Today, the Wall Street Journal reported that Waystar, a healthcare payments software company, has postponed its initial public offering (IPO). The company is in a late stage of the IPO process—it was scheduled to launch its roadshow to pitch potential investors this week, and it’s normal to see a company do its roadshow a week or two before a public listing.

From what I can tell, Waystar is majority owned by private equity firms and was last valued at $2.7 billion in 2019.

This has been a lackluster IPO year, and this postponement is another sign of how challenging things may be for the rest of the year. I’m curious to see how many IPOs are completed in 2023 and what creative ways private equity and venture capital fund managers come up with to get liquidity if the IPO market remains depressed.

A few months back, I shared that WeWork had issued a dire warning in its quarterly financial filing: “substantial doubt exists about the Company’s ability to continue as a going concern.”

Today, the Wall Street Journal reported that WeWork is planning to file for chapter 11 bankruptcy. To be fair, it hasn’t filed yet, and something could happen to allow it to avert bankruptcy and continue to operate.

Regardless, this is a stunning fall for a well-known, venture capital–backed company. Crunchbase says that the company has raised over $22 billion in equity and debt financing over the years. Its valuation peaked in 2019, when it raised a reported $6 billion from Softbank at a $47 billion valuation. When I shared the dire-warning post on August 9, 2023, the company had a market capitalization (i.e., valuation) of $272 million. As of today, October 31, 2023, it’s worth $120 million. From $47 billion to $120 million in roughly four years is a staggering valuation drop.

I’m curious to see what happens next with WeWork and if it will impact investor and founder sentiment.

A few months back, I shared some stats on initial public offerings (IPOs). I’d learned that 2021 had the highest number of IPOs (1,035) in more than twenty-five years. The next year it dropped off a cliff; 181 IPOs were completed in 2022.

We have right at two months remaining in 2023, and I wanted to see how IPO activity this year stacks up. As of today, we’ve seen 131 IPOs. For context, the lowest number of IPOs since the great financial crisis, 133, was in 2016. This year will likely end up with the second-lowest number of IPOs in that period.

I view IPOs as an indicator of public-market investor sentiment. The data shows that sentiment has gone from one extreme in 2021 to the other in 2023. 

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

Today I was reading a transcript of an interview of a successful investor. He casually mentioned a generally accepted investing principle that he’s observed to be invalid over many years of investing. He went on to say that he believes many investors don’t understand that this principle isn’t true or the impact of that fact.

This caught my attention because another investor, someone who’s well regarded and well known, briefly mentioned something similar in an old interview I dug up. When two or more credible people have reached the same conclusion, it’s contrary to what others believe, and it hasn’t been noticed or discussed (that I know of), that’s something I take note of and want to investigate further. 

I’m curious to understand their insights that led to this contrarian perspective and will dive into this more.  

A friend recently asked about posts I wrote two months ago summarizing the IPO filings of Instacart and Klaviyo. Specifically, he asked why I spent time reading through hundreds of pages for each company. Couldn’t I have gotten the same understanding from reading summary articles in the financial press—the Wall Street Journal or Bloomberg?

I wanted to determine the strength of each underlying business for myself before they went public. Whenever I’m evaluating something, I aim to come to my own conclusions. Therefore, I try to find first-source data, not interpretations by people removed from the situation. These filings, while long, were great first-source data. They laid out facts and numerical data relevant to all facets of each business, helping me to reach a conclusion about each company with a high degree of conviction. 

I could have saved time by reading summaries in the financial press or listening to the opinions of others. But I wouldn’t have had as good an understanding of each business, might have missed critical things because others overlooked them, and wouldn’t have had strong conviction in the evaluation of each business because I hadn’t done the work myself. 

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.

Marks recently released a new memo entitled Further Thoughts on Sea Change. The piece is a follow-up to a memo he wrote in 2022. In the most recent memo, Marks makes the point that a “significant” reallocation of capital to credit is warranted for these reasons:

• Returns on credit are competitive versus historical returns on equities
• Returns on credit exceed the returns required for actuarial assumptions (this is a big deal for pensions and insurance companies, who allocate enormous capital pools)
• Returns on credit are contractual and therefore less uncertain than equity returns

If Marks is correct and we are indeed going through a sea change resulting in significantly more capital being allocated to credit, public equities (i.e., the stock market), venture capital, and various other asset classes could be materially impacted.

More demand for credit could result in less demand for other asset classes. If there’s less demand for public equities, that could result in lower market capitalizations (i.e., valuations) of public companies.

Venture capital firms often aim to sell their companies to public investors by taking them public (i.e., listing them on the stock market). Lower public market capitalizations would mean that venture capital firms would be selling companies for lower prices. Lower sales prices would decrease the probability of venture capital funds generating returns that would justify the illiquidity and risk taken relative to other asset classes. This could make limited partners less inclined to allocate capital to venture capital firms (we’re seeing this already), which, over time, could result in less capital being allocated to high-growth start-ups. 

No one can predict the future, but it’s interesting to think about what could happen if Marks’s insights are accurate.

Marks’s memos are great reads, and I see why people look forward to them. He makes a lot of salient points in this recent memo. If you’re interested in it, you can read or listen to it here and here.

I’ve been thinking about a Warren Buffett quote:

I am a better investor because I am a businessman, and a better businessman because I am an investor.

Founders may not realize it, but they’re resource and capital allocators. Their goal is to operate a successful and growing business. They must figure out the appropriate allocation of resources and capital to achieve that goal. If founders allocate capital and resources to uses that provide low or no return, the business could fail. If they allocate to uses with a high return, the business is successful.

The question I’ve been wondering about is whether Buffett’s experience is true more broadly. Do operators with a track record of success have a higher probability of investing successfully across various asset classes (not just venture capital)? Meaning, are they more likely than investors who aren’t operators to find the best uses of capital across various asset classes and generate higher returns?

I think operators are the best allocators of capital for venture capital, but I’m not sure about other asset classes. That’s something I want to think about more.

This week, I caught up with an emerging VC fund manager who shared something interesting with me. His first two funds were small ones, so he’s been operating for several years. Now he’s preparing to raise his third fund, even though he knows the fundraising environment is rough. 

He said that raising those small funds ended up being beneficial. The management fee dollars were small, so he had a small operating budget. He was forced to be intentional about where he spent his budget and his time and to focus on the activities that mattered most and had the highest return. It’s paying off: those first two funds are performing well.

I’m a big fan of operating with constraints. Limited resources force you to focus your execution and learn from mistakes quickly, often spurring creativity. It was interesting to hear that this isn’t true just for start-up founders; it applies to fund managers too.

Louis Pasteur once said that “fortune favors the prepared mind.”

This quote is simple but powerful. The greatest outcomes are more likely to belong to those who have put in the work to prepare mentally. You can see it in founders. Those who have obsessed about a problem to the point where they understand it from all angles are more likely to create a superior solution that customers will pay for. Tons of paying customers equals a big company and accelerated value creation. You can see it in investors. Those who have gone deep into a company or sector or into developing a thesis are ready to deploy capital when the right investment opportunity presents itself. Even if it’s non-consensus and unpopular at the time. They can recognize that the opportunity is superior sooner than others and seize it before its window closes.

I’m a big fan of the prepared mind. I try to learn as much as I can about concepts, companies, and topics that interest me. This has helped me uncover unique insights and given me the conviction to do things I otherwise wouldn’t have done. I’ve made it a priority to make time regularly to do this. 

A prepared mind is something everyone can have—but few do. Most don’t make the effort. It’s a great life hack—a way to separate yourself from everyone else.

I had a conversation this past week with another investor, someone who invests broadly in various asset classes. He shared that when he’s considering an investment, liquidity is a priority. I think of liquidity as the ability to turn an asset into cash easily by selling it within a reasonable amount of time without having to discount it significantly. Liquidity usually means there’s a healthy market of buyers and sellers of an asset. Many investors consider public equities a liquid asset class because stock markets (e.g., NASDAQ and NYSE) bring buyers and sellers together regularly, so shares in public companies can easily be converted to cash.

I’ve been thinking about liquidity more since my conversation this week and wanted to get some different perspectives on the topic from seasoned investors who’ve had outsize success. I came across an interview of Seth Klarman, a billionaire investor, CEO of Baupost Group, and author of the hard-to-find investing classic Margin of Safety.

Klarman shares his views on liquidity after decades of investing. Two things jumped out to me. First, illiquidity comes with a cost, and investors need to be paid for giving up the right to change their mind. In other words, if you buy something that can’t be easily sold, you need to be compensated for being unable to change your mind and easily sell the asset. Second, assets in a seemingly illiquid form aren’t necessarily illiquid. For example, a stake in a building is thought of as an illiquid asset. However, if you own 100% of the building, you can decide when to sell it. Buildings get sold all the time, Klarman said, so this asset is in an illiquid form but is actually liquid.

Klarman made some good points about liquidity in this interview. If you want to hear the rest of his views on liquidity, check out that section of the interview here.