I chatted with a founder about his plans for his company. His goal is generational wealth for his family. He’s aiming to sell the company in an all-cash deal. I thought the focus on an all-cash deal was interesting given his company’s trajectory. It’s growing quickly, and I believe it has the potential to be worth a billion or even ten billion dollars one day.

Compounding is a powerful force that many—including founders—don’t grasp. If you own equity for a long time in a company with a healthy growth rate, the value of the equity compounds over time and can end up being massive. If accumulating wealth is a priority, owning equity in a great, growing company is the way to accomplish it. The families that understand this concept have continued to own significant equity for decades in the company their patriarch or matriarch started. Their wealth has compounded over that time into massive fortunes. Think Walton family and Walmart. Jim, Alice, and Sam Walton are worth close to $200 billion because of their decades-long ownership in Walmart. Even some of the recent entrepreneurs who’ve accumulated immense wealth did so because of the compounding value of the equity they owned in their company. Think Bernard Arnault, Jeff Bezos, and Elon Musk.

Founders (and everyone for that matter) should be keenly aware of the power of compounding when they’re thinking about financial security.

Over the last year or so, I’ve shared with friends a hypothesis that leverage is causing extreme fluctuations in asset prices. I believe it was a material factor in the 2020–2021 runup and that it’s played a significant role in the declines in 2022. Leverage enables an investor to multiply the potential return on an investment. It can involve using borrowed money to amplify bets or other means to allow an investor to have exposure to an asset without fully owning it. Leverage amplifies movement in both directions, which can cause havoc in markets when things move to the downside.

History doesn’t always repeat itself; sometimes it rhymes. I started looking into the past to understand the present. Specifically, periods when interest rates were increased and financial markets experienced high volatility. I’m still early into this, but I’m looking into the mid 1990s now. It was a period of rate hikes and bond volatility that the Fed couldn’t explain at the time. Rate increases kicked off a sequence of events. We now know that volatility was caused by excessive leverage that most were unaware of at the time. Because the leverage wasn’t public knowledge, the volatility was hard to understand or explain. It’s early, and I still have more reading to do about other periods that fit my criteria, but what I’ve learned so far has been interesting.

I’m no economist, but my gut tells me we have more leverage in financial markets than we’re aware of. It may be amplifying market movements to the downside now.

I connected with an investor who shared how he evolved from a start-up founder to venture capital investor. He had an idea of what it meant to be a venture investor, but he learned that the reality is quite different. His first year was one of not knowing. He didn’t know what a good company looked like, so everything looked good to him. He didn’t know what his approach to finding great companies was, so he tried a bunch of stuff. The list of what he didn’t know is long. But the big takeaway from his first year was that he could learn by doing. There’s only so much that people can tell you about the craft; you have to get your hands dirty to learn and get better.

Having always been a practical learner, I agree with the learn-by-doing mantra. Action produces information. You learn from the information, improving your decision-making and actions. This was true for me as a founder, and it’s true for me as an investor. Some of my learning has been painful and expensive, but I’m comfortable with that. Instead of being unhappy about the money, time, or energy lost, I consider them the tuition I paid for knowledge.

If I want to learn how to do something, I now think about ways to do it so I can learn (and maybe pay some tuition too).

Some of the most recognizable private companies usually don’t allow individuals to invest. The interesting thing is that individuals are often the most passionate customers or believers in the company. A well-known private company worth tens of billions of dollars has a die-hard fan base of individuals who don’t have access to investing in it. Only venture capital investors or others close to management get the opportunity to invest.

A founder I chatted with decided to do something about this. He created a petition for individuals to sign to express interest in investing. Each person had to indicate a dollar amount they wanted to invest. He figured that if he aggregated $5 million in commits, he’d be lucky and have a strong case to present to the company’s management. Far exceeding that goal, he got close to $40 million in commits from individuals. The strong showing blew his mind and got the attention of company management. They like the idea of letting passionate individuals invest through a single entity on this founder’s platform.

Time will tell if this deal gets done, but it clearly highlights the massive enthusiasm individuals have about investing in private companies. A lot of capital wants the opportunity to invest in high-quality early-stage private companies. And there’s ample demand by such companies for the capital. The traditional matching process is inefficient and can impede the flow of capital. I like the petition experiment this founder is running and hope it leads to something bigger or a blueprint others can follow.

Earlier this week, I shared a story about a venture capital fund having LPs renege on their capital commitments after signing paperwork. That was the first time I’d heard this from a VC fund manager I know personally. I assumed it was an exception rather than the norm but decided to do some digging.

Yesterday, Forbes published an article about this exact topic and why it’s happening. You can read it here. The article alludes to more established and larger venture capital funds being safer bets for institutional LPs than emerging funds are. I don’t agree with the connection this article makes that institutional LPs are investing now in established funds instead of in emerging funds. Institutional LPs don’t usually invest directly in emerging funds. Rather, emerging funds’ investors are usually family offices, high-net-worth individuals, funds of funds, and maybe some endowments (depending on their size).

I suspect that the LPs that emerging mangers target are being affected by the macro environment more than established funds are. And I suspect they’re trying to avoid selling assets at depressed prices to meet their commitments to emerging funds, or venture capital now represents too big a share of their overall portfolio (given that other asset types are more depressed than venture), or they’re gun-shy because of a looming recession and want to conserve cash.  

LPs reneging might not be the norm in venture capital, but it’s happening more than I realized and likely disproportionately affecting emerging managers. Emerging managers play an important role in getting capital to founders outside the traditional venture capital network and providing alpha to their investors. I suspect the savvy LPs will take advantage of this period and back high-potential emerging managers who will back non-consensus founders who generate outsize returns.

I chatted with a founder who’s building an interesting company. He’s crystal clear about what he wants. He realizes the market he’s going after is small and doesn’t aspire to building a $1 billion company. He’s looking to build one that does $10 million in recurring revenue.

Not all founders want to build a unicorn, and not all companies are solving problems big enough that they could become unicorns. This founder is realistic; he doesn’t have unicorn ambitions.

He raised a few million dollars from investors and accelerated hiring significantly in anticipation of revenue growth. Things haven’t gone according to plan, and they’ve missed revenue targets. Given the revenue and growth rate, the team is now too big. Translation: the company is burning cash too fast.

The founder said he plans to raise more capital if revenue growth doesn’t accelerate. I was surprised. He wants to build a $10 million company but is thinking about raising capital as if he were building a unicorn. Let’s assume he tries to raise another $2 million. A total of $5 million raised to build a $10 million business isn’t appealing to most investors, and his capital raise would likely be difficult. Especially in the macro environment we have now.

I hope this founder can figure out how to grow his revenue. If he can, his company will grow into his current team size. Otherwise, he likely won’t be able to raise capital and may have to reconsider what size team is appropriate for the stage and growth rate of his company.

Over the last few months, I’ve talked with several VC fund managers who’ve experienced fundraising from limited partners taking longer than planned. These aren’t emerging managers. They’ve established themselves with previous funds that returned capital to their limited partners. But as the public market and other asset prices have come down, limited partners have been slower to commit to making new investments.

Today I heard another story: limited partners who’ve signed paperwork and committed to investing in a VC fund reneging. They will no longer provide any capital to the VC fund. Notably, these limited partners are individuals, not large institutions.

This is just one story from one fund manager. I imagine it’s the exception rather than the norm, but it’s something I plan to watch closely. If this starts happening more often, emerging managers and the founders they back will likely be hit hardest.

Today I had the privilege of attending an event where two early-stage founders pitched the cofounders of Tiger Global and partners from Bessemer Venture Partners, Charles River Ventures, and Alsop Louie Partners. The founders did a fantastic job. I was curious to hear what feedback they received—it’s not often you’re able to hear feedback from such accomplished investors regarding early-stage companies.

The comment that stood out most was about metrics. The investors were impressed by both pitches, but the founder who included detailed company metrics was phenomenal. Customer acquisition cost, lifetime value, gross margins, projected revenue, and a host of other metrics were included in her pitch. She spoke confidently and demonstrated that she had a great handle on the levers that matter most and that drive her business. The panel said it was rare to see an early-stage founder have such a great grasp on the metrics of their business so early. They praised her and asked her if they could follow up with her so they could learn more.

If you’re an early-stage founder with a product in the market, identify the metrics that matter most in your business and focus on moving them in the right direction. Understanding these metrics will help you both stand out at this stage and make better decisions.

I listened to an investor and founder give his thoughts on what it takes to win and how he identifies winners. He described how he evaluated one of his most profitable investments: Uber. When he invested in the company early, he was betting on the founder, Travis Kalanick. Travis was intense and had what this investor calls a “burn-the-ships” mentality.

During wartime, when ships arrived at an enemy’s shore, the generals instructed the troops to burn their own ships once everyone had disembarked. The only way the troops would go home, they were told, was by taking the enemy’s ships. There was no turning back—winning was the only option.

I’d never heard an investor describe a founder in this way before, so it stuck with me. I’m all about backing founders who have a drive to win, but I’m not sure that a “burn-the-ships” mentality is a necessary or even good thing. I don’t know enough about Travis or the early Uber story to talk about them. I do believe, though, that there are ways to motivate your team to win without burning the ships.

Last week I chatted with a few investors at Venture Atlanta. With one group, the topic of sourcing came up. I’m always curious to hear how others think about identifying the companies they’ll invest in. I noticed that most of these people had a strategy that focused on driving inbound activity. They had different approaches to accomplishing this, but bottom line, they all involved founders reaching out to investors.

Inbound activity is great for investors, but I think it can also be a double-edged sword for early-stage investors. It’s reactive. Because investors are reacting to founders, the markets they end up investing in are limited by the communications from founders they happened to receive.

Markets matter a lot in venture capital investing. It’s hard to make a big impact on the world or realize outsize returns if you’re in the wrong market (one that’s small or hypercompetitive, for example).

Inbound activity is an important part of an investor’s strategy for finding companies, but it can’t be the strategy if you want to invest in the best founders building in the best markets. You’ll likely have to spend time thinking about what markets you want to be in and then go pursue the founders in those markets.