How an Emerging VC Manager Reached First Close
This week, I caught up with an emerging venture capital manager who’d held the first close on his $100 million fund, which is the firm’s second fund. They closed on $33 million and are actively working on closing the remainder—they have a line of sight to the full $100 million. As expected, he said fundraising has been harder than anticipated, but he did share a few things that have helped him get to the fund’s first close:
- Exits – His first fund has had three portfolio companies exit. Another pending exit of a portfolio company to a large publicly traded technology company is closing soon. These exits have demonstrated to potential LPs that he can find promising companies early and return cash to LPs.
- Thesis – Fund I was a generalist fund. He realized his team is best suited to invest in specific areas given their backgrounds—and that other funds generally struggle to invest successfully in those areas because they lack the relationships and deep understanding to properly do their due diligence. Fund II now has a thesis around these areas, which has resonated well with potential LPs.
- Team – The team he put together has a stellar track record in the roles they held before joining his firm. They have deep domain expertise and relationships in the areas they invest in.
- Hustle – He leaves no stone unturned and stays hungry. He’s diligent about follow-up, asking for intros, and delivering what he committed to on time.
My big takeaway from our chat was that his success has been driven by his tenacity, reflection, and willingness to continually learn and evolve throughout the fundraising process. I’m excited for this manager and looking forward to following his journey.
Winning a Small Market by Being Low Tech
I love talking shop with entrepreneurs. Today I was at a social gathering where an established entrepreneur told me about his approach to acquiring new customers. He runs his business out of Atlanta, but there’s heavy competition (i.e., low margins) in Atlanta. He’s from a smaller city three hours from Atlanta. The people in that community don’t have access to the caliber of products his company sells. They’re used to paying top dollar for low to medium quality and driving an hour to do so.
He devised a simple marketing strategy. He’s an alum and former athlete at the local high, so he sponsors the football and basketball teams. His company logo is painted on the football field, and every time the home team scores, the announcer reminds the fans that his company backs the team. He bought the scoreboard for the basketball team with his logo displayed front and center. His goal is to stay top of mind with the people in the community, and it works. When they’re ready to buy, they think of him. He makes the sales process electronic, simple, and smooth. He arranges for purchases to be delivered to their door. They get a better product at a fair price and support a business that supports the community. This strategy is highly effective. He gets a steady stream of customers from this low-tech approach, and his average cost to acquire a customer is ridiculously low.
What this entrepreneur realized was that there’s an underserved customer niche that he understands better than most. He focuses narrowly on them. He markets to them in a way that resonates with them and that has the dual benefit of doing good in the community. He made the sales process something they could do from their home, which they weren’t used to. The end result is that he’s built a thriving business and is the market leader in that city using a very low-tech and inexpensive marketing and sales strategy.
Charlie Munger died today at the age of 99. Most people know him as Warren Buffett’s right-hand man, but he was an accomplished investor before he joined Berkshire Hathaway. As I’ve learned more about public-market companies this year, I’ve also learned about the investors who’ve generated outsize returns in public markets. Munger was one of them. I’ve enjoyed learning about his investing philosophy, mental models, and unique way of viewing the world. He was a gifted person and investor who lived life by his own rules.
RIP Charlie Munger.
Amazon vs. A Shipping Duopoly
Small-parcel shipping is an industry I learned about as a founder. We spent over a million dollars on shipping in some years, which forced me to learn the industry. I saw a duopoly firsthand and navigated its impacts on our operations. I’ve continued to keep tabs on this space. A few years ago, I predicted that Amazon’s shipping service would be bigger than FedEx and UPS. I didn’t know when it would happen, but I was sure it would, given the trajectory at the time and the need for a more innovative player in the space.
Today, the Wall Street Journal reported that Amazon’s parcel volumes surpassed those of FedEx and UPS for the first time. This year, through Thanksgiving, Amazon has delivered over 4.8 billion packages, a figure that’s projected to reach roughly 5.9 billion by year-end. Through the first nine months of this year, UPS has processed 3.4 billion parcels. FedEx processed right at 3 billion parcels in the fiscal year ending May 31, 2023. Amazon started this service less than a decade ago and is now a formidable competitor (and one of UPS’s largest customers).
I saw this coming years ago when I was a founder, but FedEx and UPS were less worried because they thought it inconceivable that Amazon could create a competing logistics network in less than a few decades. FedEx’s CEO and chairman, in 2016, even called the idea of Amazon competing “fantastical.”
Amazon’s ability to become a leader in a space dominated by a duopoly for decades is a clear example of why companies shouldn’t get complacent. They should keep innovating and take growing competitors seriously, even if they’re small now.
The small-parcel industry hasn’t kept up with changing consumer needs. I think Amazon becoming a formidable player in this space will ultimately lead to more innovation and a better consumer experience. I can’t wait to see how the industry evolves in the coming years.
In 2022, I realized the power of a foundational habit. Identifying and committing to a daily foundational habit greatly increased the probability of my sticking with other daily habits. When I consistently complete all the things that I decided need to be daily habits, my chances of reaching a desired destination or objective increase drastically. I like focusing on habits and systems over results and goals.
With the new year approaching, I want to start working on my 2024 habits. Before the new year begins, I want to crystallize where I’d like to be by the end of 2024, identify the new habits that align with that destination, and identify the foundational habit that I need to focus on.
I’ve been spending more time researching public-market companies this year—specifically, technology companies that offer solutions I’m familiar with whose founder is still CEO. I’ve noticed that a lot of the public companies that fit these criteria were backed by venture capitalists (VCs) before they went public.
I’ve found a hack for researching these CEOs and companies. The VC firms that backed these companies often have a deeper understanding of them and their CEOs than most because of the duration and closeness of their relationship. (They’ve been close to the companies since well before going public was a possibility.) Companies that go public are often high priority for the VC investors who back them, so some investors will speak and write about them extensively. Much of this content is available online, and I’ve found it often contains golden nuggets about these companies or their CEOs that aren’t in any public filings. In combination with public filings, I’ve found this content helpful in evaluating whether a CEO and company are good or the company might be one of the rare great ones.
Weekly Reflection: Week One Hundred Ninety-One
This is my one-hundred-ninety-first weekly reflection. Here are my takeaways from this week:
- Thanksgiving – It was great to have time off yesterday to spend time with family and friends and eat amazing food.
- Reading – I’m using my downtime during this holiday to hit my reading goal.
- VC firm origin stories – Company origin stories are always interesting. This week I stumbled upon a podcast on which the origin story of a successful VC firm was shared by one of the firm’s founders. It was great and got me thinking about a few ideas. I’m going to look for more origin stories of unorthodox investment firms.
Week one hundred ninety-one was another week of learning. Looking forward to next week!
In-Kind Distributions to Limited Partners
A few months ago, I shared my thoughts about venture capital funds distributing returns to limited partners (LPs) via cash or in-kind distributions (i.e., stock in publicly traded companies). I wondered how many venture capital firms use in-kind distributions so their LPs will have the option to own shares in great companies for decades.
It’s hard to know how a venture capital firm makes distributions unless you work for it or are an LP in one of its funds. But I recently came across a public filing indicating that a venture capital firm distributes shares in a public company to its LPs. These shares are worth hundreds of millions of dollars. I found this interesting because this firm made an early-stage investment when the company was very young, around fifteen years ago. The company has been public for several years. The firm could have easily sold the shares and returned cash to LPs, but it opted to do the work of returning shares in the company to LPs. The filing also indicates that the venture capital firm general partners took their carry from the deal (i.e., profit sharing) in shares and haven’t sold those shares.
I don’t have insider information on this public company or the firm, but I assume that the venture capital firm’s partners are bullish on the long-term prospects of this company and want their LPs to have the opportunity to participate in its future upside.
I Touch Base to Stay Abreast of Trends
I like to keep my finger on the pulse of new technologies and emerging trends, but it’s easier said than done. One of the ways I do it is by catching up with early-stage founders who are building in that space. The founders in the early days of launching a company are typically as close to ground level as you can get. They’re usually hands on keyboard and in the weeds of everything. Hearing how they’re applying new technologies and what positives and negatives they’ve experienced helps me understand things from a practical perspective. I also try to make sure these conversations are bidirectional by providing feedback on anything that’s on the top of their mind (that I can help with).
I’ve found that this is a great approach to staying abreast of new things and maintaining relationships with and giving back to early founders.