Startup Therapy Podcast

Episode #140

Ryan Rutan: Welcome back to another episode of the startup therapy podcast. This is Ryan. Rutan joined as always by my friend and the founder and Ceo of startups dot com, Wil Schroder will. One of the things that we talked to founders about, a lot of the question that we get asked is when's the best time to raise capital? When should I raise capital? When when will this be the right thing to do in the right time? Let's instead flip that around today and talk a little about when is the wrong time to raise capital And what is the cost of doing? So

Wil Schroter: I think in the early days, ironically, when we need it most

Ryan Rutan: right, the most expensive drop of water

Wil Schroter: is when you're dying in the desert and someone will sell you anything for one drop of water. Right? And I think for startups, we were all in the desert, we all start in the desert. That's that's like, you know where our video game starts, where we're alone in the desert, right? And we're dying. And investors or co founders or anybody else has the one drop of water that we don't have. And we will do anything to get it. And we're about to make the most calamitous mistakes of our entire startup career. And that's where our story begins. 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. Well, 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: And that's where the story begins. The I think one of the biggest problems with that is it's so not obvious when you're going through it because you are the thirsty person in the desert and so you want to, you know, quench that thirst. Uh, and there are a number of ways you can do that. We'll talk through them all of them coming at, you know, extremely high costs. And often, um, I won't say always a lot of the time, completely unnecessary, right? We end up doing these things for the wrong reasons. Uh, due to this, the nature of exactly how vulnerable we are at these at these early stages, right? When when we don't yet know what the future looks like, um, when we feel like what we have, doesn't have any values who are willing to give it away. Um, and all of these other factors that play into us being just super exposed as founders, uh, and willing to take help money, uh, even just companionship from, sort of anywhere. We can get it right.

Wil Schroter: It's a dangerous place to be. And I think that's part of the narrative, the startup narratives that nobody really talks about or gives color to, you know, when we're talking come up in the last couple of weeks and founder groups where folks were further along, they weren't just starting. Um but they're at a point, they're like, hey, I need money, so it's a good time to raise money. Like, you know, this is a dangerous time to raise money because you're never gonna give up more percentage wise, etcetera of equity that you don't get back, right. That's really at the core of what we're talking about. Um then you will right now. So if there was ever a time to say maybe I shouldn't be raising money right? Or giving up equity cause this isn't just about raising money, maybe I shouldn't be giving up equity,

Ryan Rutan: the lesson we should

Wil Schroter: give to every founder and this would be part of this. This podcast is right now in the first year, you should never be more terrified of giving up equity than you are right now, right? And it's not to say you shouldn't do it. You know, it's an important catalyst that we have for all of our growth, right? It's a currency that we use etcetera, but you got to understand it's never going to be this expensive again, hopefully, right,

Ryan Rutan: It's the most expensive currency you have

Wil Schroter: Yeah, there's one version where everything is 90% off. This is like, you know, everything is 1000 times more expensive. This is inflation at the max, right? And, and I think we should dig into all the areas today where founders just get buried with these essentially bad decisions. Yeah,

Ryan Rutan: I want to, I want to hammer home one more point and this is actually quoting you. Well, I find myself saying this more and more frequently founders as they start to talk about. Yeah, well, you know, I'm only giving up this much, I'm only giving up that much. You know, it's only, it's only worth this much And the thing that you said and this is a couple months ago now, but it was remember that the equity that you give away now represents secure equity is 100% of the future value of your company, right? There will never be more of it. Um, and there will likely be less and less and less of it. Right? As you go on these things, you know, there will be additional funding rounds and, and things that will happen that will pair that equity down. Uh, so parting with it at this very early stage where what you get back from, it will be so disproportionately small to what it's worth in the future is super painful, but only if you're thinking about the future state and if you're just looking at it now in a vacuum, sure, it's worth nothing. Uh, but if that's the case and then we're going to value it based on what it's worth now, why the hell are we doing this in the first place right? We have to be thinking about the future value of this Or we're not building this company, right? So keep that in mind. This is 100% of the future value of your company that we're talking about.

Wil Schroter: And I think the biggest element here, let's start here. I think the biggest element that kind of messes with us is as founders, we don't understand the value of time, right? So so let's let's

Ryan Rutan: use an arbitrary time in so many ways.

Wil Schroter: Yeah. Yeah. It's so many in so many ways in this one. When we say value, we're meeting it quite literally, right? But like how, you know, how does that value change over the metric of time? And so let's start at months zero, right? And then look at month 12, month 24 here's typically what happens month zero to say month three months six. We've got the idea, Ryan, I pitched the idea to you, you're the only other person that said yes and lo and behold, you know, we become co founders, right? And and and we'll get into this, you know, the whole co co founder thing. But um we run into a thing where that may not have been the best decision for either of us by the way, but we didn't give it time another factor, right? Let's look at the status of the product right, You know the minimum viable product, the M. V. P. Or you know whatever we're looking at we're like hey it's just an idea but we have to get it to an M. V. P. State so we can get it out into the world. Whatever we can do to accelerate that is good, right? Not necessarily not necessarily. If we end up losing a quarter of our company to save ourselves three or six months worth of time Over the course of 10 years, that will be the dumbest decision we've ever made. And the list goes on every time we try to compress time right and give up a disproportionate amount of equity because we're vulnerable, we totally screw ourselves. And I think that's the the the essence of what we're talking about here. You know what I mean? For

Ryan Rutan: sure. For sure. I think there's another important caveat to that which is that we always assume that the compression of time leads to good things, right? And it's not always the case. It just means we're going faster, right? If we're doing the wrong things we just do them wrong faster. There can be advantages to that. We can find out that those are the wrong things sooner. But oftentimes if you were to slow down and pay attention to what you're doing and not be in such a rush to get there, you would not have made the same decisions right? There are a lot of times where, you know, founders say like, look, I just had the speed blinders on, I was moving so fast. I couldn't see these other things happening around me, whether it was erosion of the culture and the company, um, or missed opportunities or building the product the wrong direction and not listening to the market, whatever it is, these things really, really, really compound in the same way that time value can compound. So can the time losses. Right? And so I think that we cannot just take it for granted that if I could move this thing faster, everything would be better. No, everything would be faster. That's all it guarantees you. Uh, and if you're giving up a chunk of your company in order to place this bet, let's be really, really sober on what the actual outcomes might be and what the downsides are as well.

Wil Schroter: Right? And I look, I look at it saying, um, in the formative stages again, let's like a month, 02 months, 12 months, 18, maybe. Let's just stick with 0 to 12 because I've never done this before as a founder, let's say, right, I don't, I've never, I've never been through this gauntlet. So I don't understand all the ship decisions, I'm about to make. Right? And so I think that recruiting you or whomever else, you know, to the cause, um, is progress and therefore justifies the cost. I think maybe joining an incubator, not knocking incubators here. I'm just pointing out and giving up 6% or 7%

Ryan Rutan: like that you didn't mention you weren't knocking me but, but not incubators. That's cool. I like,

Wil Schroter: yeah, no, no, no, I'm definitely not. So, um, so we get into this thing where I don't realize because again, I haven't done it yet. That a lot of the things I'm about to pay for the most expensive money I'll ever spend, I could have just waited like six months or 12 months and probably gotten the same thing done. Um, in some cases better. Not necessarily right? But when you have nothing, everything feels like a giant win, right? I have nothing bring out a co founder feels like a giant win if I have nothing bringing on an accelerator who accepts me feels like a giant win, right? What I don't think about is, is it though? Like is it a win for like this week this month or is this a forever win because I'm giving up the equity forever, right? It's definitely gone and I can't get it back.

Ryan Rutan: Yeah. Yeah. And I think this is the, this is the conundrum, we get into, right? We, we start making really, really leveraged trades because we're acting in the moment, right? Again, we have to look a little bit longitudinal here and say like what is going to happen in month nine month, 12, can I make it that far? If not, why did I start this now? There's so many other decisions that can be made or could have been made up until that point where you say like, I don't have to make these super leveraged trades To get things that I'm not even really clear on the value of right to your point, you know, taking on that $25,000, you know, at, at you know, usurious rates where you're talking, you know, major percentage of the company for a tiny amount of money. Um, you would never make that trade again. And I think that's a really important thing to consider here is if you were to look backwards and say, you know, five years from now, would I make that same trade when I hand it over to somebody, then why are you doing it now? Right. And, and I think often the answer is well, because I have to, because I needed it because, well, okay, did you really, did you really need that absolutely clear that this was the, and that's that is the, that's the caveat statement right there. The only path because oftentimes there are so many other ways to skin this cat. We talk about this like pick up a side hustle, keep your day job, do something else to generate that little bit of cash that you think you need in order to move this thing forward faster, um, or moving it forward at all. Right. And there is a difference And we should recognize that there's a difference between accelerated capital and enablement capital, but very rarely is that 1st 25 K. Enabling, right? Said differently. Find another way to enable it, Right? Don't start the business for an extra couple of months and save the 25 K. Do anything else other than give up a meaningful percentage of your company for what will amount to um you know, a quality used car. That's what you're trading. That's what you're trading at this point.

Wil Schroter: I think when, you know, you're leveraged and the problem is people don't understand it in the way that they need to. Um But when, you know, you're leveraged, what I would say to a founder and have said to a founder is the money you're about to raise is the most expensive money you're ever going to raise, right? Therefore, have you exhausted every possible option to do two things. One have exhausted every possible option to not need it. Right? And the answer is always no. By the way, always. And if you're really pressed, it's always and the second is have you exhausted every possible option to need less of it? Because the only thing worse than you know, raising the money is raising even more money that you don't you find out you don't need, I'll give an example ah early on, about 2000 dates are getting so old now, 2000 and seven? Uh when when we were running a company called afford it. We raised about a million dollars in our first round, right? And uh okay terms not great. That's not really the point because in our mind we needed that money in order to run our first series of campaigns to help sell our products online. In our first month we spent about $15,000 in adwords not a ton of money right? In generated. Yeah. Yeah, that's it. That's our cmos. Uh and so we generated like $500,000 in sales, right? A disproportionate number which ended up in retrospect proving like 90% of our thesis right there um on customer acquisition on the business model all this ship. I remember talking to Elliott about it and I was like, we basically just gave up x percentage of the company. I I tell you I don't remember what the percentage was um called like 30 or 35% of the company, essentially 15,000 useful dollars. I was like, dude, why didn't we just put that on a credit card right early and saved the entire round. Because the second thing that would have happened, this is the important part. The second thing that would have happened is that we could have had $500,000 worth of sales versus $0 in sales and gone raised on that story, right? We have gotten much more money. Much better terms, right? For what's essentially just a single milestone. Yeah. We should have tested that and that's where our story continues, right? Yeah.

Ryan Rutan: And that's the conversation that we have all the time. Which is what is it really going to take you to get to that next milestone? Which will either greatly reduce the cost of capital or maybe even eliminate the need for it. Right? Often times we're talking to people who are trying to raise money just so they can get to the point where they turn revenue on and then they may not need to raise capital again or at least for a significant period of time. So it's always like, what can we do to fight a little harder to get to that point? But I want to circle back on something you said. Which is, it's funny and I was thinking the same thing as you entered into that, that dialogue which was credit cards, right? People tend to understand this and they're like, oh, I would never do that right. Look at the interest rates on those things like, hello, look at the percentage of your company. You're giving it for the same amount of money right away. That overtime. Oops, we did the math wrong there. So yeah, I think it's it's it's funny that people have that because they know the value of a dollar, right? Especially you don't have one, they know the value of the dollar in and of itself, right? But I think they do forget what it represents. I'll give another example which is that I was talking to a founder 34 weeks ago now who was already in business looking to to raise some capital to enter a new market. Looks good for them. It feels like the right thing to do in terms of entering the market. But raising the funds to get there did not seem like a great idea. And when we dug into what they actually needed to do, it turned out they could get a bunch of in kind trade from partners they already had and needed to raise almost no capital. I mean it got down to the point where it was ludicrous, it was like they needed $22,000. And this is a company that's doing uh like 200,000 monthly revenue. So like they didn't need to go raise money anymore. They're like we'll just tighten up the belts for a month or two Pocket that cash away and then we've got everything we need to execute this plan. So you know, this was a more mature company. Of course we're talking about people that very very early early stages. These guys are 1820, something like that, 1820 months in um so they're a little further along But they were still looking at making what would have been a really really bad decision. They were they were looking originally for around 200 k. And they were hoping to be able to raise that on two million and weren't sure that they would be able to mean, they're going to get at least 10% of the company

Wil Schroter: because

Ryan Rutan: it amounted to write which and they were like, we were willing to do that, they're like, okay, you know, that feels like a worthy trade, This is a good market, we believe in it, And that sounds fine, right? And if I hadn't told the other half of that story, which was then they eliminated all that down to $22,000, they didn't even need to raise. That sounds better, doesn't it? Come on. So these are the kind of exercises that we have to continuously go through and make sure that we're actually as leverage as we think we are or that the leverage is necessary in the first place. Right? Do we have to pull that lever? In many cases, the answer is just plain no.

Wil Schroter: Usually, if you give it more time, these things start to solve themselves and at the time people don't see it right at the time, all of us, myself included, I would say, okay, well again, I don't have the cash, I need the cash, I gotta hire developers or I gotta hire marketing folks, whatever, you know, I need stuff that I don't have, therefore I have to raise money, there's no other way around and instead of a better way to look at it would be um, I want to raise money, there's nothing wrong with raising money. I want to raise money, but I want to raise it for what I only what I absolutely need and cannot get any other way. I cannot get with with spending more time. I cannot get with, you know, with, with being more boot strappy kind of about it. I'm absolutely out of options now. That's rarely the case, right? When, when, when somebody puts your feet to the fire, especially if somebody who knows better, right? You've never done this before, you assume you're leveraged and that's just the way it goes. You talked to some other founders who have been through this before and I'm like, you know what? That's not, you're not as leverage as you think you are. Get to this milestone in this milestone you'll raise on better terms and probably more money. Um, this isn't about whether I raise money or not, that's not it at all. This is about when I raise money, or more specifically when I give up equity, which brings us to our next point, which is the single most expensive decision we're ever going to make is the day we meet our potential co founder right now, all of a sudden, what we gave up to investors means nothing. This is the single most expensive thing we will ever do and we all fuckinup.

Ryan Rutan: It's, it's a, it's a, it's 1000 bets at once, right, that, that's really what you're doing, You're making 1000 bets at once tied up on a single human. Um, and in so many cases we just see people part with half their equity, Right? Why? Well, because there's two of us now, we've done entire episodes on this. So we won't we don't want to go too far down that rabbit hole, but it's not great ideas. Yeah, let's let's get a little little it wants to climb out.

Wil Schroter: So, um, first things first and you and I talked about this, uh, we we take on a co founder in most cases because you're the only person, as you said at the playground that's wearing our same shirt, right?

Ryan Rutan: We both got blue shirts on. We must be best friends forever. So

Wil Schroter: you're instantly qualified, right? And again, in many cases, because we've never done it before. We never run through the math. We were like, I mean is this person going to contribute half the value forever, Right? Because that's a long time and I'll give you the most common use case. I see um the most common use case these days is um, I've got an idea. I need a developer to help me produce the M. V. P. Et cetera. I'm looking for a technical co founder and I immediately say whoever is willing to build this in whatever version I need right now is going to take half the company

Ryan Rutan: right now, imagine

Wil Schroter: a different version, right, where an investor comes to you. An investor says I will underwrite the cost of building the M. V. P. But you have to give me half the company. Like

Ryan Rutan: we wouldn't say yes to that. Yeah,

Wil Schroter: that's that seems odd. Same

Ryan Rutan: decision, slightly different framing. And yet somehow we treat those as two very very different things. They're the same

Wil Schroter: right to your point of how expensive is. But also how much we don't know about this investment, right? Because we're gonna pay for it for life and we're never getting it back. And yet we not only give it up easily, we go out of where to find people to give it to its bananas. 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.

Ryan Rutan: We get it all the time. I've got, I've got I've got, you know, this is it's timely. Uh in the last week, 10 days, maybe I've had conversation with two founders and they both came to me and said, you know, these were people who had come to us 34 months ago in both cases. And one of the, one of the things that they were looking for in, in joining up with startups dot com. And in particular founders group was they were hoping to to come in contact with other people directly in the network or somebody that they knew, somebody at a first degree connect to the network who would be a co founder for them. They were actively seeking co founders. They were running around looking for a bucket to pour half of their equity into a very leaky bucket in most cases, right? But here was the cool ending to this. So in in both of these cases, they were actively seeking co founders and it was a top priority for them. They both listed this like the, the main thing that they wanted to try to accomplish and over a three month period. So to your point of a lot of these problems, solve themselves with time and two other points around, there are often other ways to skin these cats. Don't skin cats. Don't know why I said that. I would never skin a cat. Yeah, it is. I know I never really thought about that. I use it frequently. I will never say that again. It's terrible. I have a cat. I love it. I've never skinned it. So anyways, the the other piece of that was, there are other paths to this end. And in both cases there were slightly different issues at play. one of the founders was simply scared of doing this by himself, right? He just did not want to to think about going this alone and just felt like he needed, you know, another warm body there to get through, you know, the cold early times of the startup vulnerability, Right? It's the vulnerability the other founder was having somewhere between just like a practical knowledge crisis, where there was just a lot of things that she didn't know how to do and she was very aware about that, um, which is fantastic, right? She knows that there were deficits in her knowledge and she needed to fill some of those. Um part of it was also just imposter syndrome where, you know, she absolutely was qualified. You know, even for the things that she had 15, 20 years of career experience in, she was still doubting herself a little bit. And and so, so here's what happened after three months sitting around with other founders and talking about these issues. Guess what happened? The issues went away, That person, the one who just felt lonely, no longer felt lonely, had the support that he needed and and felt good about proceeding with the support of a community of founders around him. On the other hand, she was able to attend some workshops, talk to some people within the founders group, pick up a couple of great expert calls, um, and and solve the knowledge gaps and all of a sudden guess what? I no longer need a co founder. I don't have to give up half my company. I gave up, you know, 15 or 20 hours of phone consultation and talking to people who knew what they were doing and could advise me how to do this for myself, right? Imagine the Delta in the long term of not having given up 50% of equity for those, those what became trivial, right? They didn't feel trivial at the time because you were standing behind them. Once you get on the other side of these things, they tend to look infinitely small. And it's like, I can't believe I ever felt like that was even a problem, right? And, and, and the, you know, the impostor syndrome is a great one because I think once you do get over that, it's like, I can't believe I ever felt that way about myself. I cannot believe that was an issue. I can't believe I was going to give up half my company to try to solve that. By the way, probably bringing on somebody else who had the same level of imposter syndrome that I did.

Wil Schroter: Oh, by the, by definition, what if, what if there was a law that said, you're not allowed to bring on a co founder Until the beginning of year to only 50, 50 co founders, you'd have 00 because by the time we'd all sobered up, right, and had a little bit of time in the saddle with our business. We look back on, we're not gonna fucking 50% of my company to another person to join, right? Or right. You know, how many times we see a person that's, that started a company, let's say they're in year one, and for whatever reason, they've got a little bit of traction and they've got two or three people working for them. And then retroactively says, I'm gonna bring on a co founder and give them half the company never right, right. Kind of start to see a pattern here, right? Given enough time, you start to look at the value of what you built. And I'm not giving away half this ship now. Right? And so I think for, uh, for a lot of founders, because again, they've never been through this gauntlet before. They don't understand how expensive this decision is, right?

Ryan Rutan: That's why getting that third party perspective from somebody who's on the other side or somebody's who are on the other side goes so damn far. I got an effusively thankful email six months ago, uh, from, from a founder that I've known for five or six years now. Uh, and he started something new about 2.5 years ago and was really excited about the founding team that he'd put together and you know, it was super high on them and was like, you know, this was, this was an experienced founder. He had already been through one, it wasn't a failure. I didn't go where he wanted it to, but you know, it did well enough. Um, and it kind of primed him for the second one, which is doing quite well now. He, He was really pumped up about these folks, right? And he was like, we're just gonna do an even 25% split across these four co founders. I'm like, okay, all right, I want to talk himself out and we'll circle back around all right. And so we, we had a very frank conversation around the pitfalls and dangers in doing that for everyone involved. It was like, you know, you gotta, you gotta imagine all four of you are not going to make it to the end of this thing. Uh, and so let's, let's, let's talk about, let's talk about how, how we justify who gets what, let's talk about, you know, a vesting schedule. And then let's talk about, you know, a clawback and decay if people don't stick around so that you're not consistently sitting with ghosts in the cap table. And he was not receptive to it at first of all, he's like, I feel like it's gonna be offensive. I think it's gonna be, it's gonna be that, it's like, you know, it's gonna be more offensive if you're sitting across the table from one of these people four years from now. Um, and trying to figure out how to un amicably part ways over over what was an inequitable equity split at the start. So this email comes back around and, and you know, he, he eventually did, he went with, you know, uh, kind of slicing the pie model, um, you know, good vesting schedules. And this email was, hey, look, uh, I'm so thankful that you did that for me. Uh, we're down to 22 co founders now, ironically, uh, the, the woman that's with him now as a, as a co founder is not one of the original three others who were in the mix, surprise, surprise. Yeah. And she has something like 8% of the company,

Wil Schroter: right? Whereas

Ryan Rutan: before his co founder pool was going to have 75% of the company, right? And so he was extremely thankful right at the time. And he said, you know, like I, the company would have ceased to exist was how he put it. Had this not gone that way, had he not put those things in place, he would have made this very expensive leverage, fear based decision and it would have cost him the entire company because there would have been no path to proceed had they,

Wil Schroter: Had, you know, three

Ryan Rutan: people walked with 25% of the company fully vested each, it would have been dead. It would have gone nowhere. They had to do a funding around before he brought on. I know, sorry, just after he brought on the, the eventual co founder, uh, and imagine having 75% of your cap table tied up with people who not work at Microsoft google and somewhere,

Wil Schroter: right? Just like

Ryan Rutan: can't happen,

Wil Schroter: can't do it. Okay. So we beat up co founders. Let's talk a little bit about investors because that's what a lot of this leads up to

Ryan Rutan: do. We save all our good punches for this

Wil Schroter: part. No, we love investors that

Ryan Rutan: there's, we do,

Wil Schroter: but we don't love it when our fellow founders make the wrong decisions with investors. I mean, it's kind of just that simple. And so what we try to do when we talk to folks is when it comes time to raise, we say number one again, have you exhausted all your options? Um, because they'll always say yes by the way, first pass is always yes. Right? Yes. That's the only reason I'm raising, I have to, I need this to hire developers, you know, marketing dollars, whatever. Right? And it's, and it's true, you do need those things. What I think folks don't quite understand is you don't necessarily need all of that right this minute because right this minute to really expensive time to raise some dough, right? Going back to that example, I said, where we spent $15,000 and we ended up raising a million dollars giving up a third of our company and that was a super expensive decision. We couldn't get back and how do we just waited a second exhausted a few more options. We would have done things totally different. And I would argue that's mostly the case. The problem is founders don't know any better. This is their first time doing it. So they just assume I need money. I don't have money. This is the best time, which is rarely the case. So where, where I get frustrated is I don't think founders look at this decision and they say I need the money. What they don't say? And I think that we should dig into is is this the time for that money? They think if I don't have it, it's the right time rarely the right.

Ryan Rutan: Yeah. Like we keep saying they're, they're often so many other ways to get around these things and while they are big and important problems, you know, in the, in that state of the business, right? It feels insurmountable, right? We need to get our 1st $5,000 together for a marketing budget, right? That'll be a laughable daily spend amount sometime in the future. But for right now, it's all the money in the world because we don't have it. Right? So you start to look at, well, okay, what are the other ways around that, right? If it's a $5,000 problem raising equity is, you know capital against equity is probably not the right move right? And, and sure it may be 10 or 15 different $5,000 problems. But I think this is where founders can often get lost as they go through. They run the tally, they look at the total amount of money that they need And then that just becomes this, this mountain, they feel like they have to climb, right? We need $150,000 to do everything that we can possibly think of to do in this moment, right? Which was not possible to do, write these things will have to happen. Some of them may happen in parallel, More than likely they will happen in sequence rather than in parallel. So you'll be doing one after the other, uh, and you're not going to spend all the money at once, right? So if you decided we need, you know, 90 days worth of marketing and we need to be able to spend $10,000 a month over that period. You don't need $30,000 right now. You need like five, right? That'll get you two weeks. Let's see how it backs out. Let's see if it backs out. Right? Let's start to start to play with the numbers a bit. And so I think that when we start to look at it only in the aggregate and we forget what the constituent pieces of the required funds are. We blind ourselves to a lot of other solutions. Sorry.

Wil Schroter: But let's let's build on that a little bit because what I want to talk about, you just raise a great point. Let's compartmentalize each of the things we're going to spend this money on and ask ourselves, can we move the meter on any of these things um, before we raise for all of these things. Because If we just start lumping a bunch of stuff in there that we could have gotten to otherwise without raising at the most vulnerable expensive time in our lives, that was wildly wasted money. That's my $15,000. I didn't need to hire any more people. I could have run that on any given night, run that experiment to a landing page on any given night and gotten the same results and get in my mind, I was like, I've got to raise a million bucks because I want to hire staff and I want to do marketing and I want to do all these things, which was true. I didn't need

Ryan Rutan: to do that.

Wil Schroter: I just didn't need to do them all in the same race. Right? I should have picked it off and I should have said, wait before I raise a dollar. First thing I wanna do is I want to list out all the things that honestly, I could probably figure out with or without this money over the next 3-6 months, let's say, right? And if I'm being really honest and really crafty. I should have said. Well, Even though I'm gonna need say $400,000 for marketing, I don't start with $400,000. I don't walk to the table and just dropped $400,000. I start with 10 or 15 or etc. Who have access to that cash now. Of course the answer was yes. But I should have said, well, until I run that test or you know, kind of burn through that money. I probably shouldn't jump to the next thing because that $15,000 is going to cost me 33% of my company. I'm never getting that back. That's, that's so dumb. Or said differently. If we fast forward a year from now and we look back and say, hey, Um, would you be willing to give up 33% of your company? But it was essentially the 1st $100,000 that you spent, I think not in a million years because whenever you look back, you realize how dumb and vulnerable the decision that was to begin with. Sure,

Ryan Rutan: yeah, I think there's a couple important things to unpack there. One is that If we are ready to make these bets and we truly believe in them and we think that that $15,000 in marketing spend is going to lead to meaningful traction, then why would we raise against all of the other things that are gonna happen in parallel to that, that aren't required for that piece to gain the traction because what you're saying is I'm gonna take all the money now, but one piece of the money I'm going to take is going to have a meaningful impact on traction and therefore on the valuation do that sh it first. Okay. Start with that. The other thing I want to bring up and and we're doing this consistently through this episode which is analogizing everything $2 and and this is something that I'll often sit down with founders and talk about like, hey You don't actually need $400,000. And I'm like what do you mean? Like we just clearly laid out, we need $400,000. I'm like no You've got $100,000 from marketing? They're they're like yeah we need every penny of that. Like no you need the traffic and the sales that that represents. You don't need money. Money is just a conduit to the things you're talking about and this isn't just a splitting hairs conversation where I'm trying to be a jerk about it. It's pointing out that there are other ways to get there. So instead of thinking we need $100,000 to go run ads or you know to to pay an influencer. what other ways could you possibly get there, right? Do you know some people who would be willing to take a C. P. A deal against, you know promoting your product in their newsletter or on their instagram feed Right? There are so many other ways. One silly example. But there are so many ways to buy down the cost or eliminate the cost of these things or at least the upfront cash required to do it. So remember as you're thinking about the money that you need need to raise, it is nothing more than a proxy for the outcomes you're trying to create with that cash. So if there are other ways to create those outcomes, you don't have to get the cash in the first place. You don't have to give up the equity right, particularly at a time where again you're most vulnerable and all of these activities should change your valuation and therefore the cost of that capital to begin with to your point. Well this is really not a matter of do we raise there? Maybe there's a lot of startups that are on a path where raising will become necessary at some point. Right? At that point it has everything to do with, you know, whether there's just a period or an exclamation point after the statement I sold my company. Right, right. I wanted to be a fucking exclamation point at the end of these guys like we don't want to give up all the equity in these companies before we sell the damn things because it makes the makes that process a lot less fun. Right?

Wil Schroter: You said something interesting there. You said that the money is a conduit to get more traffic, right? And there's other ways to get more traffic totally agreed. But the other thing that's interesting is when I stack rank the importance of what I'm going to spend things on. You know what I'm gonna do. I'm gonna move stuff money that I spend that gives me revenue right away. Right. That drives dollars if my business model, you know, has that option. Right? So, so I want to point something out when I raised a million dollars and I took $15,000 I put it into google adwords and I ran adwords and I sold Xboxes online, right? A whole other story of what we were doing there. I generated revenue. Now, here's what happened. The $15,000 didn't just evaporate. I got it back and then I spent it again and I got it back and then I spent it again. Right? And what I didn't consider is I didn't need $400,000 for marketing budget, ironically I needed $15,000 for marketing budget and then I needed it to return and keep reinvesting, it. right? And it turned out that if I'm ranking where I'm gonna be raising money, here's what I'm going to think about. I want to, I want to give up as little equity as possible because I can't get it back right. So I only want to raise right now for the things that those things that at the top of my list that are most likely to generate some yield to make it. So I don't have to raise as much money right now, that's the whole thing right now, I'm as hell. Right? So I want to do everything I can to make this moment in time evaporate so that when I am taking larger slugs of cash, I'm doing it less vulnerable. Everything I should be doing right now should be focused on that very moment. Right, What are all the mechanisms I can put in place to be less vulnerable? There's a ton of stuff that I could spend money on that's not really gonna make me less vulnerable, right? Vis a vis returning cash, etcetera hiring, hiring a bunch of staff or getting an office space. Like, you know, if people still do that anymore, um isn't gonna make me less vulnerable, right? If anything more vulnerable, more expensive, right, I should be thinking right now, dude, I'm so vulnerable. I need to be doing everything I can to get out of this situation and I need to be working in an order of events that balances these two things. How do I make steps toward less vulnerable and how do I make steps toward more valuable?

Ryan Rutan: Exactly, yeah, I I've never thought of this. I've used this analogy in other ways, but there's the hunting and farming analogy actually works really well here. Um I think that at this early stage, the you should be focused on hunting right, Which are things that you can reliably go out and, and, and make use of in the immediate future, right? Things that will bring in revenue or partners or, you know, that that developer that you need to get the thing built, whatever it is that is going to get you closer to unlocking those short wind, XIII hunting need to happen now. You can build the farm down the road, right? You can domesticate everything and make life easy later, right? But I think too often people are trying to build their dream house right from go, uh, not realizing that you got to run this thing out of a tent for a little while, right? Or maybe a year, which is okay. But yeah, it's, it's actually, it's, it's more than okay, right? Because I think it, it makes you harder to kill, right? As you said, the, you know, the office, the staff, all those things, they're great and they may be, you know, part necessary, right? They may contribute to what's going on, but they're very rarely core and they just add weight and baggage to the operation and, and then drag and therefore you're more likely to have cash flow issues and all these other things that you don't want at that early stage, Right? So to your point Focus on the next thing, the one next thing that you need to do that's gonna move you closer to generating revenue or getting the product out the door, whatever it is that's absolutely critical to that revenue milestone so that you can start to turn that cash over and let it produced for itself to your point that $15,000 didn't go away. Now I have it again and again and again and hopefully it's compounding on itself and 15 goes to 20 and 20 goes to 30. And all of a sudden, you know, you've got a little bit of a flywheel in at least one part of the business where something meaningful is happening. Um, if nothing else, even if you're just stacking up users, very little revenue, whatever, there's some meaningful progress in the business that will help by down that cost of capital, right the story you have to tell the early days, it's just not a great story and therefore it's going to be a really expensive story to sell every little thing that you can do to make that story that much shinier bis down the cost of capital.

Wil Schroter: 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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