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.

I had a conversation this past week with an entrepreneur who’s run a successful business for several years. During our conversation, I realized he didn’t know the cash flow of his business—or what that means. After more chatting, I realized that he didn’t understand his balance sheet either. He didn’t know how much he owed others or how much he’s owed. He mainly bases his decisions on his bank account balance and profit and loss statement. This approach to decision-making has hindered the business’s growth over the years.

In college, I was forced to take accounting classes as part of my finance curriculum. I’m not much of a rule follower and hated memorizing countless accounting rules. Many years later, I can’t remember any of those rules to save my life. But the concepts stuck with me. How to read core financial statements and how the statements work together to show you a complete picture of the business are the biggest takeaways from those courses. When I was an entrepreneur, those foundational concepts improved my decision-making. Now that I’m an investor, they’ve helped me spot opportunities and problems early that others have missed. I hated my accounting courses and don’t remember most of what they covered, but they taught me how to understand accounting. 

Accounting is often called the language of business. To thrive in business, entrepreneurs need to speak the language—or at least understand the foundational concepts underpinning accounting. If you’re an entrepreneur or aspiring to be one, consider taking time to learn basic accounting concepts. It may be difficult, but it will likely pay off in the long run.

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.

This is my one-hundred-eighty-ninth weekly reflection. Here are my takeaways from this week:

• Suitable investments – Some generally accepted opinions about what constitutes a quality investment opportunity are illogical. They create pricing inefficiencies around supposedly unsuitable investments. Therefore, this type of investment can be acquired for less than fair value, which can lead to outsize returns. Investors who think outside the box and question the status quo are more likely to realize the outsize returns made possible by these unconventional opportunities.
• Constraints – Constraints, real or artificial, are helpful in spurring creativity and focus and business and personal pursuits. I want to experiment with adding more constraints to certain areas of my personal life. I’m curious to see what the results will be.

Week one hundred eighty-nine was another week of learning. Looking forward to next week!

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 recently caught up with a friend who happens to be an investor at a large, Silicon Valley–based venture capital fund. His firm focuses on the seed stage, so they’re used to being the first check into a company before the incorporation papers are completed. He said his firm reviews over a thousand deals every month and he attends countless pitch meetings. 

I was fortunate enough to sit in when a seed-stage founder pitched him. At the end of the pitch, he gave the founder great advice on how to improve his pitch by communicating the company’s potential and his vision unapologetically (i.e., with extreme confidence). He left the founder with a quote that stuck with me:

Good founders help you see up the road. Great founders help you see up the road and give you a peek around the corner. What’s around the corner—IPO, big exit, big impact, etc.?

Seeing what’s ahead on the current path is easy because everyone can see it. No imagination or convincing necessary. But to help people see around the corner, you must paint a picture of what can’t be seen and get people excited about the possibilities. A great founder can do this, and it helps with raising capital, recruiting, and closing deals with customers and partners. My friend’s firm believes that the ability to help others see around the corner is a superpower that great founders have. Building a company is hard, but this superpower increases the chances of outsize success.

If you’re a founder or aspiring founder, ask yourself, “Am I helping people see up the road and around the corner?”

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.

I came across an interesting quote today from Winston Churchill that stuck with me:

The farther back you can look, the farther forward you are likely to see.

I’m no history buff, but I have spent time studying select historical events related to concepts I want to master. Doing so has helped me connect the cause-and-effect dots. That, and historical context, improved my thinking about what future scenarios are possible and their likelihood. The future is unknowable, but understanding the past helps me understand what could happen in the future, better prepare for those potential scenarios, and navigate them more effectively.

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.