Some companies are fortunate enough to have large cash positions. To figure out the true value (or, for public companies, market cap) of the underlying businesses, you must take the cash into consideration. Enterprise value is an approach to understanding a public company’s value. Here’s the simplified formula:

      Enterprise value = market cap + total debt – cash

Let’s use an example. As of this writing, here are Zoom’s numbers:

      Market cap = ~$19 billion

      Debt = $0

      Cash = $5.41 billion

*Note: I included cash, cash equivalents, and marketable securities (treasuries and bonds) in the cash figure.

Here’s the enterprise value of Zoom:

      $19 billion (market cap) + $0 (debt) – $5.4 billion (cash) = $13.6 billion

This means the company itself is worth $13.6 billion.

Founders and investors talk about increasing the value of a company by executing. What they really mean is they want to increase the enterprise value of the company.

Clarity of thought is a key component of success as an entrepreneur (it’s also helpful in life in general). Some people are better than others at clearly communicating their thoughts. The good news is that clear thinking is something that can be improved.

Just like anything else you want to improve, you must practice it. So how do you go about practicing clarity of thought?

In my experience, writing is the best tool to improve clarity of thought. Writing about a topic forces you to focus your thoughts and organize them coherently so others can understand your points. I like to think of it as a mental workout. The more you write, the more practice you get at clarifying your thoughts.

If you want to think more deeply about something or improve your overall clarity of thought, consider picking up the habit of writing. My takeaways from publishing my daily writings for over three years are here.

I was listening to friends talk about a particular segment of the start-up market. They said it’s a bad market. All the companies operating in this market won’t make it. Because it’s a bad market and the companies in it are unprofitable, none of the companies are worth anything, and they should be avoided at all costs. They all agreed. It seemed harsh. I thought, The sentiment on this market is bad.

I believe that the market my friends were discussing is near the trough in its market cycle. They’re likely right that many of the companies won’t make it. But they shouldn’t throw the baby out with the bath water. Some companies are risky but promising. Their upside is more probable than their downside, given how bad sentiment is.

I’m going to spend some time trying to find these companies.

I was chatting with a family member about something I want to accomplish. They started asking questions about how I was going to do it. “I don’t know,” I repeatedly said. They were puzzled. They couldn’t understand why I was okay not knowing how I was going to accomplish my goal. This intrigued me, so I began asking them questions. I eventually learned that they associate a clear path to a goal with a high likelihood of success. Said differently, if you know what steps to take ahead of time, you’re likely to be successful (if you put in the work).

No clear path means uncertainty, which scares many people. That’s understandable. In my experience, an unclear path can be scary but isn’t insurmountable. If you can figure things out as you go, you drastically improve your probability of success.

I first realized I could figure things out when I was a kid. I tried to convince my parents to let me do some hairbrained side hustle. They reluctantly agreed, to my surprise. That’s when I realized I had to figure out a lot of stuff to make the side hustle work. I had no idea what to do or how to do it. Eventually, I figured it out by talking to people and doing research. There were some bumps along the way. But to my parents’ and my surprise, it worked out. I made some money and learned how to figure things out.

The ability to figure things out is key to dealing with uncertainty. If it isn’t a skill you were born with, it can be learned. All you need to do is practice by . . . trying to figure something out.

An entrepreneur friend keeps close tabs on how public software businesses with recurring revenue are valued. He feels confident that in a high-interest-rate environment, free cash flow will play a bigger role in the valuation of these and other types of public companies than it has in the last decade.

It occurred to me that most people likely don’t know what free cash flow means. Free cash flow is a measure of how much cash a company generates (or consumes) that’s available for management to use at their discretion. For example, they may use it to pay dividends or for share buybacks. It’s important to note that free cash flow is different from net income (net profit)—mainly because of accounting rules. For example, some things that add to or subtract from net income don’t involve the company spending or receiving cash (e.g., depreciation). Companies can lack profitability but still generate free cash, and vice versa.

Here’s the formula: free cash flow = operating cash flow – capital expenditures

Operating cash flow can be found on the statement of cash flows. I won’t get into the details, but it’s basically how much cash company operations generate. It’s different than capital cash generated or spent from investing and financing activities. If a company sells widgets, it measures how much cash it consumed or generated just from selling widgets, not from investing the company’s cash or raising debt or equity.

Capital expenditures can also be found on the statement of cash flows. This is usually a measure of how much capital was spent on assets that will be depreciated over a period. Think buildings or pieces of machinery. Buying assets isn’t an operating expense, but it does reduce cash available for management to use and thus reduces free cash flow.

Free cash flow is a good concept for entrepreneurs to understand.

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

• Schedule – This was the first full week of my schedule experiment. During week one, I was able to do significantly more long-form reading. And I had some interesting insights as a direct result.  
• Banking – The First Republic Bank failure wasn’t a surprise. Interest-only mortgages being a contributing factor was. I’ve been thinking about the impact this product likely had on high-end real estate prices. It’s also got me thinking about where we were in the credit cycle when these loans were made and where we currently are.  
• Timing – I’ve been thinking about cycles and timing of ideas. Understanding where we are in a cycle can help you understand when the time is right (or wrong) to do something. Still thinking about this and getting the perspectives of others.  

Week one-hundred sixty-second was a productive week. Looking forward to next week!

The venture capital world has changed a lot in the last year or two. The good times when money was free flowing are no more. To better understand what’s happening, I decided to zoom out a bit. I’ve been reading about cycles in the investing world across various asset classes.

I’m not an expert on this. I’m still learning, but from what I’ve read so far, a simple concept describes what happens. When a strategy generates outsize profits, it attracts attention. Investors take notice. More capital is invested in the strategy. As more capital is invested into the strategy, it becomes institutionalized and has more capital to deploy than there are good investment opportunities. When that happens, returns (risk-adjusted) go down. As things perform poorly, attractive investment opportunities that generate high returns (risk-adjusted) can be found.

The public markets were hot in 2020 and 2021. Lots of venture funds saw their portfolio companies IPO (or do a SPAC) or get acquired, which allowed funds to return cash to their limited partners. Those returns didn’t go unnoticed. Over the last two-and-a-half years, venture funds raised larger funds—just before public markets began declining. It’s much harder for funds to raise today, but the capital already committed to those funds likely hasn’t been fully deployed (for a variety of reasons).

Sentiment in venture isn’t as hot as it was in 2020 or 2021. But it isn’t negative. Many funds probably have ample undeployed capital. Fund managers still have enough cash flow from management fees on committed capital to fund their lifestyles and firm expenses, and they can stay busy trying to deploy their uninvested capital. Limited partners likely haven’t seen markdowns on venture fund investments yet because many portfolio companies have been putting off raising.

I’m wondering when we’ll move into the next part of the cycle, when sentiment in venture will be negative. I’d imagine a few things will have to happen first. Limited partners will have to see their venture fund investments performing poorly (i.e., funds marking down their investments). Fund managers will have to run out of capital to invest, see their cash flow from management fees reduced or close to running out, and face difficulty raising new capital from limited partners. When (if) this happens, I think venture sentiment will be negative and closer to a low point. This will make people rethink careers in venture and limited partners rethink investments in venture.

We’re not there, but I’d imagine we’re headed that way if the current macro trajectory continues. Again, I’m still learning, so these thoughts may (and likely will) change. But that’s my thinking as of today.

Maya Angelou once said, “Nothing will work unless you do.”

If you want to achieve goals in life, work, relationships, etc., work is required. Nothing will go the way you want unless you put in the work. There’s no substitute for hard work—no sustainable way around it. If you don’t put in the work, things likely won’t go your way.

Instead of viewing hard work as an obstacle to my getting what I want, I look at it as a requirement for me to get what I want. It’s part of the journey. I don’t always like it, but I accept that it’s a package deal. No hard work, no good outcome. It’s a small mental shift that’s been helpful to me over the years.

A few weeks ago, I wrote about Apple having launched a new savings account product. The product was interesting for a few reasons:

• It offered a competitive 4.15% APY when it launched, which is higher than many other institutions’ accounts.
• The iPhone gives Apple a huge distribution advantage in a changing banking landscape.
• The Silicon Valley Bank (SVB) failure and First Republic Bank failure put uninsured deposits top of mind for depositors. People are moving deposits to mitigate this risk, which is shifting the banking landscape. Banks must now compete for deposits and reward savers.
• Given these facts, Apple’s announcement seems well timed. It may have decided to not let a good crisis go to waste.

I’ve been curious how successful this product would be. This week, I read a Forbes article that answered that question. According to the article, Apple’s new savings accounts saw inflows of almost $1 billion in deposits in just four days. That’s astonishing. If it’s accurate, it signals, to me, that there’s an huge amount of pent-up demand because of an unmet need. Talk about product–market fit and perfect timing. I can’t wait to see how Apple’s savings accounts do over time and what their next banking move will be.

iBank coming soon?

Today the FDIC announced that JPMorgan Chase Bank is assuming the deposits of First Republic Bank. The bank failed, it was seized by regulators, and the FDIC struck a deal with JPMorgan for the latter to acquire the bank. First Republic has been in the news for the last few weeks since the SVB failure, so this outcome isn’t surprising given how many weeks have passed.

Banks are complicated, and I’m not knowledgeable about the industry. But one thing caught my attention as I learned more about the First Republic situation. According to a Bloomberg article, First Republic catered to the wealthy and lured them to the bank with attractive mortgage products. It reportedly offered wealthy clients mortgages with up to 10 years of interest-only payments. Combine this with the rock-bottom interest rates of 2020 and 2021, and the bank saw a flood of wealthy clients take out mortgages. A few interesting points from the article:

• In 2020 and 2021, First Republic originated $900 million of interest-only mortgages in two small sections of Beverly Hills, California. Said differently, they originated almost a billion dollars of interest-only mortgages in one neighborhood. Beverly Hills has some of the most expensive residential homes in the country, but that’s still an incredible data point.
• First Republic originated more than $19 billion of interest-only mortgages in just three metro areas: San Francisco, Los Angeles, and New York. Again, all these areas have some of the highest prices for residential homes in the country, but $19 billion is a staggering amount of interest-only loans in three cities.
• $58 billion worth of First Republic’s loans at the beginning of the year were interest-only, and the majority don’t require principal payments until 2028 at the earliest.
• At the beginning of the year, the bank estimated that the mortgages it made were worth $19 billion less than their carrying value if sold at that time, and it had a $4.8 billion loss on its bond portfolio (bond losses sank SVB).

To be fair, there’s nothing wrong with interest-only mortgages. They’ve been around for a long time and, when used responsibly, can be a viable financing product for responsible borrowers. First Republic appears to have offered this product to borrowers with the highest credit scores who also earned high incomes. These loans may have been a great product for borrowers, but they weren’t so great for First Republic. I’m not sure about many of the details of these loans (fixed, variable, etc.), but the meeting of low rates on many of these interest-only mortgages with rising interest rates and strong deposit withdrawals appears to have contributed to a perfect storm for the bank.