I did some research after my posts on IPOs and venture capital (see here and here). Through friends at VC firms, I learned how one early-stage VC firm is thinking about exits.

The VC firm is concerned by the lack of tech IPOs because it makes it difficult for them to return cash to the limited partners (LPs) who invested in their funds. These LPs are less likely to invest in their new funds if they don’t see cash distributions from funds they already invested in. To raise new funds, VCs must exit existing portfolio companies and return that cash to LPs. To address this, the VC firm has instituted a liquidity planning strategy. Here’s what they’re doing:

• Building relationships with investment banks and deepening existing relationships so they can better understand and monitor the mergers and acquisitions (M&A) market
• Hiring a team member specifically focused on growth equity and M&A who will be part of the investment team
• Conducting biweekly liquidity planning meetings whose priority is equal to that of their weekly deal flow meetings
• Educating CEOs of portfolio companies on liquidity planning

The second and third points caught my attention. They show how important the issue of exits has become to this firm. Their strategy highlights that they’ll aim for IPOs to exit their investments in portfolio companies. They plan to lean heavily into M&A and make them a priority.

I’ll keep digging into this more. As I do, I suspect I’ll start hearing more about secondary sales being part of strategy at some early-stage firms.

Yesterday I shared an update on 2024 initial public offering (IPO) stats. A conversation with a friend at a family office sparked that post. When a company completes an IPO, it sells part of the company to public market investors via stock exchanges (usually NYSE or NASDAQ). When a company begins trading on a public stock exchange, shares in the company are more liquid. Selling all or part of an ownership stake just takes clicking a button; the cash shows up in your brokerage account instantly. Selling a stake in a private company requires more time and energy. You must find a willing buyer, agree on a price, and complete the transaction. It’s inefficient and some deals move slowly, if they get done at all.

IPOs are significant milestones for venture capital investors, one of the preferred ways to exit their portfolio companies and get publicity for themselves.

As I shared yesterday, the technology-heavy NASDAQ Composite Index is near its record-high closing price this week. The high, from July of this year, is 18,647. Earlier this week, it closed at 18,573. This year, the market has trended upward, making new all-time highs. I take that as a sign that public market investors are in a buying mood (they’re doing more buying than selling, which increases prices). Also, the prominent tech companies that IPO’d in the last year or so have seen their stock prices perform well. Klaviyo, Instacart, and Reddit are all trading near record highs, although the journey to their all-time-highs was bumpy for some of them.

So if public market investors are in a buying mood and they’re buying technology companies that recently IPO’d, why haven’t more entrepreneurs and venture capital investors taken technology companies public this year? How will venture capitalists exit their investments if they can’t or won’t take companies public? These are the questions I was talking to my friend about this week. I don’t have definitive answers, but seeing how this plays out over the rest of this year and in 2025 will be interesting.

This week, I talked about venture capital with a friend at a family office. We talked about venture capital investors’ ability to exit via the IPO market, and I realized I hadn’t checked the IPO stats since I shared early 2024 stats in March. Here are the IPO stats through October 23, 2024:

• 2024: 178

Here are previous years’ IPO stats:

• 2023: 154
• 2022: 181
• 2021: 1,035
• 2020: 480
• 2019: 232

IPO activity has picked up. The number of IPOs in 2024 has already exceeded 2023’s figure and will certainly exceed 2022’s. However, IPO activity is still low—even when compared to 2019’s pre-COVID level.

I’m surprised we haven’t had more tech companies IPO—especially since recently IPO’d tech companies such as Reddit, Instacart, and Klaviyo are all trading near all-time-highs (as of this writing). Another surprising data point is that the stock market has been near its all-time high this week. The technology-heavy NASDAQ Composite Index approached its record-high closing price this past week. The high, from July of this year, is 18,647. Earlier this week, it closed at 18,573.

I find it interesting that venture capitalists and technology entrepreneurs aren’t taking companies public via IPOs, given the current public market conditions.

If you want to see the latest or historical IPO stats, look here.

This week, I talked with a friend who’s considering selling his company to a private equity (PE) firm. He’s been reinvesting profits back into growth initiatives for years, but in the future, rapid growth is less likely. He’s spent years building a business that’s his biggest asset, and now he’s looking for it to generate a return. The business is past the high-growth stage, so it has to shift from optimizing for revenue growth to increase its valuation to optimizing for free cash flow. Whether under his or a PE firm’s ownership, that’s the business’s next chapter.

Private businesses are assets, and entrepreneurs should seek a return on them. For some businesses, that means sacrificing profit to grow revenue rapidly with the goal of increasing the enterprise’s value (i.e., valuation). For others, it means increasing the distributable cash the business generates. Identifying the best way to generate the highest return is the entrepreneur’s job. Entrepreneurs should seek to avoid ending up with an asset that doesn’t generate a return. Companies with no or minimal growth and no or minimal free cash flow typically fall into this bucket.

Researching apps to help a friend solve a problem with their business, I came across two popular apps and decided to research their founders. I learned some interesting things. Each app does over $100k in monthly revenue, with 80% or higher net profit margins. I know this because both founders talk openly about revenue figures in interviews, and one even shares the revenue figures in his social media bio.

Both founders built their apps and maintain them without the help of a team. And neither is interested in scaling their company. They’re happy to grow revenue but uninterested in recruiting or managing a team. They’re hackers who want to quickly build products others find useful and will pay for. With this philosophy, they’re not focused on B2B customers; they’ve created apps that are B2C oriented. The apps are self-service with low price points ($40). Often, people will pay for one-time usage, so they’re less focused on recurring revenue. I’m assuming this works because their apps appeal to a large global market and they acquire many new customers via word of mouth, which keeps customer acquisition costs low.  

I’m intrigued by both of these indie hacker founders. I want to learn more about their approach to quickly building and launching one-person companies that generate over $1 million in annual revenue.

Current Project: Reading books about entrepreneurs and sharing what I learned from them

Mission: Create a library of wisdom from notable entrepreneurs that current entrepreneurs can leverage to increase their chances of success

Cumulative metrics (since 4/1/24):

• Total books read: 34
• Total book digests created: 12
• Total blog posts published: 196
• Total audio recordings published: 103

This week’s metrics:

• Books read: 1
• Book digests created: 0
• Blog posts published: 7
• Audio recordings published: 0

What I completed this week (link to last week’s commitments):

• Read a second biography about Samuel Irving Newhouse Sr., founder of Advance Publications and owner of famous magazines such as Vogue, Vanity Fair, GQ, and The New Yorker
• Obtained digitized copies of two books I’ve read

What I’ll do next week:

• Read a biography or autobiography
• Create book digests for two books using Google AI Studio
• Explore Google Vertex AI Studio
• Test ways to improve the quality of AI-generated book digests by fine-tuning Google’s Gemini LLM

Asks:

• None

Week two hundred thirty-eight was another week of learning. Looking forward to next week!

Current Project: Reading books about entrepreneurs and sharing what I learned from them

Mission: Create a library of wisdom from notable entrepreneurs that current entrepreneurs can leverage to increase their chances of success

What I struggled with:

• I was frustrated this week with myself and others. I didn’t get some things done that I’d planned, and that got to me. They were my responsibility, so I was disappointed in myself. But I was also annoyed about the things I didn’t have the power to push through to completion.

What I learned:

• I finished reading another biography about Samuel Irving Newhouse Sr. this week and recognized a pattern among entrepreneurs who achieve outsize success. Many have a photographic memory and make decisions quickly. Their minds make connections between the information they’ve consumed over the years and the problems in front of them, which allows them to make better decisions faster to solve their problems. In other words, their photographic memory prepares their mind to act decisively when a solution is needed.
• Google AI Studio is a “browser-based integrated development environment (IDE) for prototyping with generative models.” This looks like a good way for a nontechnical person like me to fine-tune the output of Google’s models.
• Some public sources provide scans of books, even older, hard-to-locate books.
• I’ve lived with the problem I’m solving with this book project. I understand it deeply. If I build an MVP that solves my problems, it will likely resonate with other entrepreneurs.

Those are my struggles and learnings from the week!

I met with an entrepreneur who’s had early success in a highly competitive industry. The products his company sells are readily available from competitors, so there isn’t much differentiation. His company’s current strategy is to provide products for a low price. Its prices aren’t the absolute lowest, but they’re on the lower end of the spectrum.

As a founder, I operated in a market where price-taking was the strategy. The automotive parts we sold were readily available from multiple retailers, so there was no product differentiation. This led to lots of competition. Since we all sold the same parts, each competitor tried to take the lowest possible margin that allowed it to make a small profit. With small profit margins, the focus was on volume. A little bit of profit per order and a ton of orders can add up to a decent total profit.

This strategy can work, but it often requires scale. Companies like Walmart have proved it’s possible. Winners in this type of market are often hyper-focused on efficiency. The company that can operate with the leanest and most efficient cost structure can afford to sell for less than competitors. Lower prices attract more customers. More customers mean more volume, and more volume makes it possible to negotiate with suppliers for lower costs. If executed well, this strategy can create a flywheel that grows the company.

The entrepreneur I met with doesn’t want to be in a price-taker business forever. The lack of customer loyalty and inability to control margins concern him. He wants to move from being a price taker to being a price maker. And he wants to set prices based on the value created for customers. He’s exploring creating proprietary products and services focused on niche customer problems to accomplish this.

You can build a successful company being either a price taker or price maker. Having built a company that was the former, I want my next company to be the latter.

I set up an introductory lunch for two entrepreneurs in the same industry. I’ve been trying to make this happen for months, and I’m glad that this week, it finally did. One of these entrepreneurs is seasoned, with deep relationships and wisdom accumulated from years of experience and learning about the experiences of others. The other is new to the industry; he’s had early successes and is trying to build upon them to scale.

The lunch was a success. My being there as a trusted party helped each of them build trust with the other. The seasoned entrepreneur readily answered all questions and was transparent. He shared details about lessons learned from painful failures and explained how changing market conditions led to the strategy he’s pursuing going forward. He gave comprehensive answers to questions about the ways he overcame hurdles the newbie is facing now. He also shared his best-kept secrets, including tools he uses to access hard-to-find information.

After the meeting, the newer entrepreneur told me that the things he learned during that lunch will save him months of time and considerable money. Before, he was unsure how to overcome certain hurdles. He now knows exactly what to do and not do and the people to call for help in specific areas. He left confident and excited. If he gets stuck, he now has someone credible he can call who’s been in his shoes and who’s willing to help.

Meetings like this are important, especially for newer entrepreneurs. They can completely change an entrepreneur’s trajectory. I’m excited for both of these people and can’t wait to see what they do. As the newbie becomes more successful, I hope he pays it forward and shares what he learns with the entrepreneurs who come after him.

Last week, I finished reading At Random: The Reminiscences of Bennett Cerf. It’s Bennett Cerf’s autobiography, and it details how Cerf founded and grew book publisher Random House. Cerf was a colorful entrepreneur who lived an exciting life. Being one of the few people who influenced the distribution of knowledge by choosing what books to publish put him in a unique position. If Cerf and other publishers didn’t publish a particular book, the public never had the opportunity to read it. People were attracted to him and his influential knowledge distribution, which allowed him to build relationships with notable people, including U.S. presidents and movie stars.

Cerf founded Random House in 1927, and he died in 1971. Things have changed drastically since then. Companies such as Scribe Media and Amazon’s Kindle Direct Publishing now make it easy for authors to publish their books. More books are being published, but discovery is more challenging for books that don’t have significant marketing resources.

After reading Cerf’s book and thinking about how the industry has changed, it’s clear to me that people who curate and help others discover books can bring immense value to readers. Those who excel at this can build powerful magnets that attract others to them. By attracting others to them, they will likely also attract unique opportunities and build relationships with notable people like Cerf did. Said differently, curation and helping others with discovery is a way to create magnetic luck.