Tailwinds - The Pilot
July 27, 2019
This is the pilot episode of a weekly compilation of articles, interviews, podcasts that I found most interesting related to micro private equity, and then a few rabbit holes. Not all of these are from the last week, in fact most aren’t. Most of them I come across through my daily scanning of Twitter, what other investors write, what I see occasionally in the news, my podcast feed, or something a friend passes along.
The name “Tailwinds” was recommended to me by Nick Haschka and what he meant by it was someone looking to build something special, like a business or permanent capital, should position themselves where there is a tailwind at their back taking the form of changes in the economy, culture, cities, demographics, or some other factor. I like the name, especially since I’m an aviation geek where the term refers to wind pushing an aircraft along from behind, allowing the plane to travel faster while using less fuel.
It also relates to micro private equity in two other ways, the first being that buying an existing company, rather than starting your own, gives you momentum and a head start, a proverbial tailwind. Second, the concept of positioning yourself in front of a tailwind relates to a Charlie Munger quote about fishing where the fish are, rather than a crowded shore or dock. Micro private equity is a space with opportunity that most investors and institutions cannot touch, and that leaves the door open for smaller investors to build portfolios.
I hope you like the newsletter, please feel free to reach out to me with your thoughts, feedback, or ideas, I’d love to chat!
“In the real world of infinite play, money is not a commodity. Money is attached to people. If money is attached to people who are playing a different game than you, an infinite game, it would behoove you to understand their particular boundaries and rules, as your boundaries and rules may mean nothing to them.”
Andy published this a few days after our podcast episode to give a deeper dive on his thoughts regarding finite and infinite games in the context of micro private equity. As an overview, finite games are those that have set players, set rules, and a beginning and end. Infinite games, on the other hand, have known and unknown players, rules that can evolve, and the goal is to perpetuate the game. Andy applies this framework to how his firm Localize Capital is using it in their strategy. If this concept intrigues you, I highly recommend reading Andy’s writeup on the concept, it’s an excellent read.
“What we’re doing for the industry is really important by being innovative, by trying to challenge the current model, and trying to bring a different model to the investors.”
Here is a podcast episode from Ted Seides’ podcast Capital Allocators with Managing Director at Blackrock and Global Head of its newly launched Long-Term Private Capital business, a multi-billion dollar permanent capital fund, André Bourbonnais. This new permanent capital fund by BlackRock, also described in these articles by the WSJ and Institutional Investor, is going to be really interesting to watch and see how it evolves. Part of its origin was frustration with existing PE fund models and the demand for a fund that could serve longer term LPs. One part of the interview I found particularly interesting was the replacement of a management fee with a fixed budget to be approved by investors, a move that continues a long-term trend of ever decreasing fees in finance. Finally, André is a pilot and says he loves the intellectual challenge of flying, something I can strongly relate to.
“A few months ago, a local furniture store in my town was closing because the owner had worked for 45 years and couldn't find anyone to take over. A young couple found out about the opportunity through Facebook, purchased it and kept its iconic name while revamping the business.”
Justin Vogt sent me this article which gives a brief overview of a number of different ways to source companies to acquire. This is a topic I’ve been giving a lot of thought and will be writing an article about in the near future. Here’s a good primer to start you off.
“We want to hire great writers.”
“We charge a flat price because we don’t want big customers we can’t afford to lose.”
I’ve recently become fascinated by Basecamp and the culture and mindset that Jason Fried and DHH have applied there. Jason strikes me as someone playing the infinite game and building his business to survive. I highly doubt a lot of there philosophy would work if Basecamp was backed by VC money. He is playing with permanent capital, he has a partner, minority owner in Jeff Bezos (who also understands survival), and no board of directors. There is nobody to answer to, he doesn’t rely on investors for operating cash flow, and can grow as slowly or quickly as he’d like. That’s the difference between outside capital and permanent capital, right there. I am a big admirer of his philosophy around work, building businesses, and being patient. Jason was also interviewed on Shane Parrish’s Knowledge Project podcast recently.
“Between 1999 and 2009, I was the first employee or co-founder of three Silicon Valley venture-backed startups. The companies raised a combined total of over $200M in financing. All three of them failed and no longer exist.”
I’ve recently gotten to know Ali through the podcast and he has an incredible resume of work. Currently he is the CEO of Sporcle, which has a stronger focus on profitability and cash flow that he has enjoyed running. Ali has a wealth of insight and the answer he gave on Quora to a Google employee thinking about leaving for a start-up is eye opening and valuable for anyone at any stage to read, I highly recommend it.
“It’s a farmer and his son. They were very poor and they had a horse. That was their only asset. One day, the horse runs away and the neighbors say, “Well, that’s a calamity for you.” The farmer says, “Well, maybe yes, maybe no. We’ll see.” Then the horse returns, but it’s brought with it a herd of wild horses. Now, they said, “Well, you’re rich.” The neighbors say, “You should be very happy.” The farmer says, “Well, maybe yes, maybe no. We’ll see.”
Then the son is trying to train in one of the wild horses and falls off and breaks his leg. The neighbors say, of course, “Oh, this is a calamity for you.” He said, “Well, maybe yes, maybe no. We’ll see.” Then there’s a war and it kills all the young men in the village, but not the son because he didn’t go to war. He had a broken leg. The neighbors say, “Wow, how fortunate for you.” He says, “Maybe yes, maybe no. We’ll see.”
This interview with Marcus Ryu about starting and growing Guidewire Software is an authentic and humbling description of what it’s like creating a business from scratch, without backing from VCs. I love the concept that events that are perceived to be good or bad in the moment they happen can result in very different outcomes than initially expected. Just because something seemingly bad happens to you today, doesn’t mean that event will lead to a bad outcome.
“Well, no doubt many of you are wondering why the speaker is so old. Well, the answer is obvious: He hasn’t died yet.”
This fantastic compilation article by Shane Parrish is for all you Munger nerds out there, myself included.
If you found an interesting article, podcast, or interview that I missed, please let me know, I’m always looking for interesting stuff!
Photo courtesy of Brenda Stonehouse