Earlier this week I shared my thoughts on people being less inclined to fit their lives into their work. Here’s a little more on that. I recently spoke with a venture capital investor at a prominent West Coast fund. She shared that she’d reevaluated where she worked. She concluded that the West Coast, with no support system and her aging parents thousands of miles away, wasn’t conducive to a good life with a young family. She ended up moving back to her hometown and working remotely, with the firm’s support.

I’m glad she was able to make a move that works for her family without limiting her options professionally. It’s encouraging to hear that her firm embraces this for her and other team members. I’m curious to see how venture firms react once they realize founders are making similar evaluations. Founders are likely to want to build companies in locations that suit their personal lives rather than relocate to be closer to Sand Hill Road.

Two emerging venture capital fund managers shared their biggest learning during a session I attended today. They said there’s a difference between being a fund manager and being an investor. They spend more time than they anticipated managing their fund versus investing. Managing a fund means doing administrative tasks like working with the fund administrator, doing people related tasks, and managing limited partners. They underestimated the amount of energy and time these tasks require. These tasks also take away from the time they can spend finding great founders to back and supporting the founders they’ve already backed.

Starting your own fund is about more than being an investor. It’s more like being a start-up founder—wearing multiple hats and being spread thin. It’s also a decade-long commitment (assuming your fund is a ten-year fund). For those who haven’t worked at a fund before, it’s even harder as they don’t have a baseline for how a well-run fund operates.

Building a successful fund requires that the founding partners be good fund managers and good investors.

Today I participated in a mock negotiation session that was designed to mirror a negotiation between venture capital investors and founders. Most participants hadn’t negotiated an investment deal before, so I was curious to hear their takeaways.

One of the founders shared something that stuck with me. Their negotiation started off with aggression from the investors, which set a bad tone. And the investors were aggressive with terms throughout the negotiations. Toward the end, the investors realized they were running out of time to get a deal done and offered a better deal. The founder was so frustrated by the experience that she didn’t even realize they had offered better terms and walked out without a deal. She was stuck on the aggressiveness of the entire process and couldn’t bring herself to do a deal with these investors.

Venture investors and founders, when they come to an agreement, are planning to work together for many years. But at deal term negotiations, they have opposing interests. Today’s session was a reminder that starting off with aggressive negotiating tactics isn’t a way to begin a long-term partnership and can blow up the partnership before it even forms. The best deals are ones that everyone is comfortable with, neither side got everything they wanted, and they’re looking forward to working with each other.  

Howard Marks is a successful investor who cofounded Oaktree Capital in 1995. As of today, Oaktree has $170 billion in assets under management, over 1,000 employees, and offices worldwide.  

During a recent interview at the University of Chicago, Howard shared his interesting thoughts about a trait he believes leads to investing success: second-level thinking. He defines it as thinking deeply, differently than the herd, and better than others. Second-level thinking is about insights, he said.

I believe second-level thinking is a key to outsize success in general, not just in investing. You can’t do what everyone else is doing and achieve outsize success. Second-level thinking means taking in information and forming your own conclusions instead of easily agreeing with others. Part of that process is connecting the dots between seemingly unrelated information to produce insights others haven’t had. Those unique insights lead to conclusions and actions that differ from those of the masses. The result is outsize outcomes.

Second-level thinking is important, as it’s the intellectual process that leads to unique insights.

Today I was part of a group that chatted with Scott Kupor, Managing Partner and employee number one at Andreessen Horowitz. a16z, as the firm is known, is a well-known venture capital firm that helped start the trend of having a large operating team of specialized people support the needs of portfolio companies. As Managing Partner, Scott has helped steer the firm from $300 million in assets under management (AUM) to over $30 billion in AUM since 2009.

Scott had a lot of great things to share, but one thing especially stood out to me. He talked about the need for geographic diversity of VC investments. The Bay Area has historically been the center of the industry. This has created a challenging dynamic.

• Founders outside the Bay Area have a hard time getting funding. This means that founders working on problems experienced by broader society but not so much in the Bay Area are less likely to receive the capital needed to solve them. Said differently, some of society’s big problems go unsolved.
• Lots of people fishing in the same pond creates an interesting dynamic for return on venture capital investment. It becomes increasingly competitive as abundant capital chases scarce opportunities to invest in an exceptional founder solving a big problem. As the competition increases, the valuation increases. As the valuation increases, the potential return on the investment is reduced.

I totally agree with these points and all the other great ones that Scott made. He made a strong case for geographic diversity of venture capital investment. Hopefully Scott and the a16z team will spend more time getting to know Atlanta and its start-up ecosystem and learn for themselves why Atlanta is ranked the best place to live in the U.S.

Some founders seed their companies with their personal capital in the early days. There are a variety of ways to handle this, with a loan from the founder as a shareholder being the one I’ve seen most. When a founder plans to grow their company quickly and raise venture capital, they have another option: they can classify their capital as an investment in the company. The easiest way to do this is through a convertible note or simple agreement for future equity (SAFE).

Why would a founder want to do this? For many reasons. One is that it helps to separate sweat equity from financial equity. If a founder must leave the company for some reason and their equity as a founder doesn’t vest, they still have their financial equity. The founder will own a percentage of the company based on their investment, regardless of what happens with the equity tied to their employment.

There are other benefits too, such as owning—for the financial equity—preferred equity versus common equity.

When someone says a company is a Fortune 500 company, people know it’s a large company. But what does that mean exactly? I decided to find out. Apple is the most valuable public US company and has a market cap (i.e., valuation) of $2.42 trillion as of today, so I assumed it would be ranked first on the Fortune 500 list. To my surprise, it was third. Walmart was ranked first and Amazon second. See the complete Fortune 500 list for 2022 list here.

I looked up Fortune’s methodology and learned that it uses total revenue to determine the rankings. Not market cap (i.e., valuation) or profitability. Just top-line revenue. It ranks on how many dollars customers gave a company (revenue) in a year, not how many of those dollars the company kept (profit) or what the market says the company is worth (market cap). Here’s the top three Fortune 500 companies (with 2022 revenue for context):

• Walmart – $573 billion
• Amazon – $514 billion
• Apple – $394 billion

Conversely, the S&P 500 is an index of the largest publicly traded companies listed in the United States. The S&P 500 doesn’t rank companies directly. Instead, each company makes up a certain percentage of the overall index, which is called its index weight. The weight calculation isn’t as simple as Fortune’s revenue methodology, but it is mostly based on market cap. The larger a company’s market cap, the more weight that company carries in the index. Full weighting methodology here.

Here are the companies with the biggest index weights (with market cap as of today for context):

• Apple Inc. – $2.42 trillion
• Microsoft Corp. – $1.89 trillion
• Alphabet Inc. – $1.21 trillion
• Amazon.com Inc. – $962 billion
• Berkshire Hathaway – $684 billion
• Nvidia Corp. – $597 billion
• Tesla, Inc. – $570 billion
• Exxon Mobil Corp. – $447 billion
• UnitedHealth Group Inc. – $439 billion

Interestingly, Walmart is an S&P 500 company, but it has a lower weight in the index than the above-listed companies. It has a market cap of $372 billion as of today.

Interesting to see how Fortune and S&P 500 both seek to identify the largest companies, but their rankings differ because they’re measuring different things.

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Last week I wrote about two of my takeaways (see here and here) from an interview with the founder of Carlyle Group, David Rubenstein. David shared a lot of great nuggets, including some that would otherwise take people a lifetime to figure out. In addition to being a founder, David also hosts The David Rubenstein Show: Peer to Peer Conversations. He’s had the opportunity to interview over two hundred people, some of whom are investors, on his show and work with numerous investors over his many-decades-long career.

Over the years, David has noticed a few traits that great investors have in common:

• Well educated – They aren’t high school dropouts.  
• Good at math – Their math skills are above average.
• From an average family – They were raised in a blue-collar or middle-class family.
• Willing to own mistakes – They’re willing to recognize a mistake, admit it, and get out quickly.
• Generous – They’re willing to share credit for good things.
• Accepting of accountability – They’re willing to take the blame when things don’t go as planned.
• Avid readers – They have a strong appetite for learning and knowledge. They’re constantly reading. I noticed something similar.
• Gratified by the act of investing – The challenge of investing—not just the money—is interesting to them. It’s a matter of mental sharpness and challenge.
• Contrarian – They’re comfortable going against the grain instead of following the path of least resistance.
• Philanthropic – They enjoy promoting the welfare of others.

This is an interesting list. Some of the items I wouldn’t expect. I’m going to think about this list and see if it holds true for the investors I know.

Take a listen to David’s comments on great investors here.

David Rubenstein is the founder of Carlyle Group, a publicly traded private equity firm in DC. The firm has about $373 billion in assets under management as of this writing. David is a good example of what I call investor entrepreneurs—investors who have an entrepreneurial spirit and found their own investment firms rather than work for someone else. I’ve been learning more about David’s outsize success and the founding of Carlyle. I listened to an interview he gave recently at Wharton’s Private Equity & Venture Capital (PE/VC) Club.

David believes that culture is one of the most important things in an organization. He was purposeful in crafting the culture of his firm, and it’s been a competitive advantage and part of Carlyle’s brand. David was asked what’s needed to build a great culture. He shared something I didn't anticipate: persuasion skills. He went on to say that life is about persuading others to do what you want. Family, coworkers, friends, spouses, everyone—if you can persuade people you’re right and get them to do what you want, it’s an advantage in life and helps build a great culture.

He explained how to persuade people:

• Writing – Effective writing is important because it helps you communicate your point succinctly, which can persuade others.
• Talking – Oral persuasion is about making your case by speaking. If you can speak clearly and succinctly, that will help you be persuasive. Practicing helps.
• Actions – Leading by example is an effective way to persuade. Do what you want others to do to set an example that they’ll follow.

David is right. Persuasion is an important life skill that can be a superpower for entrepreneurs who lead other people. Culture is about how people act while they execute the company’s mission. Effective leaders are good at persuading their teams to act in a manner that aligns with the company’s core values.

I read a quote that stuck with me:

What the wise man does in the beginning, the fool does in the end.

                                                                                  – Warren Buffett

If you find an asset that’s underpriced and buy it, eventually others will realize it’s underpriced and buy it. As others buy it, the price goes up until it’s no longer underpriced. As the price continues to rise and the asset becomes overpriced, it draws more attention and people buy based on momentum. Eventually, the asset becomes so overpriced that the price begins to decline, causing a loss for those who bought at peak price because of momentum.

The wise man spurns consensus and goes against the grain, potentially realizing an outsize return. The fool values consensus and follows the crowd, potentially incurring a loss. Consistently successful investors are comfortable acting on their high-conviction, nonconsensual views.

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