I was talking to a friend who’s a big Warren Buffett and Charlie Munger fan. He shared his views on their long-standing habit of buying cash-flow-generating companies and holding them forever via Berkshire Hathaway and the Daily Journal. I’m familiar with both and with their styles of investing, but my conversation with my friend made me want to dig a little deeper.

Before Berkshire Hathaway, Buffett was investing in publicly traded companies with money from limited partners. It was 1956. He was twenty-five years old when he became an investor entrepreneur by starting Buffett Partnership, Ltd. with seven limited partners (almost all of whom were family) and raising $105,000.

Buffett is well known. He went on to have a wonderful track record as an investor. But what really intrigues me is the fact that he didn’t want to work for anyone else. Deciding to bet on himself, he started his investing partnerships. That’s strong entrepreneurial spirit combined with an investor’s mindset.

I want to learn more about his mindset in those early days and how he went about building his partnerships and investing in other companies. Buffett regularly wrote letters to his limited partners. I’ve decided to read all those letters to learn more about his early days, his entrepreneurial spirit, and, hopefully, what led to his outsize success.

Today I talked with a founder looking to start a new brick-and-mortar business. His model is interesting. He’s renting out space in a building designed to cater to an overlooked segment of entrepreneurs. It’ll be recurring revenue, and he already has a few customers committed once he launches. We talked through capital for his project. The revenue potential of the business is capped based on the square footage of the real estate, so it won’t be high-growth. He wants to do debt, but he’s faced some hurdles in getting financed with banks because their underwriting is more conservative. Venture capitalists would love to invest in him, but that isn’t an option because the company isn’t high-growth.

We started talking about the perfect situation for him, and it ended up being a mix of equity and debt. The equity would be permanent capital, meaning the investor isn’t targeting to sell in a certain number of years like a PE or VC fund. They would plan to be an owner and receive profit distributions in perpetuity. The debt would be normal term debt with fair terms. The kicker is that he’d like to do this type of deal with a single person or capital partner.

The more we talked about it, the more I thought about how big the market is. Many entrepreneurs building traditional businesses would probably benefit from a capital partnership like this, especially if interest rates stay at current levels or go higher.

This week I’ve connected with two founders approaching the end of their runway. One of them is out of cash and terminating employees. Another has three or so weeks of runway left but just agreed to terms on a new financing round. The founder is glad his company will live to fight another day. He’s sad about the expensiveness of the capital.

The round will be a down round. It will have a significantly lower valuation than the prior round and includes other terms that will leave previous investors and employees with little to no equity in the company. Existing team members will have equity, but materially less than before. The company will survive, but the CEO is aware that this round will have a negative impact on the company’s culture and relations with employees and previous investors.

Raising capital was challenging in 2022. Some founders opted to use their runway and wait until things improved in 2023. But things haven’t improved as much as they’d hoped. Many are at or near the end of their runway and must make difficult decisions.

The collapse of Silicon Valley Bank has heightened people’s awareness of uninsured deposits—deposits that aren’t insured by the FDIC if a bank fails. The limit is usually $250,000, but it can be more in certain situations.

Today I read a Bloomberg article about this topic. It discussed various ways a depositor can increase their FDIC coverage. The main way is to use a service that spreads your cash among accounts at multiple banks. The more banks you spread your deposits across, the more aggregate FDIC insurance you have and the lower your uninsured-depositor risk. The article went on to include a list of players who offer this service. The article is definitely worth a read if uninsured deposit risk is a concern.

The article also subtly mentions that these products offer competitive interest rates as compared to traditional depositor accounts at traditional banks. This is a win for savers that haven’t seen rates on deposit accounts keep up with the Federal Funds Effective Rate. The willingness of depositors to move funds to different institutions and search for higher yields will likely have a bigger impact than many people realize. For the first time in a long time, banks will have to compete for deposits and reward those who save—something we haven’t seen in almost twenty years.

This week I received a somber update email from a founder. I’ve known him for years and supported him whenever I could. I didn’t invest in the company, but he keeps me on his update email list so I can track his progress.

This email said they’ve run out of cash. They’ve been trying to raise capital for months, with marginal success, and they’re nowhere near breakeven. Employees are being terminated.

I wasn’t totally surprised, but this was still sad to read because the CEO and his team have put years into building this solution. I believe the problem they’re solving is real and experienced by a segment of the population. But I suspect it isn’t painful enough for a material number of customers to happily pay to solve it. Said differently, this solution may be more a vitamin than a painkiller.

In an environment with abundant, cheap capital, companies building vitamins can raise capital. When capital is expensive and less abundant, these companies will struggle, and some will fail.

Earlier this week I shared my thoughts on people being less inclined to fit their lives into their work. Here’s a little more on that. I recently spoke with a venture capital investor at a prominent West Coast fund. She shared that she’d reevaluated where she worked. She concluded that the West Coast, with no support system and her aging parents thousands of miles away, wasn’t conducive to a good life with a young family. She ended up moving back to her hometown and working remotely, with the firm’s support.

I’m glad she was able to make a move that works for her family without limiting her options professionally. It’s encouraging to hear that her firm embraces this for her and other team members. I’m curious to see how venture firms react once they realize founders are making similar evaluations. Founders are likely to want to build companies in locations that suit their personal lives rather than relocate to be closer to Sand Hill Road.

I read a quote that stuck with me:

It had long since come to my attention that people of accomplishment rarely sat back and let things happen to them. They went out and happened to things.

                                                          – Leonardo da Vinci

Are you driving what’s happening or being driven?

I was debating the importance of culture with friends recently. Specifically, I said it’s a big competitive advantage in recruiting and retaining top talent. A good culture can be as or more important than salary. Not just in start-ups, but all organizations. An example I gave was that star athletes will sometimes take less money to stay with or join a team with a great culture.

During this debate, one friend asked me to define “culture” in one sentence. I told him it’s how people act when nobody’s looking.

If people are doing the right thing when nobody’s looking, you’ve got a good culture. If not, you’ve got a bad and possibly toxic culture. Guess which environment talented people with good values want to be in.

A founder told me about a deal he’s considering doing. It’s a deal for equity investment in a company. This start-up has runway and is executing, but it’s open to extending runway for more cushion, so this deal is appealing to the founder. I listened to everything and asked about the person presenting the deal.

The founder told me the person is known for using aggressive tactics to tilt things in his favor. His reputation among people he’s worked with isn’t great. Knowing this, the founder told me, he negotiated a deal that limited this person’s ability to exert control over the business or to influence it. As he put it, he’d negotiated a good deal.

There’s no such thing as a good deal with a bad person—even if the terms on paper are fair or in your favor. A bad person doesn’t comply with what’s written on paper. They play by their own rules (if they follow any rules). They will do unscrupulous things to get the outcomes they want. You can enforce what’s written on paper, but that usually requires involving courts, which is expensive, time consuming, and inherently risky (and bad people in business know that and take advantage of it).

I’ve learned from my experience as a founder and investor that working with bad people never ends well. So before I start negotiating terms, I focus on figuring out what type of person I’m dealing with. If they’re a bad actor, there’s no need to negotiate terms. Because I think it’s impossible to do a good deal with a bad person, I don’t do deals with bad people.

In 2019 I shared an idea with a few venture investors. Slow- or no-growth venture-backed technology companies weren’t all bad solutions or operating in bad markets. Some solved painful problems that had big potential. Some struggled because of poor execution, team dynamics, or other factors that I thought could be fixed. Surely some of these companies were worth fixing and could be grown into profitable companies—or so my thinking went.

The investors didn’t think the idea was viable. They made some points I hadn’t considered. Some I agreed with, and some I didn’t. In hindsight, I see that the low-interest-rate environment meant these companies probably could raise capital and stay alive, and the capital raises likely could happen at (sometimes modestly) increased valuations, meaning the company value was technically going up.

At that time, it was hard to acquire these companies at valuations that reflected their true state because the founders and investors had options. They could raise capital and keep going, likely at a higher valuation. The prospect of an acquisition wasn’t appealing unless it came with a material premium, which was less appealing to the acquirer. The cost to acquire these companies and the effort required to get stakeholders on board with a deal just wasn’t worth it. In many cases, starting a new company was easier.

I revisited this idea recently. Higher interest rates have reduced valuations on publicly traded technology companies. For context, Bessemer’s Cloud Index says bottom-quartile SaaS companies were trading ~6x forward revenue in 2019. Today they’re trading at ~3x. I suspect late-stage private companies are trading at a discount relative to public companies. Some of these private companies raised capital at historically high multiples in 2020–2022, which makes raising capital at today’s multiples challenging. Translation: challenged, unprofitable technology companies have limited options. Raising capital to extend runway isn’t easy, and it’s unlikely to occur at an increased valuation.

Timing matters a lot, and 2019 wasn’t the right time for what I was thinking. But I’m wondering if the time is right now. Will we see a sharp increase in unprofitable and struggling technology companies being acquired as turnarounds in the next year or two?