Some passages in The Warren Buffett Way by Robert Hagstrom reminded me of this post from a few months ago. I shared that taxes are a successful entrepreneur’s biggest expense. Allocating appropriate time to optimizing that expense, just as entrepreneurs do with all other major expenses, can have a material impact on a company’s ability to reinvest in growth opportunities. Here are the passages:

Except in the case of nontaxable accounts, taxes are the biggest expense that investors face—higher than brokerage commissions and often higher than the expense ratio of running a fund.

In a nutshell, the key strategy involves another of those commonsense notions that is often underappreciated: the enormous value of the unrealized gain. When a stock appreciates in price but is not sold, the increase in value is an unrealized gain. No capital gains tax is owed until the stock is sold. If you leave the gain in place, your money compounds more forcefully.

Overall, investors have too often underestimated the enormous value of this unrealized gain—what Buffett calls an “interest-free loan from the Treasury.” To make his point, Buffett asks us to imagine what happens if you buy a $1 investment that doubles in price each year. If you sell the investment at the end of the first year, you would have a net gain of $0.66 (assuming you’re in the 34 percent tax bracket). Let’s say you reinvest the $1.66 and it doubles in value by the second year-end. If the investment continues to double each year, and you continue to sell, pay the tax, and reinvest the proceeds, at the end of 20 years you have a net gain of $25,200 after paying taxes of $13,000. If, instead, you purchase a $1 investment that doubles each year and is not sold until the end of 20 years, you would gain $692,000 after paying taxes of approximately $356,000.

This is a great mathematical example demonstrating the power of compounding and the impact taxes can have on investment returns over a long period. It reminded me that playing the long game in investing gives you twin tailwinds, which can lead to explosive results.

I’m rereading The Warren Buffett Way by Robert Hagstrom. I enjoyed this book last year, and I decided to read it again after reading Hagstrom’s book Warren Buffett: Inside the Ultimate Money Mind.

The book contains lots of insightful information about Buffett’s investing approach and how he thinks about capital allocations as the CEO of Berkshire Hathaway. One part of the book I found invaluable was the chapter called “Common Stock Purchases.” In this chapter, Hagstrom walks through Buffett’s process to analyze and value nine of his biggest investments: GEICO, Capital Cities/ABC, Coca-Cola, and others.

Many people are familiar with Buffett’s investing strategy, but how he applied it when making investment decisions isn’t always clear. Hagstrom explains how Buffett valued each company and compares his valuations to the prices he paid. He walks through the math and shows how Buffett’s investments were made for prices below the intrinsic values that Buffett calculated. Buying for less than intrinsic value is core to his strategy of investing only when there’s a margin of safety.

I noticed that Buffett sometimes broke his own rules, such as when he invested in GEICO. Buffett usually invests only in companies with a consistent operating history that are generating increased free cash flow. However, when he invested significantly in GEICO in 1976, the company was on the verge of bankruptcy, had zero earnings, and needed a turnaround. Over several years, Buffett bought roughly 33% of the company. Hagstrom does a great job of detailing why he made this seemingly risky investment. Needless to say, Buffett was right, as GEICO is now a household name. This example reinforces that rules sometimes need to be broken when great investing opportunities present themselves. It also shows how Buffett spent decades preparing for this investment by reading and learning about insurance, and how that preparation positioned him to act swiftly when he needed to.

Today, I chatted with an entrepreneur who owns a retail company about what can be done to grow sales. One of the projects mentioned was improving the functionality of its website. The entrepreneur views money spent that way as a cost and wants to spend as little as possible. This perspective got me thinking.

Entrepreneurs should keep a close eye on costs. The old saying, “If you watch the pennies, the dollars will take care of themselves,” is true. The best entrepreneurs keep costs under control.

However, expenses and investments are different. An expense is a cost to operate a business that generally covers only a year. Think insurance, taxes, rent, salary, etc. An investment creates an asset that produces revenue (and hopefully profits) for years. An investment should generate a return.

The entrepreneur I was talking with today was thinking of money spent on an ecommerce website as an expense, but I think it’s an investment. A website is an asset that, if properly built, can drive revenue and create a return on the money invested for years.

Entrepreneurs have a dual role. They should manage the costs of the company to ensure short-term profitability. But they’re also capital allocators who must invest profits in ways that will help the company grow long term. Treating investments as expenses will improve short-term profitability at the expense of long-term viability.

The IPO market for technology companies has been slow (see here). I’ve been curious why that’s the case (see here). Klaviyo is a known technology company that IPO’d in September 2023. I came across an interview with the CEO and co-founder, Andrew Bialecki. The interview caught my attention because he discusses initially bootstrapping and growing to over $1 billion in revenue and a market capitalization (i.e., valuation) of over $10 billion as of this writing.

One section of the interview addressed what he thinks the criteria are for technology companies to go public or, said differently, what a company needs to demonstrate to get public market investors to buy its stock and have a successful IPO. Here are the criteria:

• Positive free cash flow – the company needs to generate, not consume, cash.
• Sustainable business – The company provides a product or service that customers will value in future years.
• Durable growth – The company must be growing at a healthy rate. The smaller the revenue base, the higher the growth rate investors want to see. The growth rate must also be durable for the next four or five years.

Growing at a rapid rate that’s durable while not burning money isn’t easy to do. Many technology companies can achieve high growth rates, but they burn a ton of cash to accomplish this.

Bialecki’s perspective on the current IPO market for tech companies is valuable, given he’s one of the few who has successfully completed a technology IPO in the last two or so years.

He shares other great nuggets during the interview. If you want to hear just the section on his thoughts on IPOs, see here, but I found the entire interview worthwhile.

I did some research after my posts on IPOs and venture capital (see here and here). Through friends at VC firms, I learned how one early-stage VC firm is thinking about exits.

The VC firm is concerned by the lack of tech IPOs because it makes it difficult for them to return cash to the limited partners (LPs) who invested in their funds. These LPs are less likely to invest in their new funds if they don’t see cash distributions from funds they already invested in. To raise new funds, VCs must exit existing portfolio companies and return that cash to LPs. To address this, the VC firm has instituted a liquidity planning strategy. Here’s what they’re doing:

• Building relationships with investment banks and deepening existing relationships so they can better understand and monitor the mergers and acquisitions (M&A) market
• Hiring a team member specifically focused on growth equity and M&A who will be part of the investment team
• Conducting biweekly liquidity planning meetings whose priority is equal to that of their weekly deal flow meetings
• Educating CEOs of portfolio companies on liquidity planning

The second and third points caught my attention. They show how important the issue of exits has become to this firm. Their strategy highlights that they’ll aim for IPOs to exit their investments in portfolio companies. They plan to lean heavily into M&A and make them a priority.

I’ll keep digging into this more. As I do, I suspect I’ll start hearing more about secondary sales being part of strategy at some early-stage firms.

Yesterday I shared an update on 2024 initial public offering (IPO) stats. A conversation with a friend at a family office sparked that post. When a company completes an IPO, it sells part of the company to public market investors via stock exchanges (usually NYSE or NASDAQ). When a company begins trading on a public stock exchange, shares in the company are more liquid. Selling all or part of an ownership stake just takes clicking a button; the cash shows up in your brokerage account instantly. Selling a stake in a private company requires more time and energy. You must find a willing buyer, agree on a price, and complete the transaction. It’s inefficient and some deals move slowly, if they get done at all.

IPOs are significant milestones for venture capital investors, one of the preferred ways to exit their portfolio companies and get publicity for themselves.

As I shared yesterday, the technology-heavy NASDAQ Composite Index is near its record-high closing price this week. The high, from July of this year, is 18,647. Earlier this week, it closed at 18,573. This year, the market has trended upward, making new all-time highs. I take that as a sign that public market investors are in a buying mood (they’re doing more buying than selling, which increases prices). Also, the prominent tech companies that IPO’d in the last year or so have seen their stock prices perform well. Klaviyo, Instacart, and Reddit are all trading near record highs, although the journey to their all-time-highs was bumpy for some of them.

So if public market investors are in a buying mood and they’re buying technology companies that recently IPO’d, why haven’t more entrepreneurs and venture capital investors taken technology companies public this year? How will venture capitalists exit their investments if they can’t or won’t take companies public? These are the questions I was talking to my friend about this week. I don’t have definitive answers, but seeing how this plays out over the rest of this year and in 2025 will be interesting.

This week, I talked about venture capital with a friend at a family office. We talked about venture capital investors’ ability to exit via the IPO market, and I realized I hadn’t checked the IPO stats since I shared early 2024 stats in March. Here are the IPO stats through October 23, 2024:

• 2024: 178

Here are previous years’ IPO stats:

• 2023: 154
• 2022: 181
• 2021: 1,035
• 2020: 480
• 2019: 232

IPO activity has picked up. The number of IPOs in 2024 has already exceeded 2023’s figure and will certainly exceed 2022’s. However, IPO activity is still low—even when compared to 2019’s pre-COVID level.

I’m surprised we haven’t had more tech companies IPO—especially since recently IPO’d tech companies such as Reddit, Instacart, and Klaviyo are all trading near all-time-highs (as of this writing). Another surprising data point is that the stock market has been near its all-time high this week. The technology-heavy NASDAQ Composite Index approached its record-high closing price this past week. The high, from July of this year, is 18,647. Earlier this week, it closed at 18,573.

I find it interesting that venture capitalists and technology entrepreneurs aren’t taking companies public via IPOs, given the current public market conditions.

If you want to see the latest or historical IPO stats, look here.

After I wrote a post earlier this week, I became more curious about Reddit’s business and how it complements the Newhouse family’s media empire. I shared some reported numbers about the business in that post but didn’t dig into the business or its SEC filings.

When I get some bandwidth, I’ll read its entire form S-1 SEC filing and maybe its latest 10-Q filing too. It’s a pretty nerdy thing to do, but I always learn a ton when I read S-1s about companies I’m interested in (see here and here). I have some other filings in my queue to read first, but I’ll share what I learn from Reddit’s filings when I finish reading them.

I’ve learned a lot about the Newhouse media empire by reading Newhouse: All the Glitter, Power, & Glory of America's Richest Media Empire & the Secretive Man Behind It by Thomas Maier. In my post earlier this week, I shared that the family owned 26.5% of Reddit when the company IPO’d earlier this year.

I did some digging and found no filings indicating that they sold any of their position. This SEC filing says there’s an agreement with the Reddit CEO to vote Newhouse shares (owned by their Advance Magazine Publications entity) for certain nominees to the board of directors. The probability is high that they still own their 26.5% stake.

As of the writing of this post, Reddit’s market capitalization (i.e., valuation) is $11.2 billion (see here), which means the Newhouse family’s stake is worth just under $3 billion. I was curious how a traditional media-focused company obtained sizable ownership in a technology company.

Steve Huffman and Alexis Ohanian launched Reddit in 2005. Roughly eighteen months later, in 2006, Condé Nast, another Newhouse family company, purchased Reddit. In this tweet thread, Ohanian referred to the company’s sale and a “$10M exit.” I’m not sure if that was his share of the proceeds or the entire transaction amount, so I’d assume the Newhouses acquired Reddit for roughly $10–$20 million.  

That was eighteen years ago, and a lot has happened since then, including several fundraising rounds. Assuming the family invested in some of those rounds and covered the company’s early losses for years, they likely invested more than the purchase price. But even if those assumptions are accurate, their investment has paid off handsomely. Reddit, a technology company founded roughly twenty years ago, likely represents a material percentage of this family’s empire, which was born about a hundred years ago with Advance Publications.

The family’s empire has historically consisted of mature media properties such as newspapers, magazines, and cable operations that grew steadily but not rapidly. How the family deployed the cash from these mature properties led to the accelerated compounding of their empire (and wealth). They used cash generated from their mature properties to invest in a technology company with high growth potential because the cost of marginal replication of its product was zero. Said differently, if one person or a million people use Reddit, the cost to run Reddit doesn’t change much at all, let alone proportionally to user growth. Reddit could grow revenue and value faster than the Newhouses’ mature media properties. The Newhouses’ investment in a company whose business model had built-in leverage was the shrewd move that led to an outsize outcome and rapid compounding.

I finished reading about Sam Zell’s journey. Sam was a colorful person, and his autobiography captures this. He published this book in 2017, when he was 75, and passed away last year at age 81.

What Was Unique about Sam’s Upbringing?

Sam grew up in a middle-class family, but his upbringing was unusual. His parents left Poland’s familiarity and spent almost two grueling years migrating to the United States. When they made it, they started from nearly zero and built a prosperous life (and learned a new language). His parents thought and acted differently than his schoolmates’ parents. Recognizing you’re in the wrong situation, taking action to get to the right situation, and successfully rebuilding from zero highlights the immigrant mentality ingrained in Sam’s parents.

That mentality was the reason Sam’s parents weren’t killed by the Nazis, and they instilled that mindset in their children. Sam’s comfort in going against conventional wisdom, ability to repeatedly change strategies, and dogged work ethic resulted from being raised by parents who embraced the immigrant mentality.

How Did Sam Become So Successful?

Sam embraced capital leverage throughout his career. He often used two forms of capital leverage simultaneously. He borrowed from banks and raised money from investors to purchase investments, which is common in real estate. When he invested using leverage, he could invest in opportunities that exceeded the capacity of his capital and magnified the returns when deals were successful. Conversely, leverage magnified painful periods for him.

Sam also invested when the prices were so low that his downside risk was significantly reduced while his upside potential was massive. For example, in real estate, he purchased when properties were selling below replacement cost, meaning that any new competitors would be forced to charge higher rental rates than Sam. 

Buying at the bottom and using capital leverage significantly reduced his probability of being crushed by leverage and magnified his gains.

Sam was a macro thinker. He could understand the implications of a macro change, such as a new law, and what micro actions to take to capitalize on it. Thinking top-down and being right about micro implications is extremely difficult, and executing on such understanding consistently is extremely difficult and rare. Sam had this gift and drew on it to invest in more than just real estate.

Sam recognized the value of having access to liquidity when using capital leverage in the business. He understood that the stock market is the only reliable source of liquidity. Even when times are tough, people are still buying and selling in the market. Sam spent time mastering the IPO process and learning how to run a company in a manner that met public-market investor expectations.  

What Kind of Entrepreneur Was Sam?

Sam was an entrepreneur, not a founder. He wasn’t focused on a specific problem or solution. He was always looking for an opportunity to make money. Finding creative and intellectually stimulating ways to make money excited him. He had no interest in focusing intensely on a single problem for an extended period.

Sam enjoyed the art of deal-making, although he doesn’t appear to have been a zero-sum thinker. He wanted everyone to win so he could do more deals with them in the future and not take every penny for himself.

Sam was a high-level strategic thinker. Operational details didn’t interest him at all. He understood this and leaned into it. He was at his best when partnered with someone operationally minded, such as Bob Lurie.  

What Did I Learn from Sam’s Journey?

The immigrant mentality is a powerful force and can change one’s life trajectory. This mindset comes with risks, but if consistently applied, it will likely put you in a better situation.

Being driven and intense exacted a price. Sam was married three times.

Thinking in terms of supply and demand is a simple way of evaluating opportunities. There’s no substitute for limited competition. Thinking about when supply and demand curves will intersect and the opportunity that will be created stuck with me.

Risk evaluation—constantly evaluating the downside and upside of every situation and acting only when downside is limited—is something to keep top of mind.

Simple tools can have a big impact. Sam used outlines to organize his thinking and cut to the heart of complex issues. When he was in trouble, he made lists and zeroed in on the tasks to accomplish each item on his list. This helped him from being overwhelmed.

Capital leverage make it difficult and stressful to weather the inevitable rough periods in the business cycle. When you’re at the top of a cycle, upside potential is reduced and downside risk increases. This is a great time to reduce or eliminate your capital leverage.

Finally, Sam was eccentric and did things his way, but he did everything at a high level and to the best of his ability. Because he did everything at a high level, he won more than he lost. Because he won more than he lost, people embraced his eccentricity. If you’re excellent at what you do, people will accept you for who you are, regardless. Everybody loves a winner!

Sam was an amazing entrepreneur. In his autobiography, Sam provided specific details on some of his biggest deals. Anyone interested in buying companies, entering new businesses, or using frameworks when investing can benefit from reading his book.

Prefer listening? Catch audio versions of these blog posts, with more context added, on Apple Podcasts here or Spotify here!