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.

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

• Learning – A superpower that people who achieve outsize success possess is learning outside a structured environment (e.g., school). They’ve testing different ways of learning and found one that suits their personality. They’ve refined their approach and continuously used it to learn new things. Their self-starter approach to learning improves their problem solving and allows them to create value for others.
• Fundraising – Founders are in the final stretch of fundraising before the holiday season begins. Any deals that will close before year-end will likely be agreed upon in the next two or three weeks. Fundraising activity doesn’t usually pick back up until February.

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

Today I had a chat with an early-stage founder about his origin story. He participated in CREATE‑X’s Startup Launch program at Georgia Tech. He had an idea when he entered the program that he built into a working product with a handful of paying customers with the help of CREATE‑X.

Part of the program involved attending sessions with other founders. At one of those sessions, another founding team asked if anyone could help with ad campaigns and A/B testing, areas this founder was proficient in. He began helping, and after a while he was spending more time on the other team’s solution than on his own. After a few weeks of working well with the team, they asked him to join them as their third founder. He agreed, and now they’ve launched an MVP with paying customers. They’ve all decided to pursue this idea full-time and are looking to raise seed capital.

For entrepreneurs, being around like-minded people who are attempting to accomplish similar things is powerful. Not only do they learn faster because of experience sharing, but being around other founders can lead to serendipitous interactions that result in amazing opportunities. Kudos to this founder and his cofounder for joining CREATE‑X. I’m excited to follow their journey and the company they build!

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.

Today I read Fred Wilson’s post about sleep. Wilson is a well-known VC and general partner at Union Square Ventures, which he cofounded in 2003. In his post, Wilson talks about his struggles with sleep over the years and what changes he’s made to improve it. The big takeaway is that poor sleepers can improve their sleep, and even become good sleepers, by changing their habits.

I’ve spent time researching ways to improve my sleep. I don’t have an Oura Ring like Wilson, but I’ve done a few things that have significantly improved my sleep quality:

• Eight Sleep bed – This bed has had the biggest impact on my sleep quality. I was an early adopter and have had one of these for a few years. The bed regulates the temperature, which helps me get into and stay in a deep sleep.
• Television – I don’t have a TV in the bedroom. My body knows that when I’m in my bed, it’s time to start transitioning to sleep mode.
• Bedtime – I try to stick with a consistent bedtime on weekdays. This keeps my body on a schedule.
• Reading – I like to read in bed to wind down. I try not to read anything that requires deep concentration and usually save biographies and histories for bedtime.  
• Blackout curtains – I’ve found that a dark room helps me go to sleep and stay asleep.

Sleep quality is something I’m curious about. Good sleep’s ROI is massive. Therefore, I enjoy learning about the subject and tinkering with ways to improve the quality of my sleep. I suspect that high-quality sleep will be a lifelong quest as my body continues to evolve.

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.

This week an entrepreneur friend pinged me about an idea. We did a call and he laid out his idea for solving a problem that impacts a large segment of society. He went on to explain how his solution is now possible only because of AI. He was energized by the idea and its possibilities. We talked for a long time, and I left the call with a new perspective.

I can’t predict the impact that AI technology will have. But I can see that AI is having an impact on how entrepreneurs think. It has entrepreneurs more excited than I’ve seen in a long time. They’re overflowing with ideas around potential solutions. They’re thinking bigger about the impact of their solutions. And they’re starting to view challenging problems as solvable.

AI is affecting how entrepreneurs think, and that’s bound to have an outsize impact on society.

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

• VC – There’s an interesting dynamic now in seed-stage venture capital. Fund managers are out fundraising for new funds—but it’s tough because limited partners (LPs) are, in general, less receptive to the venture capital asset class. Some of these managers have some companies in their portfolios that are running out of runway and having a hard time raising capital. These companies could shutter. It’s already hard to raise a new fund right now. If some of a fund manager’s investments go to zero during their fundraise process, that won’t exactly give LPs a warm and fuzzy feeling about giving them more money to invest.   
• Value-add investors – Things are tough for some founders right now. They’re likely finding out which of the investors on their cap table are truly value-add investors.

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