I’ve been spending more time researching public-market companies this year—specifically, technology companies that offer solutions I’m familiar with whose founder is still CEO. I’ve noticed that a lot of the public companies that fit these criteria were backed by venture capitalists (VCs) before they went public.

I’ve found a hack for researching these CEOs and companies. The VC firms that backed these companies often have a deeper understanding of them and their CEOs than most because of the duration and closeness of their relationship. (They’ve been close to the companies since well before going public was a possibility.) Companies that go public are often high priority for the VC investors who back them, so some investors will speak and write about them extensively. Much of this content is available online, and I’ve found it often contains golden nuggets about these companies or their CEOs that aren’t in any public filings. In combination with public filings, I’ve found this content helpful in evaluating whether a CEO and company are good or the company might be one of the rare great ones.

A few months ago, I shared my thoughts about venture capital funds distributing returns to limited partners (LPs) via cash or in-kind distributions (i.e., stock in publicly traded companies). I wondered how many venture capital firms use in-kind distributions so their LPs will have the option to own shares in great companies for decades.

It’s hard to know how a venture capital firm makes distributions unless you work for it or are an LP in one of its funds. But I recently came across a public filing indicating that a venture capital firm distributes shares in a public company to its LPs. These shares are worth hundreds of millions of dollars. I found this interesting because this firm made an early-stage investment when the company was very young, around fifteen years ago. The company has been public for several years. The firm could have easily sold the shares and returned cash to LPs, but it opted to do the work of returning shares in the company to LPs. The filing also indicates that the venture capital firm general partners took their carry from the deal (i.e., profit sharing) in shares and haven’t sold those shares.

I don’t have insider information on this public company or the firm, but I assume that the venture capital firm’s partners are bullish on the long-term prospects of this company and want their LPs to have the opportunity to participate in its future upside.

As I’ve been researching more public-market companies, I’ve noticed that most of the CEOs aren’t the original founders. That makes sense for companies that have been around for many decades. But it’s true even for companies started within the last twenty years.

This got me thinking. It’s difficult to take a company from zero to, say, ten million in annual revenue. Many founders struggle to level up as the company goes through various transitions. Going from zero to hundreds of millions or billions of dollars in annual revenue must be a gargantuan task—one that only the rarest and most talented founders can accomplish.

I’m now wondering, what traits do these founders have in common that help them go from zero to billions? They level themselves up continuously—what’s their secret?

Over the next few months, I’m going to spend time learning about a few founders who are still CEOs of public companies founded in the last twenty years. I’m curious about what I’ll find—and then whether their traits exist in any early-stage founders I encounter.

I’m a believer in non-consensus investing—that is, taking advantage of investment opportunities that don’t fit into the conventional framework used by other investors. A leap of faith is sometimes necessary. I like these investments because they require independent thinking and going against the grain, two things I embrace. To get to conviction on these opportunities, I usually do a deep dive into them, so I understand them well.

After I’ve made one of these investments, I sometimes share my thinking with other investors who are using more conventional frameworks. Recently, an investor agreed with my analysis but still didn’t think my investment was a good one because this kind of investment hasn’t historically produced significant returns.

I respect his opinion—after all, I asked for it—but I disagree. Someone must be the first to do something. The person who makes a non-consensus investment first or early is usually going to reap an outsize return, assuming it works out. When other investors follow, their returns are likely to revert to the mean because of the increase in capital chasing the opportunity. I’d rather be in the former group. I like investing in things others might not. It’s more mentally stimulating, has more upside potential, and is a better fit with my personality and wiring.

Today it was reported that Google has a revenue-sharing agreement with Apple that pays the iPhone maker a staggering 36% of the revenue that Google earns from search ads on Apple’s Safari browser. The two companies have had a partnership since 2002 that makes Google search the default search engine on Safari. These details were revealed in testimony in an antitrust lawsuit.

I don’t know how much revenue Apple receives under this agreement, but I’d imagine it’s in the billion if not tens of billions of dollars annually, given the global popularity of iPhone and other Apple devices.

Apple’s successful hardware business has another benefit for Apple. These devices are highly effective modes for distributing software and other digital tools, and companies wanting to distribute digital offerings to consumers will pay Apple to do it for them. Apple’s App Store and the revenue-sharing agreement with Google demonstrate that Apple is aware of its distribution power and plans to continue to monetize these capabilities.

Early in 2023, I challenged myself to read more SEC filings of publicly traded technology companies. I’ve been reading S-1 initial registration reports for companies preparing to go public for several years. This year I’ve incorporated 10Q quarterly reports and 10K annual reports into my reading. I wasn’t sure when I began whether it would be worth the time and energy, but I figured I had more to gain than lose by trying it. 

Here are my takeaways:

• Financials – The company’s financial performance is laid bare in these reports. The good, the bad, and the ugly are there for everyone to see. Some company financials are complex; others, simple. Interpreting what the numbers mean sometimes requires work. It isn’t always fun, but once I figure it out, I’ve usually learned something useful.
• Business model – Companies detail their inner workings and how they generate revenue. They share all kinds of interesting tidbits, such as plans for future revenue sources and concerns about the stickiness of current revenue. I usually got lots of ideas after reading the specifics of a company’s business model.
• Risks – Companies detail all risks associated with the business. This is basically a list of what keeps the CEO up at night. Sometimes the risks listed surprise me.
• Competitors – Most companies list their top competitors.
• Trends – After I’ve read multiple reports from a company, I start to see trends and patterns (good and bad).
• Executive compensation – Executive compensation usually has its own section, with compensation plans described in detail. Large stock option grants based on hitting lofty stock price or market cap objectives seem common in CEO incentive packages.
• Ownership – The S-1, and sometimes other reports, detail how much of the company executives and investors own. Very interesting. Especially if it was VC backed.
• Stock-based compensation – A good number of technology companies have high stock-based-compensation expenses. This is essentially the expense the company incurs for paying employees with RSUs, stock options, etc. I’m curious whether this practice will continue at the levels seen in the last fifteen years, given how much it dilutes the holdings of other shareholders.
• Perception – After reading these reports, I sometimes reach a conclusion about a company that differs from popular opinion in the financial media.
• Dense – These reports are typically long. I can read them only when I’ve got an uninterrupted block of time when I can focus.

The filings of public companies are full of information that entrepreneurs and investors will find helpful. I wish I’d read public filings from companies in my industry when I was building my company. I’m sure it would have positively influenced my thinking and decision making. Anyone interested in reading these reports for their favorite company can search for them on the SEC Edgar website here.

I recently had a conversation with a friend about investing strategies. He’s smart and well educated, has an amazing career, and is forward thinking. We talked about public market investing, and I brought up the topic of compounding. He said he understood it and quickly moved on in the conversation.

He understood the concept, but I wasn’t convinced he understood the power of compounding. I shared a post containing a simple example that I wrote a few months back. When he looked at the numbers, it clicked. He understood how rate of growth and time work together to produce outsize results.

Albert Einstein famously called compound interest the eighth wonder of the world. It’s one of the most powerful forces that can be applied in many facets of life, not just money. Still, many don’t truly understand the power of compounding and aren’t taking advantage of it. They’re making progress toward their goals—but at a much slower pace than they could be.

I’ve been following the WeWork story for the last few months (see here and here). In August, the company, in a quarterly filing, warned of doubt the business could continue. Today it officially filed for Chapter 11 bankruptcy, with $19 billion in liabilities and assets worth $15 billion listed in its filing.

Chapter 11 bankruptcy doesn’t mean the company will cease operations. Chapter 11 of the U.S. Bankruptcy Code allows a company to reorganize and renegotiate its debts with creditors while it continues to operate. The hope is that the company will be able to exit bankruptcy with a more reasonable debt load.

Today marks another low point for a well-known, venture capital–backed company that raised over $22 billion in equity and debt financing over the years and was valued at $47 billion as recently as 2019.

I’m curious to see how this bankruptcy process will play out and what the company will look like if it successfully exits bankruptcy.

Yesterday I shared definitions of three kinds of leverage from Joel Greenblatt, founder of Gotham Asset Management. One of them was investment leverage by borrowing. This involves using debt or borrowed capital to increase an investor’s capital base, which allows them to deploy more capital into an investment. If an investor were limited to investing using only personal capital, they’d likely be using a materially smaller capital base to make investments (if they were investing at all).

Venture capital funds are examples of investment leverage by borrowing. General partners (GPs) raise a fund from limited partners (LPs). Essentially, the GP borrows capital from LPs with the goal of repaying it, plus a share of the profits, in the future. Fund GPs will usually contribute personal capital that amounts to around 1% to 2% of the total fund. This is called the GP commitment.

So, if a $25 million fund is raised, the GPs will commit $500k (assuming a 2% GP commitment). The other $24.5 million is essentially borrowed from LPs.

Investing $500k of your personal money is quite different from investing $25 million of your and other people’s money. The deals you evaluate and can participate in look drastically dissimilar.

There are other aspects of GP and LP economics and relationship that I won’t get into here. But this demonstrates how a venture capital fund is essentially a vehicle that allows a venture capital investor to use investment leverage by borrowing to increase their capital. If the fund is successful and generates returns, the GP will personally receive significantly bigger returns from their investments that they would if they used only their personal capital. That’s leverage at work.

I’ve been having conversations with friends about leverage. One thing I’ve picked up on is that leverage doesn’t mean the same thing to everyone. With a little digging, I found definitions used by Joel Greenblatt, founder of Gotham Asset Management, that I think are pretty accurate:

• Financial leverage – The amount of debt a company has taken on relative to its equity. It can lead to higher returns for shareholders if the company can earn a higher return on the money borrowed than it cost to borrow it.
• Investment leverage by borrowing – Money borrowed by an investor for the purpose of purchasing an investment.
• Investment leverage by contract – A payment by an investor of a (relatively) small amount up front to purchase the right to purchase an asset later.

These are straightforward ways to think about what leverage is. We can see, thinking about these definitions, that a lot of people and companies use leverage in some form or fashion.