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Business, Technology

What Can Angels Learn from Warren Buffett?

May 30, 2023 tremendousblog 1 Comment

Startupland is a mess. Valuations are depressed. Companies are going bust. So today, I went back to basics: Warren Buffett.

No one in history has matched his investment prowess.

Buffett’s net worth stands at $112 billion, making him the eighth richest person alive. Since taking control of Berkshire Hathaway in 1965, he has increased its value by a factor of over 37,000.

This afternoon, I dug into his latest letter to shareholders. While Buffett doesn’t do venture capital, his lessons from 80 years investing are surprisingly applicable.

Wins Matter. Losses, Not So Much.

In August 1994 – yes, 1994 – Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire.

The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow.

Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.

The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.
Warren Buffett

Berkshire’s investment returns follow the power law.

This rule holds that a small number of wins will provide almost all our returns. It’s the fundamental principle of venture capital.

So whether we’re Warren or not, we can’t worry too much when we strike out. Instead, we have to keep swinging at good pitches until we hit.

Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years.
Warren Buffett

Focus on the Business, Not the Stock

That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.
Warren Buffett

No one knows what a stock will do in the short term. Not even Warren Buffett!

But if we focus on buying into great businesses, we set ourselves up for long-term success.

Tuning out price is hard!

One of my most successful companies is raising a new round right now. The price they got is surprisingly low for a company with incredible growth.

If I wanted markups, this would be a terrible bet. I’d be way better off with a buzzy generative AI company with no revenue at all.

But I want to buy real businesses. So I’m going to take advantage of this mispricing and back up the truck.

It’s crucial to understand that stocks often trade at truly foolish prices, both high and low.
Warren Buffett

All Good Things to Those Who Wait

The world is full of foolish gamblers, and they will not do as well as the patient investor.
Charlie Munger

Many great businesses Berkshire owns have faced hard times.

Had Buffett and Munger panicked and sold, we would not know their names. They’d just be anonymous, mediocre investors.

As tough as venture capital can be, this is one area where we have it easy! Once you invest in a startup, you rarely have an opportunity to get your money out.

So I focus on helping build a great business for the long term.

It’s fun. It’s also the only option I have!

Wrap-Up

When markets are in turmoil, always go back to Buffett. No matter what kind of investments you make, his wisdom applies.

Buffett has never been a VC. But if he were, I’m pretty sure he’d be a damned good one.

Now, let’s go buy into some great businesses!

At Berkshire, there will be no finish line.
Warren Buffett

What have you learned from Buffett and Munger? Leave a comment and let us know!

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More on tech:

Heading Off the AI Cliff

The Too Hard Bucket

Right Founder. Wrong Market.

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Business, Technology

Heading Off the AI Cliff

May 26, 2023 tremendousblog 2 Comments

With valuations down, this year’s investments should be some of the best ever. But many VC’s are riding AI startups right off a cliff.

Total venture capital investment is down almost 90% from the peak, according to Carta.

Late stage funding has practically ceased to exist. Even seed is down almost 70%.

With valuations and competition down, investments done this year should yield amazing returns.

But the few rounds actually getting done tend to look the same: AI companies with little or no revenue raising tens of millions.

The valuations are often over $100 million. Rewind AI even notched a $350 million valuation.

Fred Wilson at USV has proven that seed rounds at $100 million cannot work. There aren’t enough big IPOs in the world to make money at that price.

Meanwhile, companies without AI at the core are struggling to raise capital.

They have real businesses and revenues. They’re raising at great prices.

But they’re just not cool anymore.

Let’s take a company like Uber. Uber gets you a ride somewhere. Where does generative AI fit into that?

Nowhere I can see. But it’s still a great business.

The next Uber is out there now. But VC’s aren’t looking for it.

Worse yet, many of these buzzy AI companies have minimal defensibility. If you can spin up a service quickly with an API call to OpenAI, so can someone else.

Moreover, AI is evolving so fast that today’s amazing tech is quickly upstaged tomorrow. Deploying tens of millions in that environment is treacherous.

VC funds took a drubbing in 2022. This year, they have a chance to redeem themselves by investing in great businesses at reasonable prices.

Instead, they’re running toward a new hype cycle. And their investors will pay the price.

I think generative AI is a fantastic technology. I use it every day.

But the normal rules of investing still apply. You can’t make money investing in businesses with no paying customers at 9 digit valuations.

So how can you make money?

By investing in businesses with real customers and revenue at reasonable prices. At seed, that’s around $8-20 million.

In a way, I’m happy to see VC funds stampede toward AI. That means minimal competition and low prices for the investments I want to make.

Will AI investments work? Leave a comment and let us know what you think!

Have a great holiday weekend everyone!

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More on tech:

Hard Times for New Funds

The Too Hard Bucket

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Business

Is Billionaire Carl Icahn Facing Disaster? Ackman Says Yes.

May 25, 2023 tremendousblog Leave a comment

Things are going from bad to worse for hedge fund billionaire Carl Icahn. Icahn Enterprises stock is down over 20% today after prominent fund manager Bill Ackman predicted disaster for the firm.

In a lengthy tweet yesterday, Ackman outlines a nightmare scenario for the stock:

I have been fascinated by the @HindenburgRes $IEP situation, and there are some interesting learnings here. For example, one learns from $IEP that a controlling shareholder of a company with a small float that pays a large dividend can cause his company to trade at a large…
— Bill Ackman (@BillAckman) May 24, 2023

Icahn owns 85% of the stock in Icahn Enterprises, per Bloomberg. Most of it is pledged as collateral for margin loans — as much as 65%, per Ackman’s estimate.

Meanwhile, nearly all of Icahn’s net worth is tied up in Icahn Enterprises stock.

The stock is down over 60% since a Hindenburg Research report at the beginning of the month called the company “Ponzi-like.” Now, the Justice Department is investigating Icahn Enterprises.

Icahn’s margin lenders must be getting nervous, as Ackman points out. Wouldn’t you be?

If even one of them calls Icahn’s loan, he could be forced to sell large blocks of stock. Since he owns 85% of the float, that would cause Icahn Enterprises stock to drop like a stone.

Icahn has taken huge losses in the weeks since the Hindenburg report. As I write this on Thursday afternoon, his losses likely approach $20 billion.

Ackman and Icahn have a feud that goes back twenty years. But Ackman’s criticism of Icahn Enterprises is valid.

Issuing stock to pay a fat dividend makes no sense. Dividends are to be paid out of actual profits.

But since Icahn Enterprises doesn’t have any of those, this is how they attract shareholders.

Now that Ackman is piling on, I expect more hedge funds to short IEP stock. This selling pressure could push the stock down enough for Icahn’s margin calls to start.

I don’t see how Icahn comes back from this unless the businesses Icahn Enterprises owns start making some money.

He doesn’t appear to have enough spare capital to buy more IEP stock and push it up further. And with the stock under so much pressure, I doubt anyone else is buying.

We could be looking at one of the biggest flameouts in Wall Street history. Unless the 87 year old Icahn has one more trick up his sleeve…

Do you think Icahn will go bust? Leave a comment and let us know?

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More on markets:

Carl Icahn Losing $900 Million a Day

Druck on the Coming Debt Crisis

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Business, Technology, Uncategorized

Hard Times for New Funds

May 24, 2023 tremendousblog 2 Comments

“You’re going to see a lot of emerging managers shut down in the next few years,” said a VC I met with this morning. She couldn’t stay long — she was heading to California to fundraise.

The down market is hitting emerging managers hard.

These VC’s are on their first few funds. Many are struggling to raise capital .

A report out this morning from Ryan Hoover’s Weekend Fund shows just how tough fundraising has gotten for VC’s:

2023 is on pace to have the lowest fundraising total since 2017.

LPs are moving to risk-off in VC, passing on emerging managers in favor of established managers.

Many LP’s are overexposed to venture. Their public stocks have dropped, but many venture funds haven’t taken commensurate markdowns.

That means their allocation to venture as a share of assets has ballooned. The last thing they’re going to do is add more!

Even if they do, it will probably go to a fund they have a longstanding relationship with.

About a third of the 195 emerging managers in Weekend Fund’s survey have cut their target fund size.

Barren coffers at VC firms mean less money for founders:

“Only 6.1% of active startups on AngelList raised a round or exited in 1Q23, the lowest rate ever observed in our dataset. This rate of investment activity is a 1.3% decline from 4Q22’s rate of 7.4%, and a 5% decline from 1Q22’s rate of 11.6%.”

If founders aren’t raising what they hoped, there’s a reason: fund managers aren’t either.

No one wants to admit that. So they keep taking meetings and giving out “maybes.”

One fund manager the Weekend Fund spoke with had a great tip:

“Pay attention to which Emerging Managers are actively announcing new investments and which ones aren’t. We are aware of many small firms that have essentially stopped new investments and are struggling to raise their next fund.”

This way, founders won’t waste time talking to firms with no money to invest.

Perhaps one reason VC’s can’t raise is they don’t have enough skin in the game. 6 in 10 emerging managers committed 2% or less to their fund.

On a $10 million first fund, that’s just $200,000.

Most people who start VC funds are already pretty well-off. Three quarters worked in VC previously, often for years.

A 1 or 2% commitment may not be enough to show LP’s you really believe the fund will crush it.

On the bright side, VC’s that do raise now are in a fertile environment. Valuations are down and many weak companies have exited the market, leaving only the strong.

Some of the funds raised today may be among the best of all time.

What do you think of the fundraising landscape for VC’s and founders? Leave a comment and let us know!

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More on tech:

The Too Hard Bucket

Inflection: Better than ChatGPT?

Uploading Our Consciousness

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Business

Carl Icahn Losing $900 Million a Day

May 23, 2023 tremendousblog 2 Comments

Corporate raider Carl Icahn has lost $15 billion since the release of an exposé by Hindenburg Research. That’s over $900 million a day.

The Hindenburg Report

Hindenburg claims that Icahn’s holding company, Icahn Enterprises, is structured like a Ponzi scheme. Repeated share sales support an unusually high 28% dividend.

In brief, Icahn has been using money taken in from new investors to pay out dividends to old investors. Such ponzi-like economic structures are sustainable only to the extent that new money is willing to risk being the last one “holding the bag”.

Hindenburg also alleges that Icahn Enterprises inflates the values of its assets. Since the release of the report on May 2, the stock has fallen by nearly half in just 16 trading days, costing Icahn billions.

From Bloomberg:

“He’s never been humiliated like this,” says Mark Stevens, Icahn biographer and founder of consulting company MSCO.

A History of Losses

Icahn Enterprises stock has lagged for years, weighed down by huge losses. Again from Bloomberg:

It’s hard to argue about Icahn’s lackluster performance of late. This has been a lost decade for Icahn Enterprises stock. The price has fallen more than 60% over the past 10 years, while the S&P 500 has gained about 153%. Dividends have made up some of the difference: Icahn Enterprises has handed stockholders a total return of about 6%. But the S&P has returned roughly 206%.

Icahn made massive bets that a financial crisis was coming. When those short bets didn’t pan out, he lost billions.

Icahn Enterprises’ Future

Now, federal prosecutors are investigating Icahn Enterprises. So far, no charges have been filed.

I don’t know if Icahn acted improperly. But I do know that a 28% dividend isn’t sustainable.

This means you’re paying out the entire value of the company every 3.5 years. This would be an incredible strain even for the most profitable companies.

For a business making big losses, it’s impossible.

I also disagree with Icahn’s bets on a financial crisis. Although crashes come and go, the long term trajectory of markets, technology, and humanity is upward.

Financial engineering and short bets can work — sometimes. But the better approach is to buy great businesses for the long term and bet on the future.

“Never bet against America.” – Warren Buffett
2021 Berkshire Hathaway Annual Letter

What do you think of Icahn’s huge loss? Leave a comment and let us know!

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More on markets:

Druck on the Coming Debt Crisis

‘There’s a Lot of Agony Out There’: Munger on CRE

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Business, Technology

The Too Hard Bucket

May 22, 2023 tremendousblog 3 Comments

Every now and then, I meet a hardworking founder with some great tech. But I know I’ll never invest in their business.

Despite founders’ best intentions, some companies develop serious problems. Those problems can make a startup untouchable for investors.

We put those companies in the “too hard bucket.”* And we move on to the next deal.

Let’s run down a few of those nightmare scenarios so you can avoid them!

Debt

I recently saw a cool early stage company addressing a big market. I was interested — until I found out they were almost $1 million in debt.

Early stage companies must avoid debt like the plague. It will weigh your company down like nothing else.

Investors will not touch an early stage company with debt. We want our capital to fund new growth — not pay for past mistakes!

For companies like this, the best option may be bankruptcy. Into the “too hard bucket” it goes.

Cap Table Problems

Cap table problems won’t bankrupt you, but they will stop you from ever raising a dime of venture capital.

Some startups give a huge slice of equity to a dev shop or venture studio. If someone other than founders and investors own 40% of the company, it cannot be financed.

The founders own way too little to be incentivized. And if they’re not incentivized, how will we make a return?

Maybe the cap table could be fixed with the right agreements. But most investors will put that in the “too hard” bucket and move on to the next deal.

Down Rounds

At the peak of the market, countless companies raised at huge valuations with little or no revenue.

Now, it’s time to pay the piper.

If a company raised at $100 million, it will need around $10 million a year in revenue to keep that valuation today. Otherwise, it’s looking at a down round.

Many venture firms don’t want to deal with down rounds.

Let’s say the new price is $50 million. The founders and all the prior investors will hate the new investor for “taking away” half their paper wealth.

Who wants to walk into that situation?

So, many firms put down rounds in the “too hard bucket”. Now, the formerly hot company can’t even raise a down round.

They can’t raise at all.

Always keep your valuation reasonable. And make sure the money lasts long enough to hit your milestones.

Wrap-Up

Founders have to understand the investor’s perspective. At any given time, there are 20 deals in the investor’s inbox.

If your company has serious problems, an investor isn’t interested in how they can be fixed.

He just puts your company in the “too hard bucket”. On to the other 19 deals…

So stay out of debt, keep a clean cap table and raise at reasonable prices. That gives you the best chance of success!

What kind of companies are in your “too hard bucket”? Leave a comment and let us know!

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More on tech:

From $10 Billion to Zero — Late Stage Ice Age

Right Founder. Wrong Market.

*thanks to Chamath Palihapitiya for coining this term

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Business, NYC Area

Empty Offices Hurting NYC Budget

May 18, 2023 tremendousblog Leave a comment

Nearly a quarter of all New York City office space is vacant. Now, the pain is spreading to the city’s budget.

From a report out this morning in Bloomberg:

The atrium at 60 Wall Street was once a thoroughfare for thousands of Deutsche Bank AG employees.

These days it’s eerily quiet even during rush hour on a weekday morning. The occasional pedestrian crosses between Pine Street and Wall Street, the cavernous space utilized as a subway exit or a place to nap at one of the unused bistro tables.

The 47-story skyscraper, owned by Singapore’s sovereign wealth fund and Paramount Group, has sat empty since 2021, when Deutsche Bank — its only tenant — relocated to Columbus Circle.

Those skyscrapers pay a lot of taxes. But with vacancies everywhere, tax revenue is coming up short:

It’s a worry for city officials, who for the last decade have relied on an ever-expanding commercial real estate sector for taxes to pay for schools, cops and trash collection. Commercial property taxes contribute about 20% of the city’s total tax revenue — with office buildings, specifically, contributing 10%. And as those revenues are flattening, the city’s expenses are forecast to keep growing, creating challenges for Mayor Eric Adams’s agenda.

NYC’s current office vacancy rate is 22.7%. For decades, it never reached half that level.

But COVID, remote work, and safety concerns are keeping employees home.

If companies aren’t using their whole space, they will downsize or close their offices entirely when the lease is up. Some companies are skipping out on rent altogether.

That makes it harder for landlords to pay taxes. It could also reduce the assessed value of buildings, cutting tax payments for many years.

Meanwhile, landlords are stuck with these bad assets. There are no buyers for vacant office space in NYC at any price, according to a broker friend of mine.

But NYC can help get people back in offices and the taxes flowing. It starts with safety.

When crime makes people afraid to go to work, they’ll pressure their managers to work remote. In a strong labor market, managers will acquiesce.

After all, the CEO probably lives nearby and rides to work in a livery car. But the average employee endures a long subway commute that has now become dangerous.

NYC has to start by cleaning up the streets and making the subway safe. When people feel secure, many will want to come into the office and see their co-workers.

The city and state must also make it easier to convert office space to other uses.

New York does have some advantages. It’s safer than SF and has a more traditional industry mix.

The banks that dominate NYC want their people back in person.

Personally, I prefer remote work with the occasional get-together.

But if people feel safe, many offices will fill up again. And the city coffers will too.

What do you think the future holds for empty offices? Leave a comment and let us know!

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More on markets:

‘There’s a Lot of Agony Out There’: Munger on CRE

Druck on the Coming Debt Crisis

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Business, Politics

Druck on the Coming Debt Crisis

May 17, 2023 tremendousblog 3 Comments

Stan Druckenmiller and George Soros made over $1 billion shorting the British pound. Now Druck is turning his sights to another mismanaged nation: the United States.

At a recent keynote address at USC, Druckenmiller sounded the alarm about ballooning entitlements.

“If I wasn’t so worried about the country I’d be salivating over the opportunities this could set up.”
Stanley Druckenmiller

Today, we spend 40% of our tax dollars on programs for seniors. By 2043, that will be 60%.

How do we pay for that? There are two main options: cut spending or raise taxes.

But the changes required would be huge.

Druckenmiller reckons we’d need to cut spending by 35% starting today and maintain that lower level forever. If we don’t want to do that, we could raise taxes 40% — permanently.

“Expect this trend to continue…absent radical policy changes.”
Stanley Druckenmiller

The last of the baby boomers retire soon. We’ve promised them benefits that will soon crowd out all other federal spending.

No defense, no education, no bridges, no nothing.

So how do we fix it?

Druckenmiller calls for big entitlement cuts. He supports ending payments to wealthier seniors and cutting cost of living adjustments (COLAs).

Means testing is a great place to start. People like me don’t need a government check.

And as painful as ending or reducing COLAs may be, it can happen anyway. State pensioners here in New Jersey haven’t had a COLA in 12 years, and the sky hasn’t fallen.

We must also raise eligibility ages. I see no problem with Social Security’s full benefit beginning at 75 (rather than 70) and Medicare at 70 (currently 65) for younger people like me.

I never expected to get a cent out of these programs anyway. Most young people don’t.

Reining in benefits is the one chance to salvage something for future retirees. If we don’t do something now, there will be nothing left for younger generations.

“You’re screwing seniors, you’re just screwing the future seniors. Why do they get a dollar and you get zero?”
Stanley Druckenmiller

I’m confident that we’ll muddle through to a solution. It will probably involve some combination of benefit cuts and tax increases.

“…if it can’t go on forever it will stop.”
Herbert Stein, economist

What do you think the future holds for entitlements and the US economy? Leave a comment and let us know!

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More on markets:

‘There’s a Lot of Agony Out There’: Munger on CRE

From $10 Billion to Zero — Late Stage Ice Age

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More on Fundrise in this post.

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Business, Life, Technology

Money You Can Afford to Lose

May 10, 2023 tremendousblog Leave a comment

Last night, I got a call from my old friend Matt. Matt had a problem. He had saved some money, but was terrified to invest it.

“What if I lose it?” he asked? So I explained to him the core concept behind all of my investments.

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The Money You Can Afford to Lose

In this great country, many of us are fortunate enough to have money we can afford to lose. We wouldn’t enjoy losing it, but life would go on.

That’s money we can use for riskier investments.

Why do we do this? Because greater risk often comes with greater rewards.

Francis the Speculator

Every day, I make some of the riskiest investments on earth. At night, I sleep like the dead.

A tech startup might be the most speculative investment you can make. At this early stage, a company is just a couple of people on laptops.

Assets? Nothing.

Collateral? Lol.

I expect 70% of my startups to go bust. The failure rate is higher than almost anything, except maybe crypto.

“Is that nerve-wracking?” people often ask.

Not at all. Because I know how much money I can afford to lose.

And I never bet more than that.

Startups are at the extreme end of the risk spectrum. An S&P 500 index fund is closer to the middle, and a better choice for Matt.

Money You Can’t Afford to Lose

We all need something to pay the bills, right?

That’s the money we can’t afford to lose. So we shouldn’t expose it to too much risk.

A good home for that money is a bank account or money market. You can make a little interest without worrying you’ll lose money.

Losses, Guaranteed!

Back to my buddy Matt.

“I’ll remove the mystery. You will absolutely lose money in stocks. I guarantee it,” I told him.

If you invest in any risky category long enough, you’ll take losses.

Thing is though, it tends to come back. And as humans innovate, prices reach ever higher.

Non-Attachment

I had one last thing for Matt.

It’s the concept of “non-attachment.” Called danshari in Japanese, it comes from Buddhism.

I try not to be attached to money.

I have certain assets now. But I might not always.

That money isn’t me. I’m me.

When I was younger, I didn’t have a dime. And I was still me.

So if I increase my assets, that’s great. But if they go away, I’ll still be Francis and I’ll be okay.

If we adopt a healthy attitude toward money, we become better investors.

We take a good bet when it’s available. And we don’t obsess about the potential for loss.

But something more important happens too. We become happier people.

How do you think about money? Leave a comment and let us know!

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