This week I caught up with a VC investor. He shared that he’s working on a deal recap deal. The company raised in 2021 at an inflated valuation, hasn’t grown into that valuation, and is running out of cash. The proposed valuation is a material discount from the 2021 valuation, which the investor finds interesting.

I’ve pondered recap deals quite a bit in 2023. A few thoughts:

• An investment being attractive because it’s discounted from an inflated valuation doesn’t make sense to me. A discount on an overpriced item doesn’t guarantee it’s a good buy—just that it’s less overpriced. It’s more logical for an investor to independently determine what the company’s worth given the current (not projected) traction. If the proposed price is less than (or equal to) the investor’s independent valuation, it could be an attractive investment for that investor. If it’s more, not so much.
• It isn’t easy for CEOs who founded companies in the growth-at-all-costs era to adjust their mindset about how they’ll grow. That being so, for an investor, it’s critical to understand whether the CEO has really bought into efficient growth with a focus on eventually generating cash flow or rather still believes in growth at all costs and is waiting for things to “get back to normal.” I’ve found that many CEOs will say they’ve made the adjustment, but their actions tell me they still have the old mindset. I believe that efficient growth is significantly harder than growth at all costs and that significantly fewer CEOs are capable of succeeding at the former.

I suspect we’ll continue to see recaps in 2024, and as the earlier recaps succeed or fail, investors will start evaluating opportunities more deeply than just looking at discounts from inflated valuations.

A few months back, I shared that 2023 was shaping up to be a lackluster year for initial public offerings (IPOs). The year is officially over and the final tally is in. We ended 2023 with 154 IPOs, a decrease from 2022’s 181 offerings and a dramatic drop from 2021’s 1,035 offerings. Post global financial crisis, 2023 had the second-fewest IPOs. The lowest count was 133 offerings in 2016.

I view IPOs as an indicator of public-market investor sentiment, and I’m curious to see if IPO activity changes materially in 2024.

If you want more annual IPO data, take a look here.

Fred Wilson shared his 2024 predictions yesterday. Wilson is a well-known VC and general partner at Union Square Ventures. Here are a few of his points that I took note of:

• A soft landing is likely given decreasing inflation and interest rate hikes being less likely.
• There’s more innovation in today’s environment than any other time in his forty-year career.
• This year will be the coming-out party for “the new energy stack.”
• The business of venture capital will need to find its new norm. We’re a couple of years into a transition that will take until 2025, at least, to play out.
• Capital markets will likely be robust in 2024.

Wilson is a seasoned investor who’s been through a few cycles and achieved outsize returns. Given his track record, I enjoy reading how he’s thinking about things. His predictions may or may not come to fruition, but they’re interesting perspectives to consider.

I think public markets will set the tone for the year. If public markets are flat or continue to march higher in Q1 2024, we’ll likely see most of Wilson’s predictions become reality. If public markets start to decline in Q1, his predictions are less likely to transpire.

I read something interesting yesterday that stuck with me. It was a different way of thinking about wealth. It went something like this:

Someone with a lot of wealth can be assumed to have provided a lot of value to others in the past, which resulted in their wealth accumulation.

This author was speaking from a historical perspective, meaning they were looking at wealth accumulation over thousands of years, not just the last few decades.

I like this way of thinking about wealth, and I’m curious how many people think about it in these terms, given the monetary conditions of the last few decades. Not many, I suspect, but I want to test to confirm my intuition during the holidays with friends and family. I’m genuinely interested in hearing people’s thoughts on this.

In September 2022, I shared that Adobe announced it was acquiring Figma for $20 billion. Adobe is publicly traded and has a market capitalization (i.e., valuation) of around $270 billion as of this writing. It’s an established company offering software, including Photoshop, to creatives. Figma was founded around 2011 and offers web-based tools that allow creatives to design and prototype user interfaces and user experiences collaboratively and easily.

Today it was reported that the merger has been called off because Adobe couldn’t get regulatory approval. Adobe will reportedly pay Figma a $1 billion termination fee for walking away from the deal.

Figma’s CEO confirmed the news via a blog post in which he also noted that the company has been executing since the deal was announced. It even hired 500 new people.

This news is bound to be a letdown for Figma team members and investors, who expected a large liquidity event this year. However, this might not be all bad for Figma. For one thing, market conditions have changed materially since this deal was announced. The NASDAQ Composite Index was at about ~11,000 then (on September 22, 2022). The index's 2022 bottom was ~10,200. As of this writing, it’s at ~14,900, or ~35% higher since the announcement of the merger. Another consideration is that if the 500 new hires are an indication of revenue growth, the company could be doing well financially. Last, Figma gets $1 billion for the headache of the last fifteen months, which isn’t bad considering it was valued at $10 billion in its last fundraising round in 2021.

This isn’t the outcome Figma hoped for, but it probably isn’t that bad for them. It could even turn out to be a good outcome. Time will tell. I’m curious to see what 2024 has in store for Figma.

I recently had the chance to meet Tobi Lütke, CEO and cofounder of Shopify. Shopify’s platform provides technology that allows retailers to easily sell online. Said differently, it makes e-commerce easy. Tobi initially built Shopify to solve a personal pain point but soon realized that other entrepreneurs were experiencing the same problem. In 2004, he embarked on solving the problem for others, and as of the writing of this post, Shopify is a publicly traded company with a market capitalization (i.e., valuation) of just under $100 billion.

Last fiscal year, Shopify recorded $5.6 billion in annual revenue. The Shopify platform processed almost $200 billion in gross merchandise value (GMV); i.e., revenue on behalf of its customers. Tobi has built a company that’s having a large impact on how commerce is done.

Tobi is one of those rare founders with the ability to take a company from idea to billions. I was interested in learning what trait allowed him to achieve such a rare feat. Tobi shared a variety of valuable insights, but what stuck with me most was his conviction about the power of entrepreneurship. Tobi believes entrepreneurship is a powerful force that can change the lives of those who pursue it. He’s expressing that belief through Shopify’s mission of helping people achieve economic independence by making it easier to start, run, and grow a business. And his belief and mission-oriented mindset have likely been a significant driving factor in his ability to continuously level himself up as Shopify has grown from an idea to an international company generating billions of dollars in annual revenue.

I’m glad I had the opportunity to meet Tobi, and I look forward to following his entrepreneurial journey. I can’t wait to see where he takes Shopify next and the impact it has on entrepreneurship.

Today I read an article about the dispute between Warren Buffett and the Haslam family over Berkshire Hathaway’s purchase of the Haslam family’s prize asset, Pilot Travel Centers. The dispute has led to a lawsuit. Pilot is a truck stop operator with over 860 locations operating under the Pilot Flying J and One9 Dealer brands.

Since 2017, Berkshire has gradually purchased 80% of Pilot for $11 billion. During an annual 60-day window, the Haslam family can opt to sell their 20% remaining stake to Berkshire. The contractually agreed-upon price would be 10 times the prior year’s earnings before interest and taxes (EBIT). Note that EBIT differs from EBITDA. EBITDA is earnings before interest, taxes, depreciation, and amortization.

The lawsuit centers on what financial reporting method should be used to calculate EBIT and thus determine the purchase price should the Haslams elect to sell the remaining 20%. The issue is pushdown accounting, a method that has an impact on the value of assets a company owns, which impacts the depreciation and amortization expenses, which impacts reported profitability (in this case, EBIT). The Wall Street Journal reported that the decision to use pushdown accounting can have as much as a $1.2 billion impact on the price Berkshire would pay for the remaining 20% of Pilot. I assume the Haslams want to use the method that determines a higher EBIT and Berkshire and Buffett want to use the method that determines a lower EBIT.

There’s more to this case that I won’t get into, but I find it interesting that this dispute isn’t about the company's operations. It’s about how the results of its operations are recorded in financial statements and how the method used could have a $1 billion-plus impact.

Accounting isn’t fun, but it’s the language of business. This case reinforces my thoughts about it being important for entrepreneurs to learn basic accounting concepts.

I’ve been watching Apple’s push into financial services over the last few years. Financial services for consumers and small businesses is a large enough market to move the needle for a company of Apple’s size. Consumers shifting from in-person to digital banking and the slow pace of innovation by banks make it ripe for disruption. 

Apple partnered with Goldman Sachs to offer credit card and high-yield savings account products. But it’s been reported that Goldman Sachs has been trying to get out of the credit card business, and Apple offered the bank a way out of their credit card arrangement. The article doesn’t include specific details about why the bank wants out.

I’m a fan of Apple’s push into financial services. I’m curious about why this partnership isn’t working, how this change will affect Apple Card customers, and what impact it will have on other financial products Apple offers. I hope we’re looking at a bump in the road and not a major setback for the tech giant.

This week, I caught up with an emerging venture capital manager who’d held the first close on his $100 million fund, which is the firm’s second fund. They closed on $33 million and are actively working on closing the remainder—they have a line of sight to the full $100 million. As expected, he said fundraising has been harder than anticipated, but he did share a few things that have helped him get to the fund’s first close:

• Exits – His first fund has had three portfolio companies exit. Another pending exit of a portfolio company to a large publicly traded technology company is closing soon. These exits have demonstrated to potential LPs that he can find promising companies early and return cash to LPs.
• Thesis – Fund I was a generalist fund. He realized his team is best suited to invest in specific areas given their backgrounds—and that other funds generally struggle to invest successfully in those areas because they lack the relationships and deep understanding to properly do their due diligence. Fund II now has a thesis around these areas, which has resonated well with potential LPs. 
• Team – The team he put together has a stellar track record in the roles they held before joining his firm. They have deep domain expertise and relationships in the areas they invest in.
• Hustle – He leaves no stone unturned and stays hungry. He’s diligent about follow-up, asking for intros, and delivering what he committed to on time.

My big takeaway from our chat was that his success has been driven by his tenacity, reflection, and willingness to continually learn and evolve throughout the fundraising process. I’m excited for this manager and looking forward to following his journey.

Charlie Munger died today at the age of 99. Most people know him as Warren Buffett’s right-hand man, but he was an accomplished investor before he joined Berkshire Hathaway. As I’ve learned more about public-market companies this year, I’ve also learned about the investors who’ve generated outsize returns in public markets. Munger was one of them. I’ve enjoyed learning about his investing philosophy, mental models, and unique way of viewing the world. He was a gifted person and investor who lived life by his own rules.

RIP Charlie Munger.