Share Your Early Ideas

This week I caught up with a lawyer friend. We touch base regularly to catch up. I tell him what I’m working on and thinking about (personally and professionally), and he does the same.

During our recent chat, I shared some early ideas that weren’t fully fleshed out. My expectation was that he’d ask a few questions and we’d move on to what was going on in his world. To my surprise, he quickly caught on to what I was thinking and agreed with part of my hypothesis. In fact, not only did he get it, he pointed me to a little-known database that could provide valuable information to help me execute this idea. He walked me through how to navigate the database and understand the information returned as results.

This meeting was a reminder to share your ideas with people. Doesn’t matter if they’re rough or half-baked; share them anyway. You never know what someone knows or who someone knows that could help you. There’s way more to gain from sharing than not sharing your ideas.


Weekly Reflection: Week One Hundred Sixty-Five

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

  • Investing opportunities – I had a great conversation with a good friend and fellow entrepreneur about investing. Convincing people to take the action you want them to take is critical to success in closing a deal. But building a strategic and thoughtful process to identify investment opportunities before other people do is key in investing. After studying successful investor entrepreneurs who’ve had outsize success, I know that the great ones realize this and built solid processes.
  • Twin tailwinds – I shared a post about twin tailwinds. I’m thinking more about how to use the concept of twin tailwinds to understand market cycles and spot overlooked investing opportunities.
  • Schedule – This was the fourth full week of my schedule experiment. The results are clear. Starting my day by reading long-form writings by experts on topics I want to learn more about has been a game changer. I’ve gained knowledge at an accelerated pace, and I’ve had new insights more frequently. This will become a daily habit. I still need to tweak goals and a few other things as I continue this habit.

Week one hundred sixty-five was a productive week. Looking forward to next week!


Investor Entrepreneurs, Like Other Entrepreneurs, Need a Unique Insight

I’ve spent a good amount of time developing an understanding the journey of emerging investment managers. These are people who want to start a company that focuses on making money by investing capital. Many people think of emerging VC fund managers, but it can include anyone investing other people’s capital such as private equity and real estate fund managers. I think of these people as entrepreneurs who happen to be investors, or “investor entrepreneurs.” They want to invest as their profession, but not by working for someone else. They want to create their own investing company and work for themselves.  

These investor entrepreneurs are no different from any other founder. The journey and struggle are the same; the details vary a bit because of the industry and business model.

Most great founders have a unique insight. They understand a problem well, seeing something about it that others have missed. This observation is their unique insight; it gives them an edge in developing a solution that creates real value for potential customers.  

To be successful, investor entrepreneurs need the equivalent. They need to understand and see an investing opportunity that others don’t understand, have overlooked, or aren’t aware of. They need to understand how they can generate superior returns because of this insight. This unique insight is their investing edge, their investment thesis.

A founder with a clear, unique insight, a solution based on that insight, and the ability to execute has a higher probability of success and of raising capital from VC funds. An investor entrepreneur with a clear investment thesis, a strategy to generate superior returns based on that investment thesis, and the ability to execute that strategy has a higher probability of success and of raising capital to invest from limited partners.


The Twin Tailwinds That Drove 2021’s IPO Explosion

A friend saw my IPO post and asked a question: what was the driving force behind so many IPOs in 2021? In my opinion, two things happened simultaneously:

  • Sales explosion – Many companies, especially tech companies, saw sales explode during 2020 and 2021 because of COVID-19. Years of projected growth were realized in months in some of the more extreme examples. In many (not all) cases, sales growth leads to higher free cash flow or profit. In others, companies accelerate their reinvestment into growth initiatives, driving even more sales growth but forgoing higher profits and free cash flow. When valuation multiples are applied to exploding sales, free cash flow, or profit (investors pick the appropriate metric based on the industry), you get an explosion in what the company is worth, too.
  • Multiples explosion – Many companies are valued based on a multiple—for example, price to earnings. Investors love growth, and rightfully so. Sustained sales, free cash flow, or profit growth can lead to staggering results over a long period of time once compounding is factored in. This, as well as other factors like ZIRP, makes investors comfortable paying a higher valuation multiple for a growth company. When they pay a higher multiple, that means the multiple has grown or expanded.

Growth companies usually benefit from a single tailwind, sales growth, increasing company value. The multiples used to value them would fluctuate a bit, but not much. In 2020 and 2021, companies found themselves in a rare situation. Sales and multiples were exploding simultaneously. This wasn’t a tailwind. It was twin tailwinds on steroids. The result was an explosion in what companies were worth well beyond what we’d seen before. Valuations went to the stratosphere.

Let’s use an example to quantify the difference. Suppose that a $100 million annual revenue SaaS company is growing at 40% annually and valuations are determined by a sales multiple of ~10X trailing annual revenue. There’s no pandemic. Here’s what the company is worth a year later:

  • $140 million annual revenue ($100M * 1.4) * 10 (sales multiple) = $1.4 billion valuation

Now let’s factor in the pandemic. The same $100 million annual revenue SaaS company grows 100% and multiples expand to 20x annual sales because of COVID tailwinds (they peaked at 29x in 2021 per the BVP Cloud Index):

  • $200 million annual revenue ($100M * 2) * 20 (sales multiple) = $4 billion valuation

In the COVID scenario, revenue is ~43% higher, the multiple is 100% higher, and valuation, as a result, is 185% higher—valuation expanded 4.3 times more than revenue. The company’s value is $2.8 billion more than it would have been without the pandemic’s effects. This demonstrates the power of twin tailwinds.

Here’s the math:

  • $140M revenue * 1.43 (43% more) = $200M revenue post COVID
  • $1.4B valuation * 2.85 (185% more) = $4B valuation post COVID
  • 185% (post COVID valuation growth) / 43% (post-COVID revenue growth) = 4.3x

Given this situation, many founders and investors opted to take their companies public while valuations benefited from the twin tailwinds. They were able to sell some or all of their companies’ shares at valuations that were abnormally high by historical standards.


My System for Picking a Blog Post Topic

I’ve been sharing my thoughts daily for over three years now. I was recently asked how I’ve come up with a topic every day for 1,000+ consecutive days. It’s taken a bit of time, but I’ve developed a simple system. Here’s how it works:

  • I keep in the back of my mind that I must write a post. So, I’m subconsciously on the lookout for insights and interesting information. If I read an article that catches my attention, I note it. If I’m thinking about something or have an insight, I note it.
  • I capture a note in one of two ways. The first is email. I’ll send myself an email with the thought as the subject line. Sometimes I add links or additional thoughts in the body of the email. I tag these emails as blog content and archive them. The second is the Notes app on my iPhone and laptop. I have a single note with a running list of thoughts, insights, and links to other people’s writings that caught my attention. Lately I’ve been capturing more notes via email.
  • At the end of each day, I review emails tagged as blog content and my Notes app. I choose the topic that resonates most with me. Then I think about it a bit more and start writing.

The most important and unexpected benefit I’ve gotten from this system is that it instilled in me the habit of capturing my thoughts. Recording my “lightbulb” and “shower” moments has been invaluable. Instead of losing these thoughts when the moment passes, I now keep them top of mind or at a minimum recall them later. This has enhanced my reflection process and ability to uncover insights I otherwise would have missed.

That’s my system. It’s simple and fairly low-tech.


Convinced, but Flexible Too

I tend to be someone who has strong opinions about a decision once I’ve made up my mind. When I was younger, I’d stand with my position no matter what. I wasn’t open to considering other perspectives or new information. My mind was made up, and it wasn’t changing. That trait led to some painful situations when I’d clearly made the wrong decision but refused to admit it.

Today I try to have flexibility in my thought processes and decisions. I still have conviction about my decisions, but I’m much more open to listening and trying to understand perspectives I haven’t considered. Equally important is new information. When facts or data that I didn’t previously have come to my attention, I consider them with more of an open mind.

Being open to listening and reviewing new data doesn’t necessarily mean that I change my decision, of course. Often, I stick with it because I still feel it’s the right decision, all things considered. But there are times when being open-minded has allowed me to accept that I’ve made the wrong decision, reverse course, and avoid unnecessary pain.

Now, when I’ve made a decision, I make sure that along with having conviction about it, I have mental flexibility too.


How I Consume Books I Value the Most

Over the years, I’ve used Audible to enhance my book consumption. I like the service and have found it useful when I’m doing other tasks, such as driving or exercising on a treadmill. It isn’t the ideal way to consume all books, though, especially the ones I value most.

The books I value most teach me something new or enrich my understanding of something. This means I’m usually reading the thoughts of someone who understands a topic far better than I do. I need to maximize my understanding by taking notes, highlighting important sections, trying mathematical formulas with my own numbers, etc. This is best done when I’m singularly focused on what I’m reading, not multitasking. And it’s best when I have a way to capture my reactions to or thoughts about what I’m reading.

For these reasons, I consume this kind of book the old-fashioned way: I read the physical book. I get a lot of value from having it. Annotating the book improves my comprehension and makes it easy to find key concepts and refresh my recollection of them. It also means that I’m usually focused on reading the book and not doing anything else.

I think services like Audible and devices like Kindles are great, and I love them, but I get the most value from certain kinds of books by consuming them the old-fashioned way.


An Overlooked Reading Hack

I enjoy reading nonfiction books. Books that recount historical events or people’s lives and books that enhance my understanding of complex subjects are my favorites. I’ve come to appreciate these books for more than just their content. Well-written nonfiction books can be great jumping-off points.

Most well-written nonfiction books take a long time to create. The authors spend lots of time researching their topic. They read and talk to people to make sure their facts and understanding are sound. The amount of information found and consumed during their research can be staggering. Identifying and accessing this information by applying their investigative skills can consume a material amount of time and energy.

What most people don’t realize is that authors often share their research process in their books. They cite the sources of facts and important concepts throughout the text. But more importantly, they often have a notes section at the end of the book that lists all the articles, books, interviews, etc. they researched and used in the writing of the book.

The notes section of a great book can be an overlooked gold mine. It gives me a list of additional vetted sources of knowledge about a topic I’m interested in. The author’s countless hours of research are summed up in one easy-to-read list. I’ve used the notes sections of books many times to find other wonderful writings and people I otherwise would have never known about.

When I finish reading a good book, I make a point of reviewing the notes section for golden nuggets and bread crumbs.


Weekly Reflection: Week One Hundred Sixty-Four

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

  • Schedule – This was the third full week of my schedule experiment. My purpose for reading something and the type of material affects how fast I read. For example, if I’m trying to understand a new, complex subject, I read more slowly (which I think is a good thing). Mornings are best for me for this kind of reading.
  • Supply and demand – When supply far outpaces demand, people on the supply side will experience unwanted outcomes. In investing, this can occur when capital far exceeds quality destinations for capital. It’s better to be investing when the opposite is true.

Week one hundred sixty-four was a productive week. Looking forward to next week!


IPOs: 2021 Was Gargantuan

An initial public offering (IPO) occurs when a private company is publicly listed on the stock exchange. It means the public can buy or sell shares (ownership) in a company. An IPO is a liquidity event favored by founders and venture capital firms because it gives them the liquidity of an auction-driven market that they don’t have when a company is private. Their ownership in a company can be easily sold or added to with a few clicks. And the funds from a sale are usually available instantly. That’s much more efficient than a private transaction.  

I was curious about IPO historical activity. Here’s what I found for the number of IPOs annually:

  • 2018: 255
  • 2019: 232
  • 2020: 480
  • 2021: 1,035
  • 2022: 181

The number of IPOs in 2021, in comparison with other years, was huge. That year didn’t just have the highest number of IPOs in the last five years (by a large margin), it saw the highest number of IPOs in in more than twenty-five years (I didn't find reliable data before this). And that includes the internet bubble of the late nineties.

This data was eye-opening—2021 was gargantuan. It was the best year in the last quarter century in terms of companies accessing liquidity via public markets.

Number of annual IPOs is a stat I’ll begin watching more closely.


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