News broke last night that IBM is nearing a deal to acquire HashiCorp for nearly $5 billion.
While Informatica denies the rumors, Salesforce recently made a $10 billion offer. In Q1, Roper Technologies purchased Procare for nearly $2 billion.
These massive potential deals point to a new trend – cash-rich tech titans leading the biggest corporate buyouts this year instead of private equity firms.
The primary reason? Interest rates.
While interest rates may move a few basis points here and there, the ceiling is within sight.
Publicly traded firms now have some certainty around where they will land and their balance sheets are fortified with cash.
Simply put, big corporates spent the last two years becoming more profitable due to market pressures, and the cash they collected earned 5% risk-free. Now we have firms ready to spend.
In contrast, the leveraged buyout game is looking expensive right now. Last year, the equity portion for these debt-driven deals crossed 50% – an all-time high.
Traditionally, private equity relies on loans to finance takeovers, paying down the debt from the acquired company’s profits. But with rates elevated, that classic playbook deployed by firms like Thoma Bravo and Vista isn’t such a slam dunk.
Only so many assets can support debt at that rate and most of them likely already make significant returns for their shareholders.
The combination of confident strategic acquirers and restrained financial sponsors means acquisition is the most likely path for a lot of large-cap companies this year. I’m sure we’ll see a normal return to business once rates subside, but for now, I expect more of these announcements that are front-page worthy.
We all have different motivations for why we chose our career paths. Some people have passions for industries, some have passions for making a difference, and some do it strictly for the money.
Too often, we generalize the latter as bad. If you’re only motivated by money, you can’t keep going when things get tough or, even worse, you can’t be a good person.
The truth is we all have a mix of reasons guiding our career choices.
Authenticity in motivation matters more than the reasons we give others for appearance’s sake. We can’t be consistent and persevere with motivations we don’t believe in. Trying to force ourselves to be driven by causes we don’t resonate with is a recipe for burnout and dissatisfaction.
For some, the biggest driver is finding a job they absolutely love – the kind of work that feels deeply fulfilling. For others, the motivation comes from earning a salary high enough to achieve financial freedom and support a comfortable lifestyle for themselves or their family. And for many people, it’s a combination – they want to make a difference while securing financial freedom.
Instead of casting aside money as a motivator, we should celebrate the diversity of reasons that inspire people. Most of us are a mix of motivations – recognizing this expands our empathy.
I’m motivated by a desire to help tackle enormous challenges like climate change. But I’m also driven by memories of my parents tirelessly working overtime when I was young to keep our middle-class household afloat and the sacrifices (including their marriage) they made to ensure my sister and I had every possible opportunity to succeed.
When asked about his motivations, Charlie Munger said,
“I had a considerable passion to get rich. Not because I wanted Ferraris – I wanted the independence.”
For me, doing meaningful work goes hand-in-hand with achieving comfortable independence. Not to splurge on luxuries, but to invest real quality time in relationships, like the ones with my spouse and kids and to remain present for life’s most significant moments.
Wealth alone won’t sustain someone’s passion long-term. But it’s an incredibly powerful motivator when it aligns with finding purpose and making an impact.
Ultimately, the world benefits when people are engaged, fulfilled, and motivated in their work – whether by passion, profit, or a blend of both. An ethical or impact pursuit of financial success is the ultimate win-win and we should celebrate both halves of that equation.
With a little left to go in the first quarter, I’ve published almost 40 blog posts, even with work travel taking priority over the last few weeks. My previous high for a year is just over 50. I’m on pace to potentially triple my output.
I heard two things on podcasts yesterday that reminded me not to let these last few weeks determine how I keep building the habit.
Seth Godin said:
“I wrote this morning because it was Thursday, not because I planned to publish the best thing I’ve ever written.”
What a powerful statement – especially for those who are just getting started or afraid to publish anything.
The first part is so important. There’s something about knowing I have to meet the keyboard every morning that makes me more observant, more present, and more curious.
More and more, I realize it pulls me out of a passive consumption mode into a thinking one and eventually into a creation mode. That’s something worth working hard on.
Writing is a tool to reach beyond observation until you connect concepts and step into actionable territory. That actionable territory in my world is helping companies or discovering an investible thesis.
Another good nugget from yesterday came from Shaan Puri, “We write so someone can binge our content and feel like they know us.”
Usually, people find my writing before or after meeting with me. I’m not trying to write for vitality, so the first time someone interacts with the blog is because we’re potential partners at some point.
For the first time, not writing made me unsettled. I have a list of topics I want to write about, and these were good reminders not to let a few inconsistent weeks be the downfall of what I started in January.
So, what’s coming up? Here are a few things I’ll post about soon:
Speed + Focus = Intensity
The Professionalization of the Trades
Victory is spelled Survival
Repetition Doesn’t Spoil the Prayer
Intelligence Breeds Overconfidence
Opposites Create Opportunities
Thank you for following along, even when most posts are not the best thing I’ve ever written.
The energy transition is full of deployment, recycling, and retraining. Playing these trends effectively can be a key to success.
Investors like Bill Gurley and Josh Wolfe cite Thinking in Systems as one of the most impactful books they’ve ever read.
A key concept from that book, and one that I’ve been thinking more about lately, centers on the stocks and flows of a given system. The energy transition is full of examples.
New assets like solar, batteries, data centers, and EVs create massive “in-flows” as we deploy those assets at record rates.
The stock consists of existing generation, transmission, and the labor servicing them.
And, soon, we’ll see outflows of assets that are being retired or recycled.
Matching your business to the appropriate part of this cycle can create an unexpected edge. Mismatching can result in disaster or at least slow growth. For example, the environment remains challenging for startups seeking to build O&M solutions for asset categories with small installed bases.
Flow
The easiest way to think of flow in our context is to tie it to deployment to grow the stock and retirement or recycling to shrink it.
The asset side of the energy transition remains firmly in the deployment phase thanks to solar, storage, and EVs. Boosted by AI, data centers will also stay in the deployment phase for the next several years. Startups indexed to flow should quickly achieve product-market fit if their solution solves critical pain points.
Recycling is another great example of flow. Recently, firms within the circular economy have gained more traction as the stock of certain goods needs to flow into new uses. We’ve seen firms like Redwood Materials and Solarcycle have success in batteries and solar, respectively.
Stock
Unlike flow, stock is more intuitive to understand. It is the installed base of a given market’s assets, labor pool, or existing population. So long as in flows are greater than out flows, stock goes up. The magnitude of the difference determines the velocity of stock growth.
As startups grow and mature, investors increasingly consider metrics like gross and net dollar retention to evaluate the health of a company. In addition to continually solving deployment issues, one great way to grow these numbers is by creating value attached to a growing stock.
Over the last year, we’ve seen several companies indexed to the existing stock of energy assets prove to be extremely sticky. These firms usually fall into the categories of operations and maintenance, analytics, and systems of record.
Firms that service/manage EV chargers, provide portfolio-level views of solar and storage, or keep records of installed infrastructure continue to grow in importance.
Stock Meets Flow
The graph above is an oversimplified version of stocks and flows. In reality, many stocks and flows interact with one another. Retraining labor for new industries highlights this example.
There are three ways to solve this problem using the stock and flow framework.
Create more flow by training new workers to grow the installed labor base. Population growth eventually limits this flow’s velocity as only so many workers enter the market at a given time.
Improve productivity of the installed base of labor. Do more with less. This one has worked in industries where software created exponential efficiency gains.
Steal from other tangential labor pools. We could, and are trying, outflow labor from incumbent industries and re-direct it to create an inflow of labor to next-gen energy transition industries. The graph above illustrates this.
So far, #2 has proved the most successful. But, we continually see new solutions arise for #1, and new policies like the IRA could accelerate #3.
Stocks and flows are not mutually exclusive. The companies that index themselves to both at the right time do incredibly well.
Software can accelerate deployment / flow and thus revenue, THEN enable new revenue or reduce costs with solutions for a large stock of assets. In that case, you have created an end-to-end solution for some of the most important customers in the world.
Every social media post looks the same now. Every tweet, thread, or LinkedIn post holds the same formula for engagement because we solved the problem of each algorithm.
Add a post to the algorithm, auto-tune to reach the masses, and end up with a relentless march toward mediocrity. Now, everyone competes for the same attention in the same format on the same platforms.
We see this everywhere. It’s not only social media that’s guilty of the crime. Most websites look the same, and a lot of software takes queues from Notion.
TPG co-founder Jim Coulter put this problem in the context of private equity by saying, “You raise money on doing the same thing (that you’ve done, and most others are doing), but it’s a terrible way to invest and thrive as a firm.”
We gravitate to the middle because it’s where returns (money, attention from others) appear easiest to find. It’s also where there’s less work, and humans are predisposed to doing what’s easy.
If I am to avoid doing unusual things, it becomes difficult to see what chance I have to be more than an average person. – Winston Churchill
What we miss, however, is that someone always shows up with something “everyone” says will not work, but it does, and the game resets. The BIG returns and money go to the person (or businesses) that reset the game.
The secret is that the edges, where there’s less competition, is ultimately an easier place to win.
The irony is that if we’re successful on the edge, our niche becomes the middle, and competition increases. Competition creates healthy markets but makes staying ahead harder as a company or individual.
Steve Schwarzman famously notes that Blackstone always looks to innovate because the cost of capital eventually becomes a race to the bottom in any market where returns are clearly apparent. Replace “bottom” with “middle,” and you have the current state of many things today.
Failure has never scared me. We can’t improve without taking risks. Mediocrity scares the hell out of me – being average often means we didn’t do anything different or push the boundaries.
Let’s keep pushing those boundaries, and doing things differently.
Once companies cross $10M in revenue or ARR, the right product leader becomes a secret weapon for the next stage.
If the first $10M relies on speed and execution. The next $100M adds strategy, operations, and coordination. The right product leader adds all three.
After $10M in revenue, the next leap is from product to complete platform and growing into the de facto solution for your customer. Instead of solely building and selling a product, we need to consider increasing wallet share among our existing customers (white space) and/or expanding to new ones altogether (green space).
The first $10M centers on repeated execution. After $10M, we intuitively increase the importance of new capabilities in finance and operations. But, the product organization often gets overlooked because it’s usually already “good enough.” Someone is coordinating the roadmap, so the potential hole isn’t glaring yet.
The teams that grow most effortlessly have an advantage within their product function. They’re building what the customer wants and doing so quickly. Those that don’t will eventually lose to competitors or have an R&D function that becomes a drain on the P&L, sometimes unknowingly.
So, what’s the difference between good and great. And what do you look for?
Great product leaders tend to always have three traits in common:
They are customer-obsessed, not technology-obsessed. Building the right product for the customer is more important than leveraging the latest and greatest technology. If the latter solves the former, great. If not, solving the customer’s needs comes first.
They understand the entire business and create cross-functional buy-in. The sales team loves them because they take the input and turn it into solutions for the customer. The marketing team loves them because they can explain solutions in lay terms and understand what creates the right to win. Finance loves them because they’re P&L obsessed. The entire organization loves them because they’re accountable.
They balance the long-term with the short-term. The sales team needs to close deals today, but if the product isn’t great in 3 years, they’ll have nothing to sell. Building great products requires a balance of this understanding. They’re laying the groundwork for the future without sacrificing revenue and the P&L today.
It’s not enough to know the desired traits of a product leader. We also have to think about how good/bad shows up in the metrics. Since the product team is usually in place at $10M ARR, recognizing a weak product organization can take longer to show up in the numbers.
The boiling frog analogy applies here. The pain point will grow slowly over time. By the time you realize it, you’re cooked, and a significant change is needed. The solutions are often painful and expensive, both financially and culturally.
A few early signs of poor product leadership include:
Sprint points (what the engineering team is working on) begin skewing too far in the direction of solving bugs, QA, customization, and non-revenue generating / not scalable issues. I like to think of new feature development as leading indicators of future revenues. It will show up in sales if they’re not being worked on.
The margins of implementation and customer success begin to drag. In the former, it’s usually an indication of a high level of customization if you’re pricing the service correctly. If margins within CS are poor or inconsistent, it’s often due to a solution that can be solved with software.
Win/loss ratios begin to shift due to incomplete feature sets. If customers consistently pick other solutions because of missing features, the product organization isn’t effectively strategizing for the future.
The cost of bad product leadership compounds. Eventually, the sales pipeline begins to stall as competition increases and the team burdens the cost section of the P&L outside their own team. Generating less revenue with a higher cost structure is a recipe for disaster.
Product managers catch a lot of grief, and some of them rightfully so. The “CEO” of the product monicker, popularized by Ben Horowitz, inflated a lot of egos.
But, the right product leader creates a competitive advantage. The right product leader views themselves as a servant to the other parts of the company, helping each do their job better. Find yourself the right product leader, and the entire organization will feel the effects.
AI, frontier tech, and hardware grab the headlines while services fly under the radar.
The genesis of Silicon Valley and the lure that it holds started in hardware. But you wouldn’t know it today as the venture capital industry has increasingly turned to software for returns.
It’s hard to blame them. Software produces the biggest returns and scales more easily than other business models. Buoyed by this upstream focus, private equity also turned to software as the industry matured and “ate the world.”
Kyle Harrison recently argued in this well-written piece that hardware could be on its way back to popularity in Silicon Valley. He correctly warned that venture capital runs the risk of treating hardware like software, which could be a disaster.
Nonetheless, some venture investors have turned their attention to hardware because it’s:
a) viewed as the next big thing as a result of on-shoring, the energy transition, and space and;
b) the belief that software will become more accessible due to AI, and thus, competition will grow exponentially over the next decade.
The latter could come to fruition. But, and I can’t overstate this enough, building the software is only ~25% of the battle. Once software is built, that product needs to be sold and implemented. As a company grows, hiring, strategy, and execution all increase in importance. If everyone can build software, domain expertise will become the differentiator.
Kyle’s piece inspired me to write about another business model I’ve been thinking about for a while that could grow in importance over the next decade: services. It’s a sector where private equity has done well and where smart firms are playing today. It’s also a model where distribution and knowledge moats can be fortified by rapidly creating and leveraging software to expand margins.
The energy transition is complex. How do I plan for an electric fleet? Do I need to build my own microgrid? How big should my onsite battery storage be? What data do I need to measure my emissions? Where’s the best place to put new transmission and generation?
These questions are highly complicated and customer-specific, while the solutions are opaque. They require the customer to have a high degree of trust in the person solving the problem for them. Software can solve many problems, but human trust isn’t one of them.
Some of the best private equity firms have already leaned heavily into this strategy. Oaktree Capital has a history of rolling up EPC firms. At the same time, Summit Partners and Blackstone have purchased several construction services companies. Other PE firms are rolling up HVAC technicians and electricians.
These investments fit the private equity playbook perfectly. The localized offices have built loyal customer bases within their specific region. Once combined with other firms, they can share back office systems and operations. Finally, they usually have a specialized skill in high demand with short supply.
Like hardware, service businesses have to be capitalized appropriately. No matter how digitally-enabled it may become, investing in a services business can’t be done at a 10-20x NTM revenue multiple. They also need to be profitable much earlier, if not from the beginning, as they are ultimately valued on EBITDA and FCF multiples. But, these constraints don’t preclude the businesses from being good investments, far from it.
Services have also held up well in a rocky market for energy transition stocks. Over the last twelve months, infrastructure services have grown 29%, in line with the Nasdaq, while outperforming the S&P 500 and CLES by wide margins. This surprised me, but it makes a lot of intuitive sense:
The IRA and Build Back Better reward deployment
Global infrastructure is aging or being replaced by better solutions
The revenue growth of these firms is now in line with software after the recent pullbacks
Traditionally, service businesses haven’t received the same level of attention and hype as their hardware and software counterparts. But many enduring service businesses are out there, including in seemingly mundane areas like tree trimming.
The energy transition will create more of them in the next decade, and even if they don’t grab attention, they’ll grab returns for the investors who find the right ones.
Imagine returning 30% a year to your investors for 15 years straight. Now, imagine those returns coming during one of the worst periods to be an investor and doubling the returns of the S&P during that timeframe.
That’s how well Peter Lynch performed as head of Fidelity’s Magellan Fund from the late 1970s to the early 1980s.
One of Peter’s most famous quotes relates to the persistence of finding good ideas. He famously wrote in his book One Up on Wall Street:
“I always thought if you looked at ten companies, you’d find one that’s interesting; if you’d look at 20, you’d find two, or if you look at hundred, you’ll find ten. The person that turns over the most rocks wins the game.”
The mentality seems so simple on the surface, but as we’ve learned simplicity is a strategy. If we see more pitches, we’re more likely to get a few worth swinging at. But, staying in this state of mind sets the foundation for success in multiple ways that aren’t as obvious at first glance.
Early in our investing careers, we have almost no idea what we value as an investor. We have no experience sitting in board rooms or the advantage of seeing 100s of deals. We have no idea what great looks like or what matters to us as capital allocators.
As we turn over more rocks, our mind begins to set reference points for excellence, and our core values as investors start to form. We gain a sense of confidence that is informed by data.
Keeping the turning over rocks mentality throughout diligence pays dividends, too. With this mindset, we’re more patient during our research. Instead of looking for answers to validate our thesis, we continually look for data until we are satisfied with the answer.
It’s easy to get swept away in the momentum of any deal. But, having the data gathering approach over thesis validation is an excellent way to ensure that the momentum slows down until we reach a fitting conclusion.
Finally, and most obviously, in private markets, the ability to turn over the most rocks increases our odds of accessing the best companies.
Unlike public markets, private investing naturally limits the number of shareholders on a cap table. The ability to find and efficiently research opportunities more quickly than others AND to do so in the right quarries increases our surface area of success.
Howard Marks started writing his famous memos by hand in the early 1990’s. For 10 years, he never received one response. He claims nobody even responded to let them know they got the letters. For my younger audience, pre-internet everything was sent by this service known as mail.
The answer I think is that I was writing for myself. Number one, it’s creative, I enjoy the writing process. Number two I thought that the topics were interesting and that I wanted to put them on paper. Number three, writing makes you tighten up your thinking. – Marks on Writing
Why did he do it? Marks has stated he was writing for himself, enjoyed having a creative outlet, and wanted to create a record of his thoughts. The more things change, the more they stay they same, as a lot of writers I read list the very same reasons for writing. It’s also the reason I’ve tried to write more and I think “writing for yourself” is under appreciated.
I was reminded of this by Cal Newports’s recent appearance on Ted Ferris to promote his new book “Slow Productivity”. In this clip, Cal emphasizes that the only thing that matters is loving the craft. Apply it, develop it, hone it, and find meaning in it. My favorite line is “don’t require random people on social media or an attention algorithm suck all of that skill out of you.”
Investing is my favorite craft, it has been for the last 10 years. I found it effortless to finish books on Munger, Marks, Schwarzman, KKR, etc… or spend time thinking about companies and thesis building. Writing brings me the same joy, but I never practiced as much because I let the lack of response suck the life out of me. Don’t do that.
As you can tell, I write a lot about failure, writing, and process. I do so because they are all intricately tied together. We learn from failure and process it to take calculated risks and prevent ourselves from making the same mistake twice. We write to process what we’ve learned both in theory and in practice. We refine our processes and learn to enjoy them because they’re usually all we can control.
Investors leverage many tools to make sense of the world – spreadsheets, pitch decks, expert interviews – but few exercises force us to clarify and tighten up our thinking like writing.
To be a good investor, we must be passionate about where we spend our time. Otherwise, the ups and downs of the job would eventually wear us down.
To be passionate about something, we must be optimistic that where we spend our time matters and that our research will lead to an outcome worthy of our effort.
That’s the optimism paradox. Because we’ve chosen to spend our finite time on a particular topic, anchored our career to it, and researched it heavily, it must be a good return on time and money. Otherwise, we wouldn’t have chosen it. Its success validates our decisions and, in some ways, our identities.
The optimism is required to propel us forward on the toughest of days. But, it’s also the trap we’ll fall into even on our best days.
I find myself searching for this equilibrium almost every day, especially lately. The negative headlines around the energy transition “slowing down” pile up in my inbox, but the data tells a different story. Is that my optimism, or do I understand a secret?
It’s a struggle to balance the healthy skepticism these headlines spark and the ground truth as portfolio companies grow into scaled assets with high-quality revenues.
This paradox applies to more than the energy transition and climate. All “movements” require passionate individuals to create momentum. Computers started with the Homebrew Computer Club. Crypto started with Satoshi and the first adopters of Bitcoin. All of them believed in the ultimate success of their hobby because they attached their identity to it.
The result is a constant push and pull between optimism and sufficient pessimism. Are we deaf to signals because of our desire to feel validated in our research? Or did our research unveil a secret that others can’t yet see?
The goal is always somewhere in between. Optimistic enough to make money and pessimistic enough to avoid unnecessary risks caused by a sunk cost fallacy driven by identity.