In the last few years, there’s been a push to acquire small retail brands that sell on marketplaces like Amazon. Fueled by the pandemic-induced surge in e-commerce growth, aggregators raised billions of dollars to acquire Amazon.

Aggregators remind me of private equity—but more focused. They build a scalable platform that allows acquired companies to benefit from economies of scale. They acquire a number of tiny retail brands and plug them into their platform. The idea is that these small brands can scale more rapidly as part of a platform. From what I’ve read, many acquisitions are teams of five or fewer people doing $1 to $5 million in annual revenue.

Many aggregators raised billions in debt to fund their acquisitions when interest rates were low in 2020 and 2021. Now, for a variety of reasons, they’re beginning to experience some pain. First, e-commerce growth rates in 2020 and 2021 have not held up. E-commerce is still growing, but at a rate much closer to historical averages because people are shopping in person again. This means that the growth projections of companies acquired in 2020 and 2021 aren’t being met, which in turn means that cash flow projections aren’t being met. Second, inflation has increased costs substantially. Costs for producing, packaging, and shipping physical goods are materially higher. High costs (absent offsetting price increases) translate into lower profit margins and cash flow. Third, interest rates have increased substantially since 2021. The debt service on some of these loans is an issue. When debt needs to be refinanced, it can be hard to demonstrate how you’ll repay the debt—especially when sales, margins, and cash flow aren’t meeting projections.

According to a Bloomberg article earlier this month, the Amazon aggregator industry is in trouble and may begin consolidating. Based on my e-commerce experience, I agree. But where there’s pain, there’s also opportunity. I can see sophisticated investors who are experienced in e‑commerce purchasing some of these assets at very distressed prices, turning operations around, and transforming these brands into assets that generate great returns.

Today I got together with a friend who happens to also be a former founder. We wanted to catch up, get and give feedback on our ideas, and talk investing. Instead of meeting in a coffee shop or office, we decided to go for a walk.

We ended up walking for an hour. During that time, we checked all the boxes for what we wanted to discuss, but we also got some good physical activity. We killed two birds with one stone.

The fresh air, sun, and movement felt great and enhanced our conversation. At the end, we both said we want to do this more often. I can’t do walking meetings year-round given the seasons in Atlanta, but I’m going to try to do more of them.

I hope everyone had a safe Memorial Day with friends and family!

Last night I watched the Miami Heat vs. Boston Celtics Eastern Conference playoff game. The series is a best of seven, meaning whichever team wins four games wins the series. Miami won the first three games, so the probability of Miami winning the series was high. Boston then won two consecutive games and was looking to win a third last night, tie the series, and force the series-deciding game seven. The game was played in Miami, and forcing a game seven in that environment wasn’t an easy task.

In the fourth quarter with three seconds left, Miami was ahead 103–102. Boston shot the ball, which rimmed out. With two-tenths of a second remaining, Boston’s Derrick White tipped the ball into the net. Game over. Boston has won and forced a game seven against seemingly impossible odds with three seconds left. The entire arena is stunned. It was the craziest ending of a game I’ve seen in a long time.

The last three seconds of last night’s game were a great example of what can happen if you don’t give up. The Celtics could have let the probabilities of scoring in three seconds deflate them and given a half-hearted effort. But that didn’t happen. They came out and gave their all for those last three seconds and pushed for the outcome they wanted until the clock read zero. Of course, the ball bouncing into White’s hands was a stroke of luck, but had he not hustled to be in that position under the goal he wouldn’t have gotten the lucky break.  

My takeaway is to never give up prematurely. Keep fighting until the clock reads zero. If you give up too early, you could be out of position and miss your lucky break.

This week I caught up with a lawyer friend. We touch base regularly to catch up. I tell him what I’m working on and thinking about (personally and professionally), and he does the same.

During our recent chat, I shared some early ideas that weren’t fully fleshed out. My expectation was that he’d ask a few questions and we’d move on to what was going on in his world. To my surprise, he quickly caught on to what I was thinking and agreed with part of my hypothesis. In fact, not only did he get it, he pointed me to a little-known database that could provide valuable information to help me execute this idea. He walked me through how to navigate the database and understand the information returned as results.

This meeting was a reminder to share your ideas with people. Doesn’t matter if they’re rough or half-baked; share them anyway. You never know what someone knows or who someone knows that could help you. There’s way more to gain from sharing than not sharing your ideas.

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

• Investing opportunities – I had a great conversation with a good friend and fellow entrepreneur about investing. Convincing people to take the action you want them to take is critical to success in closing a deal. But building a strategic and thoughtful process to identify investment opportunities before other people do is key in investing. After studying successful investor entrepreneurs who’ve had outsize success, I know that the great ones realize this and built solid processes.
• Twin tailwinds – I shared a post about twin tailwinds. I’m thinking more about how to use the concept of twin tailwinds to understand market cycles and spot overlooked investing opportunities.
• Schedule – This was the fourth full week of my schedule experiment. The results are clear. Starting my day by reading long-form writings by experts on topics I want to learn more about has been a game changer. I’ve gained knowledge at an accelerated pace, and I’ve had new insights more frequently. This will become a daily habit. I still need to tweak goals and a few other things as I continue this habit.

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

I’ve spent a good amount of time developing an understanding the journey of emerging investment managers. These are people who want to start a company that focuses on making money by investing capital. Many people think of emerging VC fund managers, but it can include anyone investing other people’s capital such as private equity and real estate fund managers. I think of these people as entrepreneurs who happen to be investors, or “investor entrepreneurs.” They want to invest as their profession, but not by working for someone else. They want to create their own investing company and work for themselves.  

These investor entrepreneurs are no different from any other founder. The journey and struggle are the same; the details vary a bit because of the industry and business model.

Most great founders have a unique insight. They understand a problem well, seeing something about it that others have missed. This observation is their unique insight; it gives them an edge in developing a solution that creates real value for potential customers.  

To be successful, investor entrepreneurs need the equivalent. They need to understand and see an investing opportunity that others don’t understand, have overlooked, or aren’t aware of. They need to understand how they can generate superior returns because of this insight. This unique insight is their investing edge, their investment thesis.

A founder with a clear, unique insight, a solution based on that insight, and the ability to execute has a higher probability of success and of raising capital from VC funds. An investor entrepreneur with a clear investment thesis, a strategy to generate superior returns based on that investment thesis, and the ability to execute that strategy has a higher probability of success and of raising capital to invest from limited partners.

A friend saw my IPO post and asked a question: what was the driving force behind so many IPOs in 2021? In my opinion, two things happened simultaneously:

• Sales explosion – Many companies, especially tech companies, saw sales explode during 2020 and 2021 because of COVID-19. Years of projected growth were realized in months in some of the more extreme examples. In many (not all) cases, sales growth leads to higher free cash flow or profit. In others, companies accelerate their reinvestment into growth initiatives, driving even more sales growth but forgoing higher profits and free cash flow. When valuation multiples are applied to exploding sales, free cash flow, or profit (investors pick the appropriate metric based on the industry), you get an explosion in what the company is worth, too.
• Multiples explosion – Many companies are valued based on a multiple—for example, price to earnings. Investors love growth, and rightfully so. Sustained sales, free cash flow, or profit growth can lead to staggering results over a long period of time once compounding is factored in. This, as well as other factors like ZIRP, makes investors comfortable paying a higher valuation multiple for a growth company. When they pay a higher multiple, that means the multiple has grown or expanded.

Growth companies usually benefit from a single tailwind, sales growth, increasing company value. The multiples used to value them would fluctuate a bit, but not much. In 2020 and 2021, companies found themselves in a rare situation. Sales and multiples were exploding simultaneously. This wasn’t a tailwind. It was twin tailwinds on steroids. The result was an explosion in what companies were worth well beyond what we’d seen before. Valuations went to the stratosphere.

Let’s use an example to quantify the difference. Suppose that a $100 million annual revenue SaaS company is growing at 40% annually and valuations are determined by a sales multiple of ~10X trailing annual revenue. There’s no pandemic. Here’s what the company is worth a year later:

• $140 million annual revenue ($100M * 1.4) * 10 (sales multiple) = $1.4 billion valuation

Now let’s factor in the pandemic. The same $100 million annual revenue SaaS company grows 100% and multiples expand to 20x annual sales because of COVID tailwinds (they peaked at 29x in 2021 per the BVP Cloud Index):

• $200 million annual revenue ($100M * 2) * 20 (sales multiple) = $4 billion valuation

In the COVID scenario, revenue is ~43% higher, the multiple is 100% higher, and valuation, as a result, is 185% higher—valuation expanded 4.3 times more than revenue. The company’s value is $2.8 billion more than it would have been without the pandemic’s effects. This demonstrates the power of twin tailwinds.

Here’s the math:

• $140M revenue * 1.43 (43% more) = $200M revenue post COVID
• $1.4B valuation * 2.85 (185% more) = $4B valuation post COVID
• 185% (post COVID valuation growth) / 43% (post-COVID revenue growth) = 4.3x

Given this situation, many founders and investors opted to take their companies public while valuations benefited from the twin tailwinds. They were able to sell some or all of their companies’ shares at valuations that were abnormally high by historical standards.

I’ve been sharing my thoughts daily for over three years now. I was recently asked how I’ve come up with a topic every day for 1,000+ consecutive days. It’s taken a bit of time, but I’ve developed a simple system. Here’s how it works:

• I keep in the back of my mind that I must write a post. So, I’m subconsciously on the lookout for insights and interesting information. If I read an article that catches my attention, I note it. If I’m thinking about something or have an insight, I note it.
• I capture a note in one of two ways. The first is email. I’ll send myself an email with the thought as the subject line. Sometimes I add links or additional thoughts in the body of the email. I tag these emails as blog content and archive them. The second is the Notes app on my iPhone and laptop. I have a single note with a running list of thoughts, insights, and links to other people’s writings that caught my attention. Lately I’ve been capturing more notes via email.
• At the end of each day, I review emails tagged as blog content and my Notes app. I choose the topic that resonates most with me. Then I think about it a bit more and start writing.

The most important and unexpected benefit I’ve gotten from this system is that it instilled in me the habit of capturing my thoughts. Recording my “lightbulb” and “shower” moments has been invaluable. Instead of losing these thoughts when the moment passes, I now keep them top of mind or at a minimum recall them later. This has enhanced my reflection process and ability to uncover insights I otherwise would have missed.

That’s my system. It’s simple and fairly low-tech.

I tend to be someone who has strong opinions about a decision once I’ve made up my mind. When I was younger, I’d stand with my position no matter what. I wasn’t open to considering other perspectives or new information. My mind was made up, and it wasn’t changing. That trait led to some painful situations when I’d clearly made the wrong decision but refused to admit it.

Today I try to have flexibility in my thought processes and decisions. I still have conviction about my decisions, but I’m much more open to listening and trying to understand perspectives I haven’t considered. Equally important is new information. When facts or data that I didn’t previously have come to my attention, I consider them with more of an open mind.

Being open to listening and reviewing new data doesn’t necessarily mean that I change my decision, of course. Often, I stick with it because I still feel it’s the right decision, all things considered. But there are times when being open-minded has allowed me to accept that I’ve made the wrong decision, reverse course, and avoid unnecessary pain.

Now, when I’ve made a decision, I make sure that along with having conviction about it, I have mental flexibility too.