the legacy businesses? By the time the possibilities play out, it can be too late for the incumbents. The once-small start-up has become a force to be reckoned with, forever changing the industry and taking incumbent market share.

Scrappy founders who see a problem they’d like to solve in a market with incumbents shouldn’t let the thought of competing with incumbents immediately deter them. Instead, they should consider whether there’s a white space that could serve as a noncompetitive beachhead. If you find one of these in a great market, you may have found a great entrepreneurial opportunity.

This week I was talking with a founder friend who’s building a new organization. The organization has ambitious goals and is trying to do something that hasn’t been done before. We spent time talking about the team he needs to accomplish this. He feels like a few critical pieces are missing. We ultimately landed on these team-related things as being missing:

• Incentives – The organization has a clear mission and vision and a defined set of milestones, but the team has started to slip on achieving the milestones. I dug in and realized the team isn’t incentivized to achieve them. Said differently, the team isn’t aligned to mission. They get compensated regardless of performance. Recreating the compensation structure to include payouts based on achieving milestones will align and motivate everyone. It may also help attract high-caliber people for open roles on the team.
• GSD person – Many small but important things have slipped through the cracks. Sometimes they weren’t caught until it was too late, causing the team to miss milestones. My friend realizes he needs a GSD (get stuff done) person. This person is strategic enough to have high-level conversations but able to execute on high-priority strategic projects. They’re a generalist, meaning they can dive into any area and figure it out. They will report to the CEO and be given the authority to ruffle feathers in the name of getting stuff done.

When you’re trying to do something that hasn’t been done before, sometimes you don’t know what pieces you need, and you figure it out as you go along. It’s like building the plane while you’re flying it. My friend is doing exactly that with his team. I’m curious to see what he implements and whom he hires. I think these two changes will have a significant positive impact on his organization.

Today marks the end of my one-hundred-forty-first week of working from home (mostly). Here are my takeaways from week one hundred forty-one:

• Duh – Sometimes what you’re looking for is already right in front of you. This week was a reminder of that.
• YouTube – If you want to learn from someone who’s somewhat prominent and not in your network, look them up on YouTube. They may share what you want to know in a video. Or better yet, they might drop their email in one of the videos. You can email them and refer to having watched their talk, which is somewhat flattering and better than a cold email.
• Home stretch – Two weeks until Christmas. I’m being more intentional about my calendar for the next two weeks. I want to stay focused on getting some important things completed.

Week one hundred forty-one was a focused week. Looking forward to next week!

One of the things I like to learn about a founder is their origin story. How were they raised, and what were they doing in life that illuminated the problem their start-up is solving? Sounds simple, but the origin story can be a leading indicator. Today I listened to a few fund-of-fund investors critique an emerging venture capital fund’s pitch deck and give guidance about how emerging managers can best pitch limited partners (LPs).

A consistent piece of advice for all the funds of funds was that emerging managers should lead with their story. The pitch deck shouldn’t jump right into thesis, investment track record, or how much the manager is raising. It should start with background on the manager—what their journey has been and how led them to raise their own venture fund and come up with their investment thesis.

LPs are buying a portfolio of to-be-determined portfolios of investments. Ideally, they’d look at previous fund investments to gauge what a manager’s future portfolio of investments might look like. However, many emerging managers won’t have an investment track record. When that’s the case, LPs are investing in the managers. They want to get to know who the managers are, how they think, and why they are the way they are. Understanding what makes them tick will give LPs more comfort around the person they’re backing and the nonexistent portfolio they’re buying.

This feedback makes a lot of sense, and it was a reminder that emerging VC fund managers are basically founders. Telling an authentic, compelling story—as a manager or founder—can be the key to getting early believers on board.

I listened to a fund of funds investor give her perspective on how her team and other large institutions have changed how they evaluate venture fund managers. Their focus has shifted from increasing portfolio valuation (i.e., markups on start-ups) to distributions (i.e., cash returned by exiting start-ups). Part of the reasoning was around private market valuations’ lag in correcting and its impact on portfolio allocation.

Venture capital investments are private investments, so finding their correct market price usually happens when new funding rounds happen. If a company last raised in 2021, the company’s valuation is usually marked at the 2021 fundraising-round price. Public companies’ valuations are adjusted in the public markets every day, and many have been on a downtrend in 2022. Because venture investments are slower to be marked down, some institutions are over-allocated to venture capital relative to their entire investment portfolio.

For example, venture capital might have accounted for 8% of an investment portfolio in fall 2021 when valuations were high. The max allocation for venture capital in the investment portfolio is 10%, so that 8% allocation was below the limit. As the public equities in the portfolio decreased in value in 2022, venture capital values remained flat (they continued to be marked to their 2021 level because companies are avoiding raising in this environment). That means venture capital might now account for 12% of the overall investment portfolio, which is above the max allocation.

Given this dynamic, the fund-of-funds investor said her team is now more focused on distributions: how much capital have fund managers returned to their limited partners (LPs). For those overallocated in venture capital, distributions are an ideal way to increase cash allocation and reduce their venture capital allocation. Managers who have returned or are returning cash are viewed in a positive light.  

She mentioned that part of a venture fund manager’s job is to know when to sell. Given the rich valuations in 2020 and 2021, her team is looking closely at 2017 or older fund vintages that didn’t use the rich valuations as an opportunity to distribute capital back to LPs.

Very interesting how the LP focus has changed from valuations/markups to cash returns. I suspect this focus will be top of mind for more venture fund managers and trickle down to CEOs of their portfolio companies. This, combined with a tough IPO market and other variables, could make 2023 an active year for acquisitions.