This week, I connected with an early-stage founder who’s fundraising. A few funds that are deep in the process want to do customer diligence calls—they want to talk to the handful of early-adopter customers that are larger companies. The customers don’t understand venture capital or start-ups. The thought of talking with “investors” looking to invest in a provider of a service they deem critical makes them queasy. They’re not sure if this is a sign that the company is in trouble financially and they should rethink the relationship.

If a company has a product with paying customers and it wants to raise venture capital, the investment firms are going to want to talk to the customers. They could construe not being allowed to do so negatively. “If your product is so great, why can’t we hear that directly from your customers?” goes the thinking.

 One way around this is to pitch your most important customers on your big vision. They know the product you’re offering and how it solves their current pain point, but they may not know more than that. Once you share your big vision with them, they’ll likely be more excited to be part of that journey and help turn the vision into reality. They’re also more likely to understand that going on that journey will require growth capital. When they’re asked to do reference calls with venture capital investors, the investors can be described as “partners to help provide the capital that will allow us to execute on our vision” (which is true for VC), not a financial lifeline.

A friend talked to me about an early-stage start-up because I’m familiar with the space. He asked my opinion. The space has lots of downsides, the main one being the small size of the market. And it’s complex, which makes completing transactions difficult, labor intensive, and expensive. He said he wished the founder had chatted with me before starting the company. I agreed. I learned a lot about the space the hard way and would have happily shared what I know.

Something for founders to consider doing before building a new solution is seeking out founders who’ve already built in the space they’re entering. Lessons can be learned from the successes and failures of other founders that can save lots of time, energy, and money. Oftentimes those founders are excited to share what they learned with someone who’s equally passionate about the space. It’s an activity with a high upside and relativity low downside that anyone can do.

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I’ve been keeping tabs on several early-stage founders who are aiming to raise capital before the end of the year. Their funding experiences so far are on the extreme ends of the spectrum (for various reasons). From what I’m hearing so far, it sounds like funding rounds will end up in one of two camps.

• Fundraises will be extremely successful and engender a high degree of interest from several firms. These founders will likely be given offers to raise materially more capital than they set out to raise (which isn’t necessarily a good thing).
• Fundraises will be completely unsuccessful, with zero interest from firms. If these founders are running out of runway, they’ll likely struggle to raise a bridge round.

These initial thoughts are subject to change as the market changes. But if they hold, it sounds like an extreme case of haves and have nots this fundraising season.

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. 

Howard Marks is a successful billionaire investor who cofounded Oaktree Capital in 1995. As of today, Oaktree has over $170 billion in assets under management, more than 1,000 employees, and offices worldwide.

Marks is known as a shrewd investor and for sharing his insights on financial matters in widely read memos since 1990. It’s said that many notable investors, including Warren Buffett, look forward to reading these memos.

Marks recently released a new memo entitled Further Thoughts on Sea Change. The piece is a follow-up to a memo he wrote in 2022. In the most recent memo, Marks makes the point that a “significant” reallocation of capital to credit is warranted for these reasons:

• Returns on credit are competitive versus historical returns on equities
• Returns on credit exceed the returns required for actuarial assumptions (this is a big deal for pensions and insurance companies, who allocate enormous capital pools)
• Returns on credit are contractual and therefore less uncertain than equity returns

If Marks is correct and we are indeed going through a sea change resulting in significantly more capital being allocated to credit, public equities (i.e., the stock market), venture capital, and various other asset classes could be materially impacted.

More demand for credit could result in less demand for other asset classes. If there’s less demand for public equities, that could result in lower market capitalizations (i.e., valuations) of public companies.

Venture capital firms often aim to sell their companies to public investors by taking them public (i.e., listing them on the stock market). Lower public market capitalizations would mean that venture capital firms would be selling companies for lower prices. Lower sales prices would decrease the probability of venture capital funds generating returns that would justify the illiquidity and risk taken relative to other asset classes. This could make limited partners less inclined to allocate capital to venture capital firms (we’re seeing this already), which, over time, could result in less capital being allocated to high-growth start-ups. 

No one can predict the future, but it’s interesting to think about what could happen if Marks’s insights are accurate.

Marks’s memos are great reads, and I see why people look forward to them. He makes a lot of salient points in this recent memo. If you’re interested in it, you can read or listen to it here and here.

I’ve been thinking about a Warren Buffett quote:

I am a better investor because I am a businessman, and a better businessman because I am an investor.

Founders may not realize it, but they’re resource and capital allocators. Their goal is to operate a successful and growing business. They must figure out the appropriate allocation of resources and capital to achieve that goal. If founders allocate capital and resources to uses that provide low or no return, the business could fail. If they allocate to uses with a high return, the business is successful.

The question I’ve been wondering about is whether Buffett’s experience is true more broadly. Do operators with a track record of success have a higher probability of investing successfully across various asset classes (not just venture capital)? Meaning, are they more likely than investors who aren’t operators to find the best uses of capital across various asset classes and generate higher returns?

I think operators are the best allocators of capital for venture capital, but I’m not sure about other asset classes. That’s something I want to think about more.

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

• Simple business – I talked with friends about a simple business that’s performing exceptionally well. We were all surprised at how well. This was a reminder that great businesses don’t need to be overly complex. Sometimes the model can be simple and superbly executed.
• Early-stage VC – I’ve had some great conversations with early-stage VC investors the last few weeks. The consensus seems to be that early-stage entry prices are still high relative to public markets.

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

This week, I caught up with an emerging VC fund manager who shared something interesting with me. His first two funds were small ones, so he’s been operating for several years. Now he’s preparing to raise his third fund, even though he knows the fundraising environment is rough. 

He said that raising those small funds ended up being beneficial. The management fee dollars were small, so he had a small operating budget. He was forced to be intentional about where he spent his budget and his time and to focus on the activities that mattered most and had the highest return. It’s paying off: those first two funds are performing well.

I’m a big fan of operating with constraints. Limited resources force you to focus your execution and learn from mistakes quickly, often spurring creativity. It was interesting to hear that this isn’t true just for start-up founders; it applies to fund managers too.

Lots of people want to start a business but don’t know where to begin. Their uncertainty prevents them from acting—they never get off square one. It’s more common than you’d think, but it doesn’t have to be that way.

There’s a simple hack aspiring entrepreneurs can use. This hack is helpful if you don’t know what kind of company you want to start or have a list of potential companies you could start.

Find another aspiring entrepreneur (someone who’s serious) and have regular accountability meetings. They don’t have to be super structured or long. Here are a few things they could cover:

• What problems have you evaluated since the last meeting?
• What’s the result of your analysis (i.e., do you kill the idea or move further in your evaluation)?
• What are the next steps in your process?
• What’s the deadline for completion of the next steps?

The goal of the meetings is to initiate momentum, keep the momentum going, and have a sounding board for your ideas and thoughts. Accountability meetings help accomplish all of that, and then some, in a simple format. 

Entrepreneurship is a tough journey that’s full of uncertainty. Founders are constantly trying to figure out what action they should take given the information at hand. You don’t have to travel alone. Find someone going the same way, and you’ll help each other get to the destination faster.

Louis Pasteur once said that “fortune favors the prepared mind.”

This quote is simple but powerful. The greatest outcomes are more likely to belong to those who have put in the work to prepare mentally. You can see it in founders. Those who have obsessed about a problem to the point where they understand it from all angles are more likely to create a superior solution that customers will pay for. Tons of paying customers equals a big company and accelerated value creation. You can see it in investors. Those who have gone deep into a company or sector or into developing a thesis are ready to deploy capital when the right investment opportunity presents itself. Even if it’s non-consensus and unpopular at the time. They can recognize that the opportunity is superior sooner than others and seize it before its window closes.

I’m a big fan of the prepared mind. I try to learn as much as I can about concepts, companies, and topics that interest me. This has helped me uncover unique insights and given me the conviction to do things I otherwise wouldn’t have done. I’ve made it a priority to make time regularly to do this. 

A prepared mind is something everyone can have—but few do. Most don’t make the effort. It’s a great life hack—a way to separate yourself from everyone else.