Tiger Global is an investment firm founded over twenty years ago by Chase Coleman. Tiger has been investing in public and private technology companies for many years and has tens of billions of dollars’ worth of assets under management. It made waves in the venture capital industry for its investment pace in 2021.

Tiger closed a fund in 2021 that was reportedly $6.65 billion. And it closed on a $12.7 billion fund a year later (including $1.5 billion from firm employees, so $11.2 billion from outside investors) that took less than six months to raise. Read more about these funds and the firm here.

Last fall it was reported that Tiger was raising a new fund targeted at $6 billion. As of now, it has reportedly raised $2.7 billion, according to regulatory filings. (It’s still raising, and this figure could change.) Tiger’s ability to raise capital for technology investments has declined, and it’s not alone. Insight Global is a venture capital firm that reportedly has cut the target size of its latest $20 billion fund because of the challenging fundraising environment.

I don’t have inside information, and I haven’t talked to anyone at any of these firms or their LPs. But given rates paid on US Treasuries, returns required by LPs to justify illiquid venture capital investments are likely higher than they’ve been for ten years. Translation: LPs probably want venture capital funds to produce higher returns to compensate them for the risk of capital loss and the inability to access their capital for a decade. Combine that with the compressed multiples that technology companies experienced in 2022 (i.e., falling valuations), and fund managers are in a tough spot. They’re being asked to produce higher returns when exit valuations have come down (though this could go back the other way during the fund’s life).

This dynamic will likely have an impact on the venture capital industry if it continues. I’m curious to watch this and see how it plays out.

I chatted with a friend who’s in the process of acquiring a business. Instead of using a bank to finance the debt portion of the purchase price, he’s using seller financing. That is, instead of taking out a bank loan and paying the full purchase price in cash, he’s accepting a loan from the seller. The seller gets paid part of the purchase price in cash at closing, with the remainder repaid over time with interest.

This is common, but I hadn’t heard about it being used as much in the last few years because interest rates have been so low. I was curious how the seller felt about it, so I asked my friend.

He said the seller envisioned selling the business, getting cash in a lump sum, and riding off into the sunset. Seller financing, which prevents a clean break from the business, wasn’t part of his vision. It took a bit of convincing by my friend, but in the end, they made a deal after a detailed walkthrough of the math.

Riding off into the sunset is every founder’s dream scenario if they want to sell, but it doesn’t often play out that way. Things like earnouts and seller financing are common and can mean the seller will get delayed payments over a period of time.

I’ve been evaluating a potential investment and researching the industry. Today, I spent time with someone in my network who’s worked in that industry for over a decade. It took only an hour’s conversation for me to gain a much better understanding of the industry and its incumbents and get feedback on the value proposition of the company I’m evaluating.

Today was a reminder that you can’t know everything, and it’s helpful to have a network of people who can fill your gaps in various areas. Especially if you’re a generalist investor.

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.

I recently watched an interview in which Marks shared an interesting fact. Between 1990 and 2000, he didn’t receive a single response when he sent out his memos. Utter silence. People didn’t even acknowledge receiving them. But Marks continued to write them. After more than a decade, people began paying attention. Thirty years later, his memos are highly anticipated and widely read.

Marks’s memos are a great reminder that good things don’t always happen overnight. Marks put in consistent work for over a decade before his writing efforts began to pay off.

A few days ago, I chatted with a founder in the medical field who turned down a private equity offer to acquire his business. Today, a founder of an automotive business reached out to me and shared that someone in private equity inquired about buying his firm. Neither of these founders had their companies up for sale. The private equity firms found them.

These two stories are anecdotal, but they align with what I’ve been hearing from other investors. Large pools of capital have been raised by private equity to buy relatively small, profitable businesses.

Small businesses represent a great investment opportunity. Their size, usually $10m in annual revenue or less, means there’s ample room to grow revenue if their market is big. Their operations may not be very efficient and may rely heavily on the owner, so technology and better processes can enable these businesses to grow while increasing profit margins. Last, because these businesses are small, valuations are low because there are (or were) fewer potential buyers (i.e., less competition).

I chatted with an entrepreneur in the medical field who has built a business doing seven figures in annual revenue. He built the company from the ground up over the last decade and was recently approached by a private equity firm about acquiring his business.

He wasn’t looking to sell but decided to go through the process of having the private equity firm evaluate his business. In the end, the firm gave him a thorough analysis of his company and an offer to buy the entire company. He would have had to stay on, with a high salary, to continue running the company.

The founder did his own analysis and declined the offer. His business is generating a material annual free-cash flow. He concluded he’d rather own the business for the long haul than sell for a lump sum today because he’s built an asset that’s giving him an above-average return that probably will improve over time. He’d rather own a cash-flowing asset he controls with potential for increasing returns than take a lump sum and find other assets to invest in that will likely pay a lower return.

I enjoyed talking to this founder and hearing his thought process. I like the way he views his company as a cash-flowing asset and how he factored returns of his two options into his decision-making.

Yesterday I was at a social gathering. The topic of markets and investing came up because a few of the people there make relatively small personal investments in their spare time. The gathering included people from various backgrounds, locations, and professions, so I was very curious to hear what everyone had to say. I observed three notable points:

1. Negative sentiment – These people are interested in investing only in traditional cash-flowing businesses. This wasn’t surprising; I’ve heard the same from other investors and entrepreneurs. What stood out was the negative sentiment my friends had about start‑ups, technology companies, and to a lesser degree public equities. Their views applied to all start-ups and technology companies (excluding mega caps such as Google).
2. Historical trends – They expect certain asset classes, including real estate, to continue to perform well even in the current interest-rate environment.
3. Debt – They’re still embracing the use of debt to purchase physical assets.

Here are my thoughts on each point:

1. Sentiment about start-ups and technology companies may have swung from too optimistic to too pessimistic.
2. Understanding why a trend occurred in the first place is important. Then you can assess whether the same conditions still exist and gauge the probability of the trend continuing.
3. Everyone must make the decision that’s appropriate for their personal situation when considering whether to assume debt.

I enjoy going to social events that include people from various backgrounds and perspectives. I get a lot out of conversations at these events. It’s a great opportunity for me to understand how different people think about things.

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.

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.