I’ve spent time with a few entrepreneurs recently. One of them is gifted at finding undervalued assets. He buys them at deep discounts, improves them, and sells them for premium prices. He’s got a great eye for opportunity and has a top-notch business. 

He said his main constraint is capital. He doesn’t have a deep network of people who invest in projects like his. So, he has relied on a single wealthy investor to back his projects. This has worked, but it’s put him at a disadvantage in negotiating terms. It also has limited the opportunities he could pursue because the investor, who must sign off on each project beforehand, doesn’t understand the potential of some of the assets.

It amazes me that an entrepreneur with a decade-long track record of success is constrained by capital availability. I suspect there’s a large, fragmented market of entrepreneurs like this one. Seems like a big opportunity!

I found a report from Carta, the equity management platform, that’s full of data and very helpful. It’s called State of Pre-Seed: Q2 2023. Carta defines “pre-seed” as “any company that has yet to raise a priced equity round.” Lots of companies begin by raising capital on convertible instruments and do priced equity rounds as they mature. Carta doesn’t explicitly say this, but I assume it also caps valuation of companies included in this report.

The report is full of useful data. In addition to high-level data, it provides granular data broken down by the two most common convertible instruments used by early-stage companies to raise: simple agreements for future equity (SAFEs) and convertible notes.

One point that stood out to me was that 52% of pre-seed companies that raised in the first half of 2023 were in California and New York. These companies were also more likely to raise more than $2.5 million in their pre-seed rounds.

The report is a great resource for anyone curious about the state of fundraising for early-stage venture capital companies in the first half of 2023. The report can be downloaded for free here.

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

• Limited partners’ appetite – I had a long conversation with a good friend in private equity this week. He’s seeing that existing and prospective limited partners have a strong appetite for cash-flow-positive businesses and fund managers with operating experience who can improve portfolio company results by rolling up their sleeves.
• Impatient – This week was a reminder that I’m still impatient about certain things. Some projects take time to show results, which is frustrating. I’ve worked on being more patient over the years, but I still have my moments.
• Ground-level data – I was also reminded that in some instances, data collected at the ground level can help me get a better understanding of what’s happening—and much sooner—than aggregated high-level data in publications or from trade associations.

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

I recently reviewed an early-stage founder’s fundraise deck. He’s raising capital for his start-up. His first start-up was shuttered when he couldn’t attract paying customers. He mentioned the first start-up to me but positioned the idea behind that business as a success because another company executed on it and is worth $10+ billion. Even though his business failed.

Most start-ups fail. Failed start-up attempts, while painful, can pique an investor’s interest. The failure itself isn’t what they focus on. What they want to know is what you learned from it and how you’ll apply that knowledge to the next attempt. If you learned valuable lessons that will increase your chances of success and speed of execution, that’s a positive founder trait to many investors.

Founders shouldn’t shy away from their failures. Instead, they should own them, share what lessons they learned from them, and articulate how those lessons increase their chances of success as a repeat founder.

I caught up with an entrepreneur who’s frustrated with a service provider. The firm handling his bookkeeping hasn’t provided him with financial statements for his multiple businesses in a few months.

I was curious how he makes decisions, knows the companies aren’t in financial trouble, and knows whether they’re making or losing money. He told me that he’s been keeping close tabs on each business’s bank accounts to get some level of comfort.

Financial statements, such as profit-and-loss statements and balance sheets, are important tools for entrepreneurs. They help you understand the financial health of your company and alert you to situations that could harm the company (e.g., a cash shortfall). Running a company without financial statements is like driving with your eyes closed. It’s dangerous. Bad things can happen if it goes on too long.

If you’re an entrepreneur, you should make sure you have relevant financial statements prepared monthly, and you should review them every month. If something doesn’t make sense, ask questions until it makes sense or is corrected. If a firm can’t consistently meet that expectation, it may be time to find one that can. Otherwise, you’re driving blind and could end up driving your company into a brick wall.

Today kicks off what I believe will be a memorable fundraising period for technology in public and private markets. With private companies going public through IPOs, start-ups raising venture capital, and venture capital funds raising from limited partners, we’re likely to see a lot of activity between now and the holidays.

I’m curious to see how receptive investors are to these varying investment opportunities and how much capital is raised.

Happy Labor Day!

I hope everyone had a safe and healthy holiday!

Over the years, I’ve learned that some of my insights and ideas come to me when I least expect them. Thinking back, the best ones usually come to me in the middle of the night. I wake up, and something I couldn’t figure out is suddenly crystal clear. I have a stream of related insights. It’s like all the puzzle pieces fit together and I can see the picture clearly.

These episodes can be fleeting. Just as suddenly as inspiration comes, it can go. I’ve had great insights in the middle of the night that I didn’t capture. Maybe I was too tired to get up or didn’t have the right tools. Whatever the reason, I’ve regretted not recording them when I couldn’t remember them the next morning. Knowing I had the insight and not being able to recall it was frustrating.

Knowing how rare and valuable these moments are and how quickly they dissipate, I’ve changed my approach. When I have an insight in the middle of the night, I get up and write it down in my journal. I don’t try to organize my thoughts. I simply write down as much of my stream of consciousness as possible. My brain is in the zone, and my goal is to capture as much of its output as possible. There’ll be time to organize it later. 

It happened last night. The solution to a problem I’ve been thinking about for months came to me. I recognized what was happening, got out of bed, and spent an hour writing down my thoughts. When I reviewed them this morning, I was glad I’d captured them. I think they’re the building blocks of something that could be big.

Great insights don’t happen every day. When I have them, I do whatever I can to capture them.

This week I was discussing an upcoming capital raise with a founder. The company has pivoted, and its latest product is resonating with prospective B2B customers. These businesses have been searching for a solution to a problem, to no avail. This founder’s solution checks all their boxes. Prospects are converting to customers relatively quickly.

Things are looking good, and the founder wants to raise venture capital. His pitch is coming together, but we talked a lot about one part of it: the market. How many customers exist for his solution? I learned that his “known” market is material but not gigantic and not growing (as far as we could tell). There’s a clear path to building a company with seven-figure annual revenue. Beyond that, not so much.  

Markets matter a lot. It’s hard to build a big business in a small market—there just aren’t enough people willing to pay for the solution. It’s equally as hard in a static or shrinking market because companies grow by taking market share from other businesses—the market is cutthroat (and likely low margin).

Venture investors understand this dynamic and spend lots of time understanding the market a start-up is operating in before they invest. If the market won’t support a large company (now or in the future), the probability of an investment being profitable for the fund goes down drastically. If they can’t see the investment turning a large profit for the fund, they probably won’t invest.

Markets matter, and founders should understand their market and its potential. If a founder can’t articulate why a market will support a large company (or multiple companies) and how their solution will win in that market, they may not be able to raise venture capital.

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

• IPOs – I learned a lot from the IPO filings of Klaviyo and Instacart, and I had some interesting conversations about these offerings. They could have a material impact on public and private tech markets.
• Holiday weekend – Looking forward to a long weekend and Labor Day holiday.

Week one hundred seventy-nine was another week of learning. Looking forward to next week!