Today I listened to Marcelo Claure and Shu Nyatta discuss their new growth-stage fund, Bicycle Capital. Both of them had spent several years investing at SoftBank’s $7.6 billion Latin America Fund (source).

Claure shared that $200+ million of the new fund’s $500 million capital target will come from Bicycle partners. He and Nyatta went on to explain that venture capital partners investing a significant amount of their own net worth in a fund has an impact on how the funds are invested. When they’re investing their own money, it becomes more personal. They’re not just allocating other people’s capital; rather, they’re looking for people they can partner with who will be good stewards of the partners’ capital. The investing goes from thinking in terms of bets to thinking in terms of partnership. Also, the returns matter more because they affect the personal wealth of the venture capital partners.

I agree with Claure and Nyatta. I’ve learned best and focused more on partnering with entrepreneurs when I’ve had skin in the game via my own capital.

Albert Einstein famously called compound interest the eighth wonder of the world. Compounding is indeed a powerful force. Yet I’ve noticed that many people don’t understand just how powerful it is. More importantly, they don’t understand that compounding is applicable to other aspects of life, not just money. Relationships, effort, knowledge—all of these and more can benefit from compounding.

I tried recently to communicate the power of compounding to someone but failed miserably. The concept didn’t resonate with them. It wasn’t their fault. I realized I wasn’t doing a great job of explaining it in a simple way that everyone can grasp. I searched for a simple way to communicate this powerful concept and found a helpful monetary example.

Start with a penny. Double it on day 2. Then keep doubling the amount you have every day for thirty days. How much do you think you’ll end up with? The answer is over $5 million, an astronomical amount, all because of compounding. To be exact, $5,368,709.12. Not sure how you go from a penny to over $5 million in a month? Here’s a breakdown of what happens when you double the amount you have every day:

A few things to note:

• It takes 15 days for the value to surpass $100.
• On day 18, the value surpasses $1,000.
• On day 21, the value surpasses $10,000.
• On day 25, the value surpasses $100,000.
• On day 28, the value surpasses $1,000,000.

This is a great example that most people can understand. It demonstrates that most of the benefit from compounding is backloaded.

• Days 1–15: $100 added
• Days 16–30: $5.3+ million added
• Days 28–30: ~$4.7 million added (or 88% of the final amount) in 3 days!

This example also does a great job of showing how powerful it can be to stick with the process even though the payoff is small in the beginning. The small amount you have in the early days provides the base required for future compounding. Without the $100 gained in the first 15 days and the continued compounding, you never reach the $5.3+ million on day 30.  

While this example is monetary, the concept of compounding is applicable to various aspects of life. If you start something and stay consistent over a long period of time, you’ll likely see outsize benefits toward the back end due to the compounding of your consistent efforts.

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Today Bloomberg reported that Tiger Global and Accel sold their remaining stakes in Indian e‑commerce company Flipkart in a $1.4+ billion transaction. The acquirer was Walmart, who had purchased a 77% controlling stake in Flipkart in 2018 for $16 billion. The transaction was completed at a reported $35 billion, down from the $38 billion in Flipkart’s 2021 funding round.

I don’t have any insider information on this deal or this company’s metrics, but it appears that Tiger Global first invested in Flipkart’s 2009 Series B round by investing $8.6 million at a $42 million valuation. In subsequent years, it invested an additional $1.2 billion. It began exiting its position in 2017 when it sold part of its investment to Softbank, and it then sold more to Walmart in 2018. Tiger is reported to have made $3.5 billion in profits on its investments in Flipkart.

This is a large secondary transaction and likely will allow Tiger to provide LPs in its prior funds with much-desired liquidity.

I’m curious to see whether this transaction is a one-off or we’ll start to see more VCs get liquidity by selling stakes in growth-stage companies to large corporations.

I’m studying investor entrepreneurs—investors who have an entrepreneurial spirit and found their own investment firms rather than work for someone else. I’m specifically interested in those who’ve had outsize success—meaning they’ve been able to compound their capital at an annual rate that exceeds benchmarks like the S&P 500—for a decade or more.

I’ve noticed that many of these investors are opportunistic—that is, the types of investments they make depend on market conditions. The degree of opportunism varies by investor, but the great ones don’t stick with only one thing.

More importantly, I’ve picked up on a simple framework mentioned by multiple seasoned investors. It’s used to gauge what they should or shouldn’t consider investing in. They look at investments through the lens of supply and demand. If investor demand for an investment is high, its price is often higher and its potential return lower. If demand is low, its price is often lower and its potential return higher. These investors have had outsize success with opportunities for which investor demand was low, resulting in their being materially mispriced.

I like the approach of beginning the investment evaluation process by thinking in terms of supply and demand. It’s simple and can put the investment into perspective quickly.

Fred Wilson is a well-known VC and general partner at Union Square Ventures, which he cofounded in 2003. Earlier this year, he shared his predictions for 2023, which I recapped in this post. This week, he shared his updated thoughts on the venture capital sector.

Here are a few takeaways:

• Venture capital has been in a downturn for roughly eighteen months.
• The NASDAQ peaked at ~16,000 in November 2021.
• The NASDAQ was down ~33% by June 2022 and ended 2022 at ~10,500.
• As of July 14, the NASDAQ was at 14,113—up ~36%.
• Interest rates and inflation are driving the NASDAQ.
• The Fed raised rates aggressively in 2022 because of post-pandemic inflation, causing asset prices to decline.
• Inflation is down now, which means rates may have peaked.
• Expectations drive markets, and inflation and interest expectations have settled down.
• Venture capital lags public markets by a few quarters.
• Venture capital will likely respond to the NASDAQ’s strong 2023 quarters.
• Venture capital may be through its downturn.

Taking a company public has historically been a popular way for investors, founders, and employees of venture-backed companies to get liquidity for their company shares. It makes sense that public markets heavily influence venture capital.

I can’t predict the future, but as Fred said, in the next few quarters we’ll have a better idea of where things are headed.

I caught up with a venture capital investor this week who shared that he’s raised a new fund in the last six months that’s over $1 billion, but he hasn’t started deploying it yet. He’s still deploying from his last fund. As he put it, the new fund is “on the shelf” for now. This got me thinking about the amount of dry powder venture firms are sitting on and how this dynamic affects the cycle of the venture capital business.

I went and found an old interview of Bill Gurley. Gurley said Howard Marks told him that venture capital can’t avoid cyclicality and is a boom-and-bust business model. Here are the reasons Gurley listed:

• A fund’s life cycle lasts a decade. Capital is committed, invested, and returned over in that period.
• The business has low barriers to entry and high barriers to exit.
• As markets begin to boom, capital floods in quickly.
• As the market breaks, capital can’t go away quickly. It’s stuck because it’s been committed for a decade.
• The vast majority of returns occur right at the end of the cycle.

VC is a boom-and-bust business model because of the way funds are structured. A boom is likely behind us. I wonder if the industry is ready for what comes next.

I’ve spent time working on understanding the journey of emerging investment managers. These people start companies that make money by investing capital. I think of them as entrepreneurs who happen to be investors, or “investor entrepreneurs.” I’ve been curious to learn how the most successful emerging managers are wired, so I started studying managers who’ve had outsize success over a decade or more. This means they’ve been able to compound their capital at an annual rate that exceeds benchmarks like the S&P 500. I started with venture capital fund managers but expanded to studying managers in private equity, real estate, hedge funds, value investing, and other areas.

Studying several managers who’ve compounded their capital at above-average rates in various ways has been enlightening. It’s shown me that the ways to have success as an investor vary widely. But I’ve noticed a trait that these successful managers have in common: a burning desire to approach investing in their own unique way as opposed to a way mandated by someone else. They wanted to develop, test, and refine their own investment approach. They saw starting their own firm as the best path. A few worked for other people, but that was never the goal—it was a stepping-stone. The goal was always to invest using a unique insight and control their own destiny as an investor.

Bloomberg published an article today entitled Shares of Startups Are Turning Dirt Cheap, Attracting Venture Funds. It contains some insights into the current state of the secondary market for start-ups.

A secondary sale is usually a transaction between two parties to exchange equity in later-stage start-ups. The start-up isn’t involved, except that sometimes it must approve the transaction.

I know a few investors, both individuals and institutions, who bought or sold shares on the secondary market in 2020 and 2021. Usually, it was a way for the buyer to get exposure to a company when they couldn’t become an owner in a funding round. The seller was typically an early employee, angel investor, or seed-stage venture fund. These investments were done at a valuation premium relative to the last funding round.

Things appear to have changed. According to the Bloomberg article, recent secondary sales have been done at steep valuation discounts relative to the most recent funding rounds. And there is increasing appetite by funds to buy on the secondary market and increasing desire by institutions such as pensions to sell private investments on the secondary market.

As more institutional investors, venture capital funds, and start-up employees seek liquidity when an IPO isn’t an option, I’m curious to see how secondary markets evolve.

Tiger Global is an investment firm founded over twenty years ago by Chase Coleman. Tiger has been investing in public and private technology companies for many years and has tens of billions of dollars’ worth of assets under management. It made waves in the venture capital industry for its investment pace in 2021.

Tiger closed a fund in 2021 that was reportedly $6.65 billion. And it closed on a $12.7 billion fund a year later (including $1.5 billion from firm employees, so $11.2 billion from outside investors) that took less than six months to raise. Read more about these funds and the firm here.

Last fall it was reported that Tiger was raising a new fund targeted at $6 billion. As of now, it has reportedly raised $2.7 billion, according to regulatory filings. (It’s still raising, and this figure could change.) Tiger’s ability to raise capital for technology investments has declined, and it’s not alone. Insight Global is a venture capital firm that reportedly has cut the target size of its latest $20 billion fund because of the challenging fundraising environment.

I don’t have inside information, and I haven’t talked to anyone at any of these firms or their LPs. But given rates paid on US Treasuries, returns required by LPs to justify illiquid venture capital investments are likely higher than they’ve been for ten years. Translation: LPs probably want venture capital funds to produce higher returns to compensate them for the risk of capital loss and the inability to access their capital for a decade. Combine that with the compressed multiples that technology companies experienced in 2022 (i.e., falling valuations), and fund managers are in a tough spot. They’re being asked to produce higher returns when exit valuations have come down (though this could go back the other way during the fund’s life).

This dynamic will likely have an impact on the venture capital industry if it continues. I’m curious to watch this and see how it plays out.

I chatted with a friend who’s in the process of acquiring a business. Instead of using a bank to finance the debt portion of the purchase price, he’s using seller financing. That is, instead of taking out a bank loan and paying the full purchase price in cash, he’s accepting a loan from the seller. The seller gets paid part of the purchase price in cash at closing, with the remainder repaid over time with interest.

This is common, but I hadn’t heard about it being used as much in the last few years because interest rates have been so low. I was curious how the seller felt about it, so I asked my friend.

He said the seller envisioned selling the business, getting cash in a lump sum, and riding off into the sunset. Seller financing, which prevents a clean break from the business, wasn’t part of his vision. It took a bit of convincing by my friend, but in the end, they made a deal after a detailed walkthrough of the math.

Riding off into the sunset is every founder’s dream scenario if they want to sell, but it doesn’t often play out that way. Things like earnouts and seller financing are common and can mean the seller will get delayed payments over a period of time.