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.

I recently had a conversation with a friend about investing strategies. He’s smart and well educated, has an amazing career, and is forward thinking. We talked about public market investing, and I brought up the topic of compounding. He said he understood it and quickly moved on in the conversation.

He understood the concept, but I wasn’t convinced he understood the power of compounding. I shared a post containing a simple example that I wrote a few months back. When he looked at the numbers, it clicked. He understood how rate of growth and time work together to produce outsize results.

Albert Einstein famously called compound interest the eighth wonder of the world. It’s one of the most powerful forces that can be applied in many facets of life, not just money. Still, many don’t truly understand the power of compounding and aren’t taking advantage of it. They’re making progress toward their goals—but at a much slower pace than they could be.

I’ve been following the WeWork story for the last few months (see here and here). In August, the company, in a quarterly filing, warned of doubt the business could continue. Today it officially filed for Chapter 11 bankruptcy, with $19 billion in liabilities and assets worth $15 billion listed in its filing.

Chapter 11 bankruptcy doesn’t mean the company will cease operations. Chapter 11 of the U.S. Bankruptcy Code allows a company to reorganize and renegotiate its debts with creditors while it continues to operate. The hope is that the company will be able to exit bankruptcy with a more reasonable debt load.

Today marks another low point for a well-known, venture capital–backed company that raised over $22 billion in equity and debt financing over the years and was valued at $47 billion as recently as 2019.

I’m curious to see how this bankruptcy process will play out and what the company will look like if it successfully exits bankruptcy.

Yesterday I shared definitions of three kinds of leverage from Joel Greenblatt, founder of Gotham Asset Management. One of them was investment leverage by borrowing. This involves using debt or borrowed capital to increase an investor’s capital base, which allows them to deploy more capital into an investment. If an investor were limited to investing using only personal capital, they’d likely be using a materially smaller capital base to make investments (if they were investing at all).

Venture capital funds are examples of investment leverage by borrowing. General partners (GPs) raise a fund from limited partners (LPs). Essentially, the GP borrows capital from LPs with the goal of repaying it, plus a share of the profits, in the future. Fund GPs will usually contribute personal capital that amounts to around 1% to 2% of the total fund. This is called the GP commitment.

So, if a $25 million fund is raised, the GPs will commit $500k (assuming a 2% GP commitment). The other $24.5 million is essentially borrowed from LPs.

Investing $500k of your personal money is quite different from investing $25 million of your and other people’s money. The deals you evaluate and can participate in look drastically dissimilar.

There are other aspects of GP and LP economics and relationship that I won’t get into here. But this demonstrates how a venture capital fund is essentially a vehicle that allows a venture capital investor to use investment leverage by borrowing to increase their capital. If the fund is successful and generates returns, the GP will personally receive significantly bigger returns from their investments that they would if they used only their personal capital. That’s leverage at work.

I’ve been having conversations with friends about leverage. One thing I’ve picked up on is that leverage doesn’t mean the same thing to everyone. With a little digging, I found definitions used by Joel Greenblatt, founder of Gotham Asset Management, that I think are pretty accurate:

• Financial leverage – The amount of debt a company has taken on relative to its equity. It can lead to higher returns for shareholders if the company can earn a higher return on the money borrowed than it cost to borrow it.
• Investment leverage by borrowing – Money borrowed by an investor for the purpose of purchasing an investment.
• Investment leverage by contract – A payment by an investor of a (relatively) small amount up front to purchase the right to purchase an asset later.

These are straightforward ways to think about what leverage is. We can see, thinking about these definitions, that a lot of people and companies use leverage in some form or fashion.

Today, the Wall Street Journal reported that Waystar, a healthcare payments software company, has postponed its initial public offering (IPO). The company is in a late stage of the IPO process—it was scheduled to launch its roadshow to pitch potential investors this week, and it’s normal to see a company do its roadshow a week or two before a public listing.

From what I can tell, Waystar is majority owned by private equity firms and was last valued at $2.7 billion in 2019.

This has been a lackluster IPO year, and this postponement is another sign of how challenging things may be for the rest of the year. I’m curious to see how many IPOs are completed in 2023 and what creative ways private equity and venture capital fund managers come up with to get liquidity if the IPO market remains depressed.

A few months back, I shared that WeWork had issued a dire warning in its quarterly financial filing: “substantial doubt exists about the Company’s ability to continue as a going concern.”

Today, the Wall Street Journal reported that WeWork is planning to file for chapter 11 bankruptcy. To be fair, it hasn’t filed yet, and something could happen to allow it to avert bankruptcy and continue to operate.

Regardless, this is a stunning fall for a well-known, venture capital–backed company. Crunchbase says that the company has raised over $22 billion in equity and debt financing over the years. Its valuation peaked in 2019, when it raised a reported $6 billion from Softbank at a $47 billion valuation. When I shared the dire-warning post on August 9, 2023, the company had a market capitalization (i.e., valuation) of $272 million. As of today, October 31, 2023, it’s worth $120 million. From $47 billion to $120 million in roughly four years is a staggering valuation drop.

I’m curious to see what happens next with WeWork and if it will impact investor and founder sentiment.

A few months back, I shared some stats on initial public offerings (IPOs). I’d learned that 2021 had the highest number of IPOs (1,035) in more than twenty-five years. The next year it dropped off a cliff; 181 IPOs were completed in 2022.

We have right at two months remaining in 2023, and I wanted to see how IPO activity this year stacks up. As of today, we’ve seen 131 IPOs. For context, the lowest number of IPOs since the great financial crisis, 133, was in 2016. This year will likely end up with the second-lowest number of IPOs in that period.

I view IPOs as an indicator of public-market investor sentiment. The data shows that sentiment has gone from one extreme in 2021 to the other in 2023. 

If you want more data on annual IPO activity, take a look here.

Today I was reading a transcript of an interview of a successful investor. He casually mentioned a generally accepted investing principle that he’s observed to be invalid over many years of investing. He went on to say that he believes many investors don’t understand that this principle isn’t true or the impact of that fact.

This caught my attention because another investor, someone who’s well regarded and well known, briefly mentioned something similar in an old interview I dug up. When two or more credible people have reached the same conclusion, it’s contrary to what others believe, and it hasn’t been noticed or discussed (that I know of), that’s something I take note of and want to investigate further. 

I’m curious to understand their insights that led to this contrarian perspective and will dive into this more.  

A friend recently asked about posts I wrote two months ago summarizing the IPO filings of Instacart and Klaviyo. Specifically, he asked why I spent time reading through hundreds of pages for each company. Couldn’t I have gotten the same understanding from reading summary articles in the financial press—the Wall Street Journal or Bloomberg?

I wanted to determine the strength of each underlying business for myself before they went public. Whenever I’m evaluating something, I aim to come to my own conclusions. Therefore, I try to find first-source data, not interpretations by people removed from the situation. These filings, while long, were great first-source data. They laid out facts and numerical data relevant to all facets of each business, helping me to reach a conclusion about each company with a high degree of conviction. 

I could have saved time by reading summaries in the financial press or listening to the opinions of others. But I wouldn’t have had as good an understanding of each business, might have missed critical things because others overlooked them, and wouldn’t have had strong conviction in the evaluation of each business because I hadn’t done the work myself.