Startup Therapy Podcast

Episode #111


Ryan Rutan: Welcome back to another episode of the startup therapy podcast. This is Ryan Rutan joined by Wil Schroder, my partner, the founder of startups dot com. Well, we see hot startups come and go, I mean, there's some, some recent examples, things like we work, there are no squid be. Um, but the reality is that throughout the year are startups are going through these, these periods of hot and cold. How often does this happen in, in your life? Which of course is also my life.

Wil Schroter: I mean, like, I don't think a month goes by where we don't think we've unlocked the gold and like now it's, you know, we're gonna be taking off and we've figured it all out only by the end of the same months to find out we're right back to where we started the Holy Grail,

Ryan Rutan: I found it. And you're

Wil Schroter: like Rutan, that's

Ryan Rutan: just your dirty coffee

Wil Schroter: cup. Damn. And I think, you know, we're talking the cycle of weeks and months at a larger level. And when we're talking about these lessons, we're looking at the lessons of how startups, uh, you know, have written this, this kind of hotness if you will for sometimes months, years and, and so on. And you mentioned, you know, folks like Quimby or we work or Theranos, I mean they got so high on their own supply right on how well things were going to the extent that no one even stopped to say, hey, like this whole thing actually isn't working right, Like no one stopped to say like this is a giant house of cards. So on one hand you're getting massively praised for how well you've done in the game, and on the other hand you haven't scored any points point of profit and sustainability. So I think it would be interesting to talk about, what are those signals, right? What are those signals that we often don't see in our own businesses? And I'm not just saying if, you know, if you become some high flying startup, I mean like at every point in the growth of a startup, even if you just launched a month ago, what are those early signals that tend to blind us from what we should actually be doing and what do we do about it? You know, I mean, you know, how do we get our arms around? Because I think that's going to be particularly important to a lot of folks. Alright, so before we get into this next topic, I just want to let you know what we talk about here is like 1% of the conversation, you know, really, this conversation is going on all day long online at groups dot startups dot com Where Ryan and I pretty much talk endlessly with founders about every one of these topics. So if by the end of this discussion, you like the topic and you want to dig into it a little bit more with Ryan and I just had two groups startups dot com and we'll pick it up from there.

Ryan Rutan: Yeah, yeah, I think, I think especially in the early stages, were, were very susceptible to this because anything going even a little bit right, is something that we just want to hold onto and hug and never let go of, right. So it can be really, really simple and tiny things, but you know, if nothing has gone right yet or just nothing's happened yet, right? At the early stage of the startup, there's just a lot of noise. There's a lot of, there's a lot of dust. We're working on a lot of little things, but there's very little external manifestation or anything where anybody could look at and go, hey, that worked right. We had some, some little success. Um, and it's amazing how very, very little of that it actually takes to put the blinders on to the reality of um, how repeatable is that, right? How much longer is that likely to last? Is that a blip versus a trend? Right. Can we expect this to ever happen again? Do we know how we made it happen in the first place is one of my favorites there. Like we success. Like, okay, cool. How did you do it? Not a fucking clue, but it will be expected to continue. It will keep happening because we aren't going to get in this way. We have no idea how we did it. So therefore we couldn't possibly negatively impact it. So we see this a lot. Right. This is, this is something that that happens at various stages. But um let's let's pick up a couple of specific examples. Well, where where are you seeing this happening? Let's, and let's stick to the really early stages. What are some of those really early happenstance is where we like to extend one little success off into the future and allow that to blind us from the reality of our situation.

Wil Schroter: Yeah. Look, when we're up in anything in life, were blind, right? Like when we're most excited about life is when we are most blinded to probably how things are actually going to turn out, because these things tend to be kind of momentary. These things tend to have kind of a shelf life to them, but at the time we love to project. I mean, Ryan, how many times have you know, again, we found that that one golden nugget and just projected it out for the year and said, okay, I guess we've got to figure it out, but we've got to figure it out so many times. Yeah, I won't need to touch the P&L again for 12 months, let's just go back and watch it grow and here's where it gets really dangerous when we start to get up. Things are going well, everybody's pretty excited. We start to make decisions based on that trend line. We start hiring people, maybe we're raising capital were making other capital commitments In 1000 shirts? Yeah. Oh my gosh, right, let's least huge office space. Right. You know, probably the most seminal mistake of when we're up, we're blind. We need lots of space. Well, maybe not anymore. But yeah, but that, that was typically it. Now, here's the problem. It's not that we don't want to be excited. We don't want to be up. We don't want to be blind. We don't want to be in a position where we don't step back inside. What if, because when things are down, we try to picture a version where they're going to go up, right? But when they're up, we often don't picture a version where it's going to go down and start to be a little bit conservative in some of our projections and Ryan, I can think of a million instances where we've fallen into this, right? I can think of a million commitments we've made when things were up, right, that we had to then steadily unwind later. I can't think, I can't think of a couple

Ryan Rutan: million dollars that we've spent on exactly these kinds of things. Yeah,

Wil Schroter: 100%, And I can think of a lot of instances were, we're a little more mature now, I don't just mean in our age, I just mean more and more of that too, but more in the sense of kind of how we look at these things. It's, it's happened, we've, we've almost won the lottery so many times that now when it happens, we're like, yeah,

Ryan Rutan: that's not exactly going to work

Wil Schroter: out like it's a good signal, right? But I think we're more cognizant of how dangerous and vulnerable we become when things are going really, really well.

Ryan Rutan: Yeah, you gotta be careful there. I mean, again, when, when you're drawing lines more than one data point is typically the go to method there, right? Um, we can't just say, you know, this happened once. So let's, let's pretend it's gonna happen forever. But I want to talk for a minute about two things. 11 why that happens right internally is the founder. There's some degree that we have to feel this way, right. We have to feel that it's at least repeatable, right? We have to feel that we've achieved this level of success. We've achieved some good thing happened. We have to believe to some degree that we can keep doing that right and that it will continue otherwise. What the funk are we doing here? This is probably just a one time thing, pack it up and take it home, everybody clear your desks out, we're going to bail on the lease. So you do have to have, you know, some level of optimism without optimism. Um, this is a really, really hard game on the other hand, you do have to balance that. And I think this is where the real challenge comes in and I want your opinion on this one, Well, How do we temper that? Right? So particularly if you're a solo founder, you're only dealing with your own emotions around these things. But quite frequently we're dealing with a team. It does, it definitely matters. And that's a different situation. We can unpack that separately. But I want to talk about when there's a team, let's say you get 5 to 15 people and you've you've been nose to the grindstone, you're working hard, you achieve something, you get to some level of success and now it's incumbent on the founder to figure out how excited do we get about this? How do we use that to motivate the team? But how do we keep that from allowing us to be blinded and the team to be blinded by thinking like this is just it. We've done it now. The only thing next is to figure out what I'm going to wear as I enter the gates of shangri

Wil Schroter: La. Right?

Ryan Rutan: So what does that look like in reality

Wil Schroter: look? Well, I think it's a couple of things, let's be honest, when things are going well that is currency that we didn't have five minutes ago, right? That's the currency that attracts capital, that attracts team, it gets the team pumped, which gets them to work harder, etcetera. So it's kind of hard to not want to double down on that currency, that optimism, right? Because there's so much ry in doing that. However, the problem is when we believe it right? when we say on the one hand, we have we have to be optimist, that's the whole name of this. On the other hand, we have to not be pessimists. We just have to be conservative, right? We have to recognize that when things are going well, it geometrically increases our vulnerability, right? And that's that's the core of what we're talking about is that when things are going well, all of a sudden I'm vulnerable to a lot of decisions that are based on a small amount of data. In many cases that I should probably look at a little bit more closely take the case of we work right? Which is just maybe the biggest example ever of optimism fueling optimism with no actual business model behind it right right now. In their case perhaps, and again, I'm I'm guessing perhaps the right decision was let's just fuel optimism because we actually can't fall back in a business model like, like this, is it right? You know, the optimism in the excitement is the is the business model? Um, Yeah, yeah, yeah. And and look and maybe it'll figure itself out later. It clearly was not going to. But um, the problem is we're so vulnerable in that moment. We want those next things we want to be able to get investors pumped about raising capital. So we raised at these really high high evaluations that feels good what we miss is okay, but those valuations imply that we're actually going to be able to build the company that that suggests if we don't, we're so upside down in this raise in this valuation, we've basically bankrupted ourselves from future value and that's just the beginning, all of the operational expenses that we take on staffing is actually the biggest. I mean, how many times have we thought about this? Oh my God, things are going crazy. We gotta hire a ton of people only to find out not to, you know, months later that our enthusiasm and the need for those people were so were so distant from each other. And there's there's no good way, you know, there's there's no nice way to be able to unravel that. Um, this is the crazy part run and I'm curious your thoughts. I can't think of a single instance where our enthusiasm, where we're a little bit blinded lead to a better outcome, can you?

Ryan Rutan: Oh, blind enthusiasm. No, I mean, there were definitely times where I think enthusiasm, it all depends on the outcome, right? So I can like going back to, let's say the virtual acquisition, there was a lot of enthusiasm fueling that, right. We had to believe that we could turn that around and make something far better than than what we were requiring at the time and to really be able to breathe some life into that. And there were all sorts of, you know, some negative press around it. There were, you know, negative sentiment amongst the clients amongst the staff who had just gotten burned by the previous management. And so there was a hell of a lot of enthusiasm there. And so that's as close as I can get to an exception that proved the rule. But even in that we were very, very measured um and we certainly were doing downside planning, but if I go back and I'm very, very honest with myself, I definitely remember making decisions that were at least equal parts emotion and logic um simply because and for a lot of right reasons we wanted that to succeed for for for the people aspect of it, right? We're looking at all of that staff, you know, 400 plus people, we're gonna be out of jobs overnight if we couldn't figure something out, all of those clients who relied on virtual for business critical processes that we're just going to be high and dry without any any recourse. And so I think that there there was some sense that like our optimism that we could make this thing work um was definitely the pervasive cologne in the conference room at the time, um but we did have downside planning and we were we were being as measured as we could um and then we let the optimism carriers and that turned out quite well, but that's as close as I can get to and again, like it's not a fair, not a fair comparison because we weren't blinded by it and it was also a situation that we approached as a third party. So this wasn't something that occurred internally where we had kind of been lulled to sleep by

Wil Schroter: this, excuse

Ryan Rutan: me, this growing success. Um, so yeah, that's as close as I can get man, and I can give you a lot of examples to the counter optimism went the other way. Yeah, that when those are easier to pull, I got a big bag right over here, but that's the one that I can pull on the side where maybe optimism um, was a currency that we spent just the right amount of in that case,

Wil Schroter: you know, by the way, I just want to mention if what we're talking about today sounds like the kind of discussion you wish you were having more often, you actually can, you know, we're online all day, everyday working through exactly these types of topics with founders, just like you. So any question you would have, or maybe some problem you just want to work through. We're here and we love this stuff and we're easy to find, you know, head over to groups dot startups dot com and let's just start talking Well, I mean, well, but think about the opposite. Prior to buying the company. If you looked at the previous incarnation of the company, the economics were all busted right at so many levels. Growth was incredible. And to their credit, I mean growth isn't easy to achieve. So I don't want to discount that. But the business model was 100% broken that the numbers were 100% broken optimism and kind of being the ones hot startup kind of overlooked these things to be honest. No one had ever really even checked. I mean that was the crazy thing about it. I don't want to dig into that too far. But this is exactly what I'm talking about, hey, everything is going well right and everyone else believes it must be going well because everybody else is saying it's going well, No one stops to say, Hmm you're kind of losing 25 cents on every dollar, like by definition like, like the, the model is so broke, you're selling dollar bills for 75 cents, right? Like just just want to make sure that you're forever, but you are going to go bankrupt right? There is a hard limit on that. And so you know what the problem is, is someone needs to step in at those moments and ideally that's the founders and, and maybe just you know that the sea level team to say, look, this is awesome, We love it. It's great. But

Ryan Rutan: how much do we really

Wil Schroter: know right now, right? How much history do we have with this trajectory to, to give us any sense that this is going to continue to go and if we blip right, if this thing goes, goes, you know, taking off up into the right and then all of a sudden blips the wrong direction, what does that mean for us? And I think that's the core of what we're talking about when I go to Vegas Ryan and, and I'm at the blackjack table, which is the only thing I play uh, in them up In my mind, I'm not thinking of what happens when I lose 30 hands in a row. My wife is right. She's sitting there taking all my chips off the table, right? Like when I'm not looking, which is why we win. Um, but I'm not thinking like that, I'm forever the founder. I'm thinking, well if its tenets 20 if it's 20 it's 40 and I bet accordingly Because at the time I'm winning right, I just hit Blackjack, no one after they just hit Blackjack says I'm going to lose the next 20 hands. Maybe someone does, but generally like your, your enthusiasm is there. And I'm like, it

Ryan Rutan: says, you will. But

Wil Schroter: yeah, unlike blackjack where you're typically the only person playing the outcome or the cost to getting blinded by this is multiplied by all of these people around you in the case of virtual, the cost to that blindness was hundreds and hundreds and hundreds of jobs, right? So it's not just one of those things where we can be cavalier and we're thinking, okay, well, you know, if I was off, maybe, you know, my stock is worth less, no being off has major consequence toward a lot of people. And so we don't have the luxury of only feeling good about it. We have to feel good about it. We have to pump up the troops, but then we have to go back to our office and be like, okay, now let me think about what happens if everything goes sideways, right? We have to play both roles.

Ryan Rutan: Yeah. And I think that's the most difficult part about this, I think that's the absolute most difficult part and it's not even the logical calculus that you go through and it's not the, the analysis around what is the downside look like, right? It's, it's getting to the mental state where you can even do that and then figuring out how you deliver that to the team without looking like a pessimist, right, without taking the wind out of everybody's sales because you can absolutely kill momentum that way, right. Um, it can be really de motivating when somebody comes to you and says, look, I just built this landing page, launched it and it's performing forex better than everything else that we've got going right now. And in my brain I'm going, that's pretty much every landing page ever for the first week. And listen, it's just the way it goes, you get some, you know, you're focused on it, you're paying attention to it, you're driving the absolute best traffic to it. There's things that happen, right and then it just falls back to normal performance. But in the moment, I can't tell somebody that can't be like, yeah, it's probably gonna fall pretty well in line with the rest of what we produce because that's super de motivating, right? And on the other hand, when they come and say, and because of that, I want to triple our budget to that page. That's where that little bit of pessimism that, you know, being really careful about spending that currency around optimism, especially when it comes along with spending the currency of actual cash. We have to get a bit more guarded and measured. And I think this is the hard part because as the founder we wanted to work to write like I wanted to be the best landing page we've ever produced. I wanted to drive four X results. I want to drive more cash into that uh, into that marketing budget. And yet history tells me, experience tells me that we have to be guarded and measured in that moment. And I also don't want to de motivate that individual. I want them to feel good about what they've achieved. But I need to do it in a way that they get to see the reality of it play out before they get blind and drunk on the early

Wil Schroter: results, right? Yeah, you've got to be measured and I think, I think part of that is really interesting because you know, we're talking about like once hot startups like we work or you know Theranos or what have you as if just the big companies suffer from this. I think you know what we've learned is that companies that just got founded five seconds ago suffer from this, right? This isn't a late stage company problem. This isn't a big, you know, well known company problem. This is a mentality problem. There's a mentality problem that happens when we get super excited for good reason. It feels good when we have a win. You know, we land a big client or or like you said, you know, our landing page does well or we sell our our first few products and we're thinking okay now we're on to something and ideally we are to to be fair, you and I would say yes, I hope that continues to be true. But what if Right? And and we have to look at it and say and you said this earlier, is there something repeatable about what we just did that tells us we can keep repeating it. And I'll give you some examples company launches for the first time they do this great consumer product and then they find 100 people that they that they presented to and like 90 by and they're thinking holy sh it, everybody wants this thing, right? And and on paper that sort of makes sense. They did some customer discovery they did some customer validation. It proved that this is a really, you know, interesting product and a lot of people wanted it. So it's good. Here's what they didn't do. And here, here's why those, those trends tend to kind of fall apart. What they didn't do is find out if total strangers wanted. What they didn't do is find out if they can actually find a market past the first group of people that they were going after and do it in a way that's profitable, right? I mean, this happens all the time. It reminds me of startup weekends. You remember how like the whole thing was startup weekend is you, you launch your page, you try to drive some traffic to it and then on sunday, when you present it, you try to tell everybody how, you know how well the startup is done, how well you've, you've proved something and it's like, that's awesome. That's great. You know, it's fun, but you haven't proven shit improving ship means a year from now. You're still doing it right? And this is where we get caught up and this is where we start to make all of those, those really challenging decisions. You know what I mean?

Ryan Rutan: Yeah. The other place we saw and still continue to see this. I mean, it was, it was a crucible of this type of activity and we just saw one after another, after another, after another was in the rewards crowdfunding space, right? Where you would see these companies come in and um, you know, early on, there was just this like there was a little bit of magic around crowdfunding, where people were just intrigued

Wil Schroter: by it. That

Ryan Rutan: went away really quickly. And then the companies that you saw dr these massive successes and let me air quotes successes, they, they drove a ton of cash into those to make that happen, right? And their whole thesis was, it won't matter, um, if it's profitable at this point, it won't matter if we're, you know, profitably acquiring customers. All that matters is that we get that exposure that we prove there's a market there and then we'll go build our business after that. And well, how many of those did we see? Where? Yes, they did massive numbers. They posted huge, huge 10 15 $20 million crowd funds delivered their products and where the hell are they now? Right nowhere. They had zero cash to go on with apex. Um, or if they had enough or they took on following investment. It turns out that that customer acquisition cost, that they suffered through for their crowdfund was exactly the same customer acquisition costs they had for the rest of their business, which was very short lived because it wasn't profitable, right? And to your point, they didn't prove anything other than, yes, people will buy this at this price, but it was a price that wasn't sustainable. They couldn't keep doing this. And they sort of knew that going into it and they just assumed that things would get better right. It's that same blindness around optimism that, well, if we made this work, we'll just make it work better in the future, right? And of course, always the hope. But man, nowhere, nowhere did I see this happen, um, with the quantity and the public visibility that we saw in rewards based crowdfunding, It was pervasive

Wil Schroter: and, and that was kind of like the, the biggest moment of getting so many high fives and being so blinded by everything externally. And I think that's a big part of what we're talking about is that for a lot of folks, uh, getting all of these external signals, like a good example is when you start hearing from investors that they want to invest in your mind, you've arrived right? The business model is validated. You know, now it's time to do big things, so to speak. Uh, in the case of, like, you know, back in the day, like you were talking about, like with a Kickstarter, you had 10,000 people pledged to, to want your product. So it must be good, right? The concept of it must be good. You know, the theory of it must be good. But we're a long way away from actually proving there's a business behind it. And there's no lack of, you know, um, gravestones, tombstones around Kickstarter to prove how badly, uh you know, we've been, you know, uh misrepresented ourselves actually, you know, misrepresented to ourselves uh in that moment of triumph, so to speak. And I think the challenge with it for all of us is to be able to say, I've got to keep pumping the enthusiasm. The enthusiasm is a currency like we talked about at the top of the episode, but at the same time, I've got to kind of just block some of this stuff out, right. You know, we're getting great press, we're getting these great tweets that are saying, hey, this product is incredible. That's cool. I'm glad that it's better than the opposite. However,

Ryan Rutan: I've

Wil Schroter: got to be able to take all of that with a grain of salt and say, okay, cool, uh there seems to be like a positive trend now. What do we need to do to actually support that long term ergo what are some of the new assumptions that we have to support that we have to keep getting to in order to make this blip an actual trend right? For example, how much do we have to keep on spending? And what's the likelihood that at that spend level we'll keep seeing the same result, but we don't actually know no one does, that's sort of the point, You know, at some point, we've got to be able to say, here's what we know based on all these good things that are happening, here's what we know this happened, this happened, this happened. However, here's all the ship that we don't know and that's where our focus and concern should be in that. Yes, we knew we sold an enterprise customer and they referred another enterprise customer but we don't know that that's going to keep on happening. We hope, but we can't build a forever model based on that. We know that we've had 50% month over month growth. That's insane. What's the probability that that's going to keep happening? Pretty much 0%. We project that out and so all we're doing, you know, as as founders, as the team etcetera. He's just saying, okay, good press, good info. All this great stuff is great rara yay us, but let's just put that in a bucket, let's step back and let's take a look at what we actually know what we can take action on and if ship goes sideways, what we can actually fall back on, right that you can't fall back on that bucket, right?

Ryan Rutan: There's no version of paying your rent, paying your staff with with good press and and high fives unfortunately would be great. Now they are leverage herbal assets right and we should be thinking about that and they can and should fit into the strategy. But again we cannot let those be the indicators that say now we should make some big financial decisions based on that. Now we should hire staff now we should increase office now, we should, you know, dump money into a marketing campaign because we got that one enterprise client that one time and now we want more of those, right? Yeah, easier way towards that. But let's not assume that that's now the future and everything's going to be, you know, copasetic, um you've got to take all of this, all of this with like as many grains of salt as you can fit in the hand all the time because to your point really early on, we get blinded by this stuff and then we go into tunnel vision mode. Um and we talked about this, a lot of founders, it's it's hard because you constantly have to switch between tunnel vision on like just getting heads down focused, getting something accomplished and then leaning back and being able to see the real picture. And I think that the noise from that type of ra ra press um going back to the crowdfunding example again, right, there were so many of these companies who got so excited about how well they were received as a product, as a project, but then they assumed that there was just this logical transition into being a business, right? And they didn't look around to see what else was going on, they didn't lean back from it, they allowed that tunnel vision to exist and they just plowed forward on exactly the same path that allowed them to be successful at the crowd funding level. And it turned out that had nothing to do with what it was going to take to be a successful business,

Wil Schroter: right? We, we also kind of lose sense for the fact that having a good week, month year also kind of doesn't really mean anything in the grand scheme of things. You know, my favorite is Every year and I mean every year, Ryan, we have a company that is like the, you know, the, the new hotness of, of, of startups. Right? Right now, in this year, it's 2021, it's a clubhouse, right? Everyone's talking about clubhouse. There's a fairly good chance and I'm not trying to, you know, create a tombstone for anybody that a year from now, a month from now. No one will talk about clubhouse and it will be yet another cautionary tale. Remember when meerkat came out for a minute, it was clubhouse. Do you remember what meerkat is? No, you don't write because at that moment we're all celebrating the wrong ship. We're celebrating funding raises, right? Celebrating a funding raise is the equivalent of celebrating the cost of a wedding, right? Not the actual intent in the outcome of the wedding, right? Nothing's happened yet. The hard part is yet yet to come, but we get all juiced up about this stuff. We say, okay, wow, they raise $50 million and they're hiring a ton of people and they're getting pressed everywhere. Those are all the wrong signals, Those are all the wrong things to be able to say, this is actually what the business is. To be fair as a founder, you gotta do all that stuff, you gotta get people pumped up, you gotta bring the dough, it's just not the same as saying, and I've built a real business that's getting totally, totally blinded by your own bullshit. Alright, so that was fun. But let's actually keep this conversation going. You've heard what we think about this, but you know, Ryan and I would really like to hear what you think and we're online, like all day long, pretty much talking about every startup topic you could think of from fundraising, the customer acquisition to just really had to get all of this crazy startup stuff out of your head. And there's tons of other founders, just like you they're weighing in on these topics so you'll get a chance to just hang out and meet some really smart founders were also super, super easy to find. You head over to groups dot startups dot com and let Ryan and I hear what's on your mind, let's get to know each other a little bit and let's just start having more of these conversations

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