Today I read an article about the dispute between Warren Buffett and the Haslam family over Berkshire Hathaway’s purchase of the Haslam family’s prize asset, Pilot Travel Centers. The dispute has led to a lawsuit. Pilot is a truck stop operator with over 860 locations operating under the Pilot Flying J and One9 Dealer brands.

Since 2017, Berkshire has gradually purchased 80% of Pilot for $11 billion. During an annual 60-day window, the Haslam family can opt to sell their 20% remaining stake to Berkshire. The contractually agreed-upon price would be 10 times the prior year’s earnings before interest and taxes (EBIT). Note that EBIT differs from EBITDA. EBITDA is earnings before interest, taxes, depreciation, and amortization.

The lawsuit centers on what financial reporting method should be used to calculate EBIT and thus determine the purchase price should the Haslams elect to sell the remaining 20%. The issue is pushdown accounting, a method that has an impact on the value of assets a company owns, which impacts the depreciation and amortization expenses, which impacts reported profitability (in this case, EBIT). The Wall Street Journal reported that the decision to use pushdown accounting can have as much as a $1.2 billion impact on the price Berkshire would pay for the remaining 20% of Pilot. I assume the Haslams want to use the method that determines a higher EBIT and Berkshire and Buffett want to use the method that determines a lower EBIT.

There’s more to this case that I won’t get into, but I find it interesting that this dispute isn’t about the company's operations. It’s about how the results of its operations are recorded in financial statements and how the method used could have a $1 billion-plus impact.

Accounting isn’t fun, but it’s the language of business. This case reinforces my thoughts about it being important for entrepreneurs to learn basic accounting concepts.

I’ve been watching Apple’s push into financial services over the last few years. Financial services for consumers and small businesses is a large enough market to move the needle for a company of Apple’s size. Consumers shifting from in-person to digital banking and the slow pace of innovation by banks make it ripe for disruption. 

Apple partnered with Goldman Sachs to offer credit card and high-yield savings account products. But it’s been reported that Goldman Sachs has been trying to get out of the credit card business, and Apple offered the bank a way out of their credit card arrangement. The article doesn’t include specific details about why the bank wants out.

I’m a fan of Apple’s push into financial services. I’m curious about why this partnership isn’t working, how this change will affect Apple Card customers, and what impact it will have on other financial products Apple offers. I hope we’re looking at a bump in the road and not a major setback for the tech giant.

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.

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.

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.

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.

As I’ve been researching more public-market companies, I’ve noticed that most of the CEOs aren’t the original founders. That makes sense for companies that have been around for many decades. But it’s true even for companies started within the last twenty years.

This got me thinking. It’s difficult to take a company from zero to, say, ten million in annual revenue. Many founders struggle to level up as the company goes through various transitions. Going from zero to hundreds of millions or billions of dollars in annual revenue must be a gargantuan task—one that only the rarest and most talented founders can accomplish.

I’m now wondering, what traits do these founders have in common that help them go from zero to billions? They level themselves up continuously—what’s their secret?

Over the next few months, I’m going to spend time learning about a few founders who are still CEOs of public companies founded in the last twenty years. I’m curious about what I’ll find—and then whether their traits exist in any early-stage founders I encounter.

I’m a believer in non-consensus investing—that is, taking advantage of investment opportunities that don’t fit into the conventional framework used by other investors. A leap of faith is sometimes necessary. I like these investments because they require independent thinking and going against the grain, two things I embrace. To get to conviction on these opportunities, I usually do a deep dive into them, so I understand them well.

After I’ve made one of these investments, I sometimes share my thinking with other investors who are using more conventional frameworks. Recently, an investor agreed with my analysis but still didn’t think my investment was a good one because this kind of investment hasn’t historically produced significant returns.

I respect his opinion—after all, I asked for it—but I disagree. Someone must be the first to do something. The person who makes a non-consensus investment first or early is usually going to reap an outsize return, assuming it works out. When other investors follow, their returns are likely to revert to the mean because of the increase in capital chasing the opportunity. I’d rather be in the former group. I like investing in things others might not. It’s more mentally stimulating, has more upside potential, and is a better fit with my personality and wiring.

Today it was reported that Google has a revenue-sharing agreement with Apple that pays the iPhone maker a staggering 36% of the revenue that Google earns from search ads on Apple’s Safari browser. The two companies have had a partnership since 2002 that makes Google search the default search engine on Safari. These details were revealed in testimony in an antitrust lawsuit.

I don’t know how much revenue Apple receives under this agreement, but I’d imagine it’s in the billion if not tens of billions of dollars annually, given the global popularity of iPhone and other Apple devices.

Apple’s successful hardware business has another benefit for Apple. These devices are highly effective modes for distributing software and other digital tools, and companies wanting to distribute digital offerings to consumers will pay Apple to do it for them. Apple’s App Store and the revenue-sharing agreement with Google demonstrate that Apple is aware of its distribution power and plans to continue to monetize these capabilities.

Early in 2023, I challenged myself to read more SEC filings of publicly traded technology companies. I’ve been reading S-1 initial registration reports for companies preparing to go public for several years. This year I’ve incorporated 10Q quarterly reports and 10K annual reports into my reading. I wasn’t sure when I began whether it would be worth the time and energy, but I figured I had more to gain than lose by trying it. 

Here are my takeaways:

• Financials – The company’s financial performance is laid bare in these reports. The good, the bad, and the ugly are there for everyone to see. Some company financials are complex; others, simple. Interpreting what the numbers mean sometimes requires work. It isn’t always fun, but once I figure it out, I’ve usually learned something useful.
• Business model – Companies detail their inner workings and how they generate revenue. They share all kinds of interesting tidbits, such as plans for future revenue sources and concerns about the stickiness of current revenue. I usually got lots of ideas after reading the specifics of a company’s business model.
• Risks – Companies detail all risks associated with the business. This is basically a list of what keeps the CEO up at night. Sometimes the risks listed surprise me.
• Competitors – Most companies list their top competitors.
• Trends – After I’ve read multiple reports from a company, I start to see trends and patterns (good and bad).
• Executive compensation – Executive compensation usually has its own section, with compensation plans described in detail. Large stock option grants based on hitting lofty stock price or market cap objectives seem common in CEO incentive packages.
• Ownership – The S-1, and sometimes other reports, detail how much of the company executives and investors own. Very interesting. Especially if it was VC backed.
• Stock-based compensation – A good number of technology companies have high stock-based-compensation expenses. This is essentially the expense the company incurs for paying employees with RSUs, stock options, etc. I’m curious whether this practice will continue at the levels seen in the last fifteen years, given how much it dilutes the holdings of other shareholders.
• Perception – After reading these reports, I sometimes reach a conclusion about a company that differs from popular opinion in the financial media.
• Dense – These reports are typically long. I can read them only when I’ve got an uninterrupted block of time when I can focus.

The filings of public companies are full of information that entrepreneurs and investors will find helpful. I wish I’d read public filings from companies in my industry when I was building my company. I’m sure it would have positively influenced my thinking and decision making. Anyone interested in reading these reports for their favorite company can search for them on the SEC Edgar website here.