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.

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.