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!

Sam Zell was riding high in the 1980s. According to his autobiography, the early 1990s were one of his most difficult periods. His partner of twenty years, Bob Lurie, died of cancer in his 40s, which rocked Sam. He was in denial about the severity of the situation until Bob sat him down and told him he needed to prepare for Bob to die. To make matters worse, his second marriage ended in divorce in 1994.

While Sam navigated those challenges, the economy went into a recession. Sam’s companies couldn’t refinance their debt and struggled to make payroll. Sam was on the brink of default and failure.

Listing his companies publicly on the stock market was his only option for raising cash. Sam dove into learning everything about this process and, in 1991, completed his first IPO for a portfolio company. Learning how to run the IPO process would be a valuable skill. During this period, Sam listed seven of his companies for about $2 billion in total.  

Sam recognized he wasn’t the only one struggling. Many companies had too much debt and were desperate to raise capital. In 1990, Sam created a $1 billion fund to invest in distressed companies; he bought ownership stakes at discounted prices.

Sam also spotted a structural change in real estate:

• Easy money from Japan lent to US developers caused overdevelopment
• The savings-and-loan crisis eliminated a key source of lending to real estate
• The Tax Reform Act of 1986 reduced tax benefits for syndicate investors (such as Sam’s father), which reduced the capital these investors allocated to real estate

With most real estate using 80% to 90% borrowed money, Sam recognized that these factors, plus a recession reducing rental demand, would make it impossible for property owners to service their debt loads. This would lead to a real estate crisis worse than the Great Depression.

Sam was right. Commercial real estate lost 50% of its value. Losses were estimated at $80 billion. Between 1989 and 1996, Sam raised four funds for $2.1 billion and went on a buying spree.

In 1992, Morgan Stanley created a new real estate investment trust (REIT) structure called an umbrella partnership real estate investment trust (UPREIT), which allowed property owners to contribute property to REITs listed on the stock market and gain liquidity without triggering a tax event. Property owners could turn illiquid buildings into liquid holdings that generated predictable cash flow (UPREITS must distribute at least 90% of taxable income to shareholders annually). Sam leveraged his decade of taking companies public in 1997 by taking his four real estate funds public as a UPREIT and named it the Equity Office Properties (EOP) Trust.

Ten years later, in 2007, Sam perfectly executed a competitive bidding process between Blackstone Group and Vornado Realty Trust and sold EOP to Blackstone for an eye-popping $39 billion. Sam’s timing was impeccable—the Global Financial Crisis was approaching.

Sam also leveraged his experience investing where populations grew and started investing in real estate in emerging markets. He created Equity International in the late 1990s and began partnering with developers in emerging markets who were great operators. Sam provided the capital and best practices on financial discipline and strategies and helped prepare the developers for public-market investors.

This period was a wild journey full of ups and downs for Sam. But two things stood out to me. Sam had an uncanny ability to recognize macro events and understand how they impacted the supply and demand of real estate and capital available to companies. He masterfully positioned himself to take advantage of these insights before others appreciated them. Sam also did a great job identifying and learning skills that could be helpful in the future. He could have relied on investment bankers to run his IPO processes, but he decided to learn the skill himself because he knew it would be valuable in the future given that public markets are the most constant source of liquidity.

In the next post, I’ll share my takeaways from Sam’s journey.

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

In the 1970s, Sam Zell refined his business principles to the following:

• If an opportunity has a large downside and minimal upside, steer clear—and if it has a minimal downside and large upside, go after it
• Make sure you’re getting paid sufficiently for the risk you take
• Never risk what you can’t afford to lose
• Keep it simple: the more steps, the more opportunities to fail

He also refined his thinking on supply and demand:

• Opportunity is embedded in the imbalance between supply and demand
• Both rising demand against flat or diminishing supply and flat demand against shrinking supply create opportunistic imbalances

According to his autobiography, Sam’s refined thinking led him to realize that his thesis of investing in high-growth second- and third-tier cities had run its course. Other investors had recognized the opportunity, so more capital was chasing these properties, increasing prices and reducing returns. By 1973, Sam realized that the supply/demand imbalance in commercial real estate was getting extreme. Easy money had led to more development and too much supply, which Sam predicted would decrease rental rates. At the same time, a recession was beginning, which would reduce demand. In short, supply was increasing rapidly and demand was about to start decreasing.

Sam sold his properties and started stashing cash to take advantage of the crash he thought was inevitable. He also launched First Property Management Company to focus on managing distressed properties. Until the market crashed twelve months later and Sam was buying properties at 50% discounts, everyone thought he was insane.

Between 1974 and 1977, Sam used a creative strategy to purchase $4 billion worth of properties with $1 down per property. He borrowed at a roughly 6% fixed interest rate while inflation was 9% or higher—so he was making 3% the second the deals closed. He realized the real money in real estate is made from borrowing at a long-term fixed rate in an inflationary environment, which increases property value and rents and depreciates the value of the loan.

Sam became known as the grave dancer because he bought at deeply discounted prices when others were afraid. But he viewed it as an opportunity to resurrect properties with potential. His low entry price drastically reduced his downside risk and increased his upside potential. This perspective gave him the conviction to bet heavily and be contrarian.

In the 1980s, Sam saw overdevelopment in real estate again but believed the sector had structurally changed. He realized that his business principles and focus on supply and demand could be applied to companies, too, not just real estate. Setting a goal to have 50% of his investments not be in real estate by 1990, he bought distressed companies that had borrowed too much but owned lots of assets like plants and machinery. A weakening economy provided him with ample businesses that fit his criteria and that other investors didn’t want to invest in. He went on a deal spree. In the book, Sam discusses the deals for several public companies he bought entirely or partially.

During this period, Sam also learned that businesses reliant on borrowing benefit from understanding the motivations of their lenders and their methodologies for issuing loans. Doing so led to companies Sam owned offering financing to buyers. At that time, having these loans on their books allowed Sam’s companies to borrow more from banks, which was counterintuitive.

During this period, Sam sharpened his understanding of risk, business, and supply and demand, which led to his transition from real estate investor to investor. When asked what he did for a living, Sam began confidently saying, “I’m a professional opportunist.”

This new outlook would profoundly affect the rest of his career, but first, he’d have to survive some challenging times.

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

When Sam Zell returned to Chicago, he was rejected by 43 law firms. When he finally landed a job at a small law firm, he lasted four days. Reviewing contract details all day was painful. When he quit to start doing deals again, the firm made him an offer: if he would stay, they’d do his legal work for him and give him a 50% commission on any legal business he brought in.

According to his autobiography, Sam did so well bringing in new business that he made three times as much money as the junior partners. The firm cut his commission to 25%. What he brought to the table wasn’t being valued, so he quit, which was risky given that his wife was pregnant. Sam was 25 and didn’t want to be held back by anyone else’s rules. He wanted to control his own destiny.

He started his own investment firm focused on investing in small, high-growth cities with limited competing capital. Colleges were growing, so he focused on buying apartments in cities with universities. In 1966, he closed his first major deal, a $1 million apartment building, with his father as an investor. Sam predicted it would yield 19% annually, while his father thought it would yield 8%. It ended up generating 20% annually. Sam expanded to Tampa, Orlando, Jacksonville, and Reno.

He tried to develop properties from scratch, but mistakes with Lake Tahoe and Lexington, Kentucky, projects burned Sam. He learned that development was complex and risky. Things outside of your control can change and doom a project between the idea and completion stages. Sam couldn’t stomach that level of risk.

In 1969, Jay Pritzker, part of the family that founded Hyatt Hotel Corporation, tried to hire Sam to scout deals for him. Sam declined, but Jay became a mentor and co-investor with him. Sam’s relationship with Jay elevated his thinking as an investor. Sam learned to understand risk, that most deals depend on one or two things, and that you can organize your thinking to cut to the heart of something complex by breaking it into pieces and creating an outline.

Around 1970, Bob Lurie rejoined Sam in Chicago at the firm, now called Equity Group Investments. Bob complemented Sam and they worked well as partners. Bob stayed in the office, viewed things pessimistically, and focused on details. Sam was Mr. Outside, an optimistic salesman who hated details. They had a team of 10 in the 1970s and encouraged everyone to wear what they wanted, believing that if you dress funny and are great at what you do, you’re eccentric. They wanted to attract eccentric who would do a phenomenal job, not mediocre people who could dress the role. Early on, Bob and Sam reinvested everything in deals and their business, so they were cash poor and ran the company on a shoestring budget.

In the 1970s, Sam and Bob met a brilliant dealmaker named Arthur Cohen, and they learned a valuable lesson from Cohen’s struggles. Cohen acquired an offshore mutual fund that offered daily redemptions to investors, but it held real estate, which couldn’t be sold quickly. When the market turned sour, the combination of long-term assets and daily investor redemptions put pressure on Cohen to raise cash quickly. Sam and Bob took advantage of Cohen’s predicament and bought several of his properties at attractive prices because they could decide and close quickly.

Things were going well for Sam until 1976. Then, partners at a law firm he used to craft tax-advantageous deals were indicted. One partner, Sam’s brother-in-law, was convicted. Sam was indicted, too, but the case was dropped. The stain of an indictment on his record would follow him for years. Sam learned how important reputation is when people began to question his.

Sam was in control of his own destiny, but being in control didn’t mean things were always smooth. Sam learned painful lessons, most notably how to understand and minimize deal and reputational risk. A focus on risk would play a critical role throughout his career, but especially in the next phase of his journey, a period when Sam was known as the Grave Dancer.

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

Reading Wayne Huizenga’s biography, I learned something unexpected: Blockbuster Video’s roots were in making software for oil and gas companies. David P Cook & Associates was founded in 1978. By 1983, when it went public and raised $8 million as Cook Data Services, it had employees in five offices and hundreds of oil company customers. Then the oil market tanked and customers stopped paying their bills. Founder David Cook sought ways to use the company’s barcode technology and settled on the exploding video rental business. Powered by software and a high-tech distribution center, he could build a superstore in an industry full of mom-and-pop entrepreneurs. The first store opened in 1985 and had more customers than it could serve.

So how did a garbage entrepreneur find a small, public company that was pivoting? Wayne, through Huizenga Holdings and wealthy friends, built a deal machine with great deal flow that they shared with each other. A friend came across Blockbuster and pulled Wayne in. Wayne visited a store and was hooked on the rental and service aspects of the business.

In 1987, Cook tried to raise money to grow Blockbuster, but a negative Barron’s article sunk his chances of selling $18 million worth of shares to public-market investors. He raised only $4 million. Wayne and his friends came to the rescue. They agreed to invest $18.5 million and receive 1.2 million shares, warrants to buy another 1.7 million shares, and 60% company ownership.

Wayne believed the company could be easily duplicated, so he focused on getting large quickly. In 1987, with just 19 stores, he acquired a large competitor with 29 stores. Cook, losing control and disliking acquisitions, quit, forcing Wayne to become CEO.

Wayne quickly realized this was an unfamiliar industry and hired seasoned executives to fill his gaps. This team would drive the hyperbolic growth he envisioned. Wayne preferred company-owned stores to franchising, but each store cost $500,000 to build. He planned to fund the growth by selling shares to public-market investors, but Blockbuster shares cratered by more than 50% during the October 1987 stock-market crash. Wayne hastily arranged for family and friends to invest $8.4 million via a private placement instead.

The company grew from 19 stores in 1986, to 133 stores in 1987, to 415 stores in 1988, to 1,079 stores in 1989. While Wayne’s lieutenants ran operations, he focused on acquisitions and on managing Wall Street analysts’ and institutional investors’ perceptions of the company. Positive perceptions led to a high multiple on the stock, his main currency in acquiring companies. Employees at all levels were partially compensated in stock options, which Wayne also used as motivation to run the company at a breakneck pace. The pace took a toll: one executive died of a heart attack and others divorced.

Wayne completed 110 deals in seven years. He needed a strategy to raise capital to fuel that growth, silence critics who said pay-per-view was a threat, and gain more credibility with Wall Street, and he devised one: he struck deals with Cox Enterprises and United Cable, two of the largest cable companies. Each invested $12 to $15 million initially and bought rights to open 100 stores. The companies perceived as big competitors were now Wayne’s investors and partners.

Wall Street embraced the company, which moved from trading on an over-the-counter (OTC) stock market to the NYSE in April 1989. The stock went from $5.75 to $33.50. Blockbuster was perceived positively . . . for the time being.

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