Startup Therapy Podcast

Episode #165

Ryan Rutan: Welcome back to the episode of the Startup therapy podcast. This is Ryan Rotan joined as always by Will Schroeder, my friend, founder and CEO of startups dot com. Will, the market is currently taking a giant shit on itself. Nothing entirely new here, which I think is part of what we're gonna talk about today. But yeah, things are looking pretty bleak right now as startup founders, like, what do we need to know about this uh historically, what should we be, what should we be doing right now and, and kind of how do we set ourselves for the future and what should we expect?

Wil Schroter: Well, I mean, the thing is Ryan, you and I've been through this multiple times and if you've been startup land long enough and even if you've been around long enough to be through the 2001 crash to the dot com bust or the 2007, 2008 financial meltdown. If you haven't been through it as a startup, there's a very different version of it. There's a, a version like it. Some people, you know, they read the headlines and they say, oh, that sounds bad, I guess a bunch of rich people must have lost money. But if you're in the startup world, you rely on a lot of those rich people to, to raise money. Those are your customers that this, a lot more of this affects you, uh, in your business right away. The thing is for a lot of folks, they've either never been through this cycle as a startup or they're just not old enough to have been through one of these cycles in 2001. Some of our listeners we're born. So they have not been through these cycles, right? It is what it is so well, just because we are. But the point is I think let's first start kind of do a quick history lesson and I think it's important because we've been here before. So none of this is unprecedented. You're like, oh my God, this has never happened before. COVID has never happened before. Markets melting down. Yeah, we've kind of been through this one before and we kind of know what it looks like. We know how to prepare for it. We know how to not prepare for it and we know how to get a, how we're affected. So why don't we start off with the first one that we kind of all dealt with, which was 2001 dot com. Crash Ryan as you remember it. What was life like before the crash?

Ryan Rutan: Oh man, it was so exciting. I mean, everything was just going up and up and up and we had drawn lines on, on all the charts. We had to get extra paper to put on top of your chart because the up to the right graph went up so sharply it wouldn't fit on a landscape sheet of paper should have put another one above it because things were gonna go that way forever and ever and, and always,

Wil Schroter: and there's no indication otherwise.

Ryan Rutan: No. And I mean, and money was, was everywhere. Of course, you know, the, the, the startup scene wasn't what it is now in terms of the, the quantity, the number of investors and everything. But if you were looking for money and you had a reasonable startup idea and you could fog a mirror with your breath, you were probably going to have some thrown at you. I mean, raising was easier. You know, there was a lot going around and it was just great times, right? Until it wasn't until

Wil Schroter: we all got caught flat footed. It was the first time I'd ever heard of a financial crisis. I didn't know what they, they, the same thing. I was 27 when it happened. Right. Like, I, I didn't know any better. And so when that whole thing imploded, I was like, what happened? I remember exactly. I'm at the agency and I, again, having never been through this before, at this point, we've got like 10 month in payroll. And I say that because I was just like, well, only 10, right? Like, like, we're good. And I remember I get a call from Best Buy one of our big clients at the time. And the clients, like, yeah, man, you see what's happening in the markets and I'm like, who cares? Right. Like, I'm like, and, and he's like, well, yeah, well, obviously we're gonna have to, uh, you know, put a pause in this project and I'm like, wait, what? Exactly. I was like, wait, huh? I didn't

Ryan Rutan: buy your stock. You just send me checks.

Wil Schroter: Yeah, I know. What the hell. And they just lit, lit up like a $5 million project with us. So, we had a whole bunch of people on the project and all these things gone immediately. I'm like, oh, well, well, shit, that's not great after that. Every day. My phone's ringing again with another customer saying, just kidding. We're out. We had a, a client who will remain nameless. Although there, they were a fortune 500 pharmaceutical company who stiffed us on their bill. Right. And this is how stuff gets. Like, people don't see, it would never even thought of in a million years. They stiffed us on a $500,000 invoice. Right. Not like a 1500

Ryan Rutan: dollar. No, no. Which was all the money in the world for your company. And in, prior to this moment sounds like a rounding error for a company that size and yet, right, these, these dollar amounts become important.

Wil Schroter: These are the things I think when people hear about the markets imploding, they, again, they think it's somebody else's problem. But today we're gonna talk about white. No, it's very much our problem. I had never seen it before. So all of a sudden the world turns on a dime and I'm like, what the hell just happened. We go from having like 70 open positions to having to lay off 40 people like in 90 days and you're seeing it everywhere right now. It's happened. I'm gonna fast forward a few few years after that. Markets, correct things, good things happen. Companies like Google are born from this era, et cetera. Fast forward to 2007, 2008. Everybody gets a loan, everybody gets a mortgage, you get a mortgage and you get a mortgage and you get a mortgage.

Ryan Rutan: Some people get a couple.

Wil Schroter: Yeah, no money, no income loan, the ninja loan. So that obviously implodes financial meltdown of 2007, 2008. We were fortunate enough and by fortunate, I mean, unfortunate enough to be fundraising for a higher risk consumer finance company. At the dawn of the financial crisis, it looked like this prior to financial crisis, the world is going amazing. People were lining up to fund us. I mean, quite literally people were lining up to fund us. They're trying to get in our deal. It was also at the dawn of party rounds where we started to do more than a few investors where we had like 10 investors that wanted it and it was awesome. We closed that round. Fortunately, right at the time, Lehman Brothers implodes everything just total disaster. Right. Six months later, we got to raise our next round. After having amazing metrics, no one will touch us with a 10 ft pole. All of those people lining up, all the people that are in the deal forgot who we were totally amnesia.

Ryan Rutan: It's yeah, that the the landscape at that point had changed entirely. It was like going to Yellowstone National Park before the fire and after the fire, it's like this is great. This is beautiful. It's abundant and you go back after just a wasteland, right? There's nobody, nobody handing out money at that point. Yeah. And so specifically, in that case, like, how did that end? Let's walk through that. I think this is a great illustration of what we may and we, we don't know, we don't know what's gonna happen tomorrow, right? We don't yet, but this is probably going to look a lot like what the next few months or maybe even years of fundraising are gonna look like.

Wil Schroter: So here's what happens within the market and this is at a macroeconomic level. So let's like project that to today because it kind of applies a couple of things happened in the last 18 months, not even counting COVID for a second. I'm actually gonna take COVID out of it because that's just such a straw man. Right. A couple of things happened. 50 companies plus more than that. When IP O and the NASDAQ almost across the board they all tagged and these were not only good companies, these were good companies across every possible field. It wasn't like it was just one. Right. Right. It just wasn't the

Ryan Rutan: dot com thing, right. Where there was the consistency in industry there. Yeah, that caused some of the

Wil Schroter: trouble and everything from fashion to crypto to dating to like you name it right. All over the place. They all imploded at first. You look at that and go. Ok. Well, that, it's odd like why would that matter? Here's why it mattered because in this last cycle, a couple huge players entered the market by the names of Softbank who you've, you've heard of in much detail through we work but more recently

Ryan Rutan: by the day. So by

Wil Schroter: the day after, by the day and uh Tiger Global, why does this matter? What, like, why does anybody, you know, listening care about this? It matters because when it comes to fundraising, this all maps back to an outcome and that outcome is IP or big sale, that doesn't mean we're going to have it, but we get to attract high risk capital because we might, because that lottery ticket might exist and people are willing to, to make dumb bets, dumb irrational bets because it might be that one. Well, the good folks at the vision fund and at Tiger Global raise an unprecedented amount of money to help fuel that dream and it changed the game. The reason investing got so crazy was because not only were there, you know, more people out there with, with funds, but there are more people at the end of the line, Not just IP O to help buy out stakes to create liquidity. So somebody like a, a soft bank could create liquidity at Uber could create liquidity at Wework even before they won. IP O I can't overstate how important that was for the rest of us fundraising because it gave all the people at the beginning the people we're about to ask for money from hope. It gave them a much and it started to create outcomes. People were taking money off the table, people were getting rich and when people get rich, things get frothy and that's good for us as founders or at least we think

Ryan Rutan: we think so. Yeah, so and yet,

Wil Schroter: yeah, everybody could raise, everybody did raise, right? And I'm not saying it was easy, but it's easier that it's been a long time. Valuations doubled, tripled. In some cases, things got nutty, just

Ryan Rutan: look at the round sizes. I mean, what, what was a, a series D is now like now we did AAA fairly large precede round uh, you know, like,

Wil Schroter: wow. Yeah. Yeah, like a $4 million precede round. So things got nutty, but here's where it all fell apart and this is where it starts to really matter to us. Things broke at the top. The IP OS imploded, the people behind the IP, Os Softbank and Tiger. Global imploded Tiger Global just released. What was one of the most, the worst, most disappointing hedge fund earnings of all time? Right? I mean, they are going to set a record for failure, right? And which is horrible by the way that affects all of us because of that. All the investors down the line get real gun shy the investors. You're probably talking to those high now worth angel investors. They just watched their portfolios get eviscerated. Then all the investments they just made in these, these crazy startup companies had their exit market taken away from them. Nobody's saying, man, you'll be great right now. Let me go risk some of my personal capital on high risk startups and I'm not saying nobody does it. There's funds that just raise their fund and they've got committed capital and they're writing checks, right? Don't stop asking. Just understand what just happened. The Pixie dust just got blown away.

Ryan Rutan: Did they got, they got the outcome they wanted in terms of, of what happened, right. So that we got to that place we wanted to be we IP O ed, everything's great. This is exactly what we're after. But the follow on which is that then it stabilizes continues to grow and we get rich from doing this didn't happen, right? So this is kind of like saying, hey, uh keep planting seeds, water weed, do all these things grow your garden, spend all that time out there. By the way, none of these things are ever gonna bear flowers or fruit, right? But do all the work anyways, right? It it becomes a very hard ask very different situation.

Wil Schroter: We're fueled by that hope this entire industry is fueled by that future because it's such a high risk industry. We're trying to make dreams happen.

Ryan Rutan: Hang on, hang on, hang on, hang on, hang on. I wanna, I wanna, I wanna hold on that for a second. Yes. But Right. So what we're talking about now when you say industry you're talking about not just the startup industry as a whole, you're talking about that portion of it that is focused on V C funding. Yes. Yeah.

Wil Schroter: Yeah. Well, I'd expect but I hear what you're saying, that is the high risk capital that, that we're talking about. But take what I was talking about at the top of the episode, which was where I was at the agency. Yeah.

Ryan Rutan: Oh, there's plenty of other fallout there, plenty of other fallout,

Wil Schroter: right? And so there's just less money to go around. So then we have to think about it as the, as founders, how does it affect us? Ok. All that sounds horrible. Great clouds everywhere. How does it affect me? It affects us in two ways. I just want to dig into both of them. The first is that it affects us in terms of trying to raise capital. We're getting access to capital, et cetera. And that's kind of what we leaned on. And the second one, for my example, at the beginning is we have less customers, right? Things are about to get gnarly. We've got two ways to put money in the bank, we raise it from investors, we get it from customers. Both of those are getting cleared out now, you might say, oh, that's not true. I mean, it's an investor problem. I got plenty of customers, they got cash. Give it a second. Give me a second because what you're seeing right now is the flash in the mushroom cloud in the distance and you're like, God, that's far away. That won't affect me. It takes a second but it does happen and it's really difficult. So let's walk into each of those Ryan when you think in terms of investors pulling back, how do you picture that affecting each of the startups in their own ways? Like at all

Ryan Rutan: levels, I mean, well, it, yeah, at all levels, that's, that's exactly it. Right. So from just an access to capital, right? It becomes harder, the, the terms often change, right? So even when they do find money, the likelihood that it's going to be at these really rosy pixie dust level terms. It's not there, right. It's not gonna happen. Yeah, a lot of other things start to happen. Right. It's, I don't know, man, like it's, it's sort of everything, everything at once. Like the access to capital becomes much harder, the terms get worse which make your likelihood of being able to succeed under those terms that much harder, which makes it even harder to get to that final Pixie dust land and drive those outcomes, right? So everybody's just far more sober about what's going on and this impacts us at kind of every level, right? I where I don't see it as much is, is with, you know, within the really early stage stuff, the friends family credit cards, right? That's all still pretty much there, roughly the same levels, but not always, right? And people are, are more hesitant and or, and this is kind of a secondary effect of the markets collapsing other things happen, right? So things like hard assets become cheaper, right? And all of a sudden you've got, there are places you can put your money, real estate collapses that becomes very attractive for people, right? They're like, well, I had cash and I was thinking about putting it at something high risk, but now housing is at a 50% discount. Guess I'll go do that because we have plenty of, of historical

Wil Schroter: or Netflix is 60% cheaper than it

Ryan Rutan: was. All of a sudden. This is what I said, you know, this is how I felt. I was in cash when the COVID collapse happened. It was like buying stocks at a discount warehouse. Everything was 60 70 80% off. Didn't have to be smart. Just had to have money. Right. And because everything was gonna recover to some degree, I was gonna say

Wil Schroter: there's, there's another part to consider too, you know, something that's really funny about everything we talk about here is that none of it is new. Everything you're dealing with right now has been done 1000 times before you, which means the answer already exists. You may just not know it, but that's ok. That's kind of what we're here to do. We talk about this stuff on the show, but we actually solve these problems all day long at groups dot startups dot com. So if any of this sounds familiar, stop guessing about what to do. Let us just give you the answers to the test and be done with it. How things change, how the dynamics change when you are a funded company. And all of a sudden, the folks within the company, I'm talking, you're bored your existing investors. Shit changes very fast because the first thing they're, they're saying is, well, five minutes ago, you're gonna go raise more money in, in an up round, et cetera. Now, the probability you're gonna do that is almost zero, right or very low, which means whatever runway you have left is what you have left. We raise when we raise funding for folks that, that haven't done this much. We raise for 12 to 18 month milestones. We don't raise for the rest of the lifespan of the company. It just doesn't work that way. So we're intentionally saying we're raising to get to a milestone when we get to that milestone, we're then gonna go raise more money. It's the nature of the fundraise business. Now, all of a sudden that next milestone doesn't exist. There's no Lily Pad to jump on to, right? And so our investors come, come at us and with all the provisions that were about governance and control and all the things we didn't think we'd have to deal with these all. Start showing up, you start finding out about what's in those operating agreements, right? And they're looking, looking for downside protection, they're looking to get defensive and that's usually not a very positive conversation for us as founders where the, where all the investors are trying to basically batten down the hatches and we're trying to grow a business now. It doesn't mean we can't respond positively and do something about it. But these are gnarly times now and things start to get a bit heated because when people are losing money, they're not cool about it. And this, this is when all this this investor tension starts to really bubble to the surface

Ryan Rutan: for sure. And another area that I see this, uh that starts to get impacted from things like this. We saw this at the beginning of COVID as well. Talent acquisition becomes harder and not for the, the, the obvious reasons, right? The non obvious when you want to join a startup, right? If you're let's go early stage, we're not talking funded startup. Now, we're talking early stage, oftentimes you're bringing people on at a pay cut or maybe, you know, it's, you, you're bringing somebody on for equity and they're foregoing cash for a period of time when everything's rosy and maybe it's a dual income household and there's no worries about, you know, financial markets collapsing or your 401k just got cut in half, people can make those decisions, those decisions get a lot harder to make when there's extreme financial uncertainty and or just outright collapse, right? And so this can make talent acquisition a lot harder. On one hand, there may be more people in the market as a whole, but can they accept what you have to offer? And I see the early stage startups get beat up around this stuff very frequently. Any time there's some uncertainty like this in the market and that's, you know, that can be really, really hard to work around those early stages. We've talked about this before. The business is the people, right? So if you can't get the right people in the mix going forward can be really tough. You

Wil Schroter: also get in a situation where you're looking at our my customer capital, you know, revenue. And I said, no, I think I'm ok. The people are, you know, nothing's changed there. Not true. As soon as you start seeing layoffs, that's the early warning system for all of this. When you start seeing layoffs, two things are happening. Big companies, I'm just gonna focus on the big company side. Big companies are clearly tightening the reins, which means they're going to spend less. So if they're your customer, that's a problem. All the people they're laying off or cutting back on also have less money. So if they're your customer, that's also a problem in cases like this where basically the whole world is tightening up, there is less money in circulation. I don't care what business you're in any business that was essentially gonna get some sort of discretionary spending short of you being a power company, right? Like a true utility. You become a question as to whether or not they're gonna keep spending that money when we plan for the future based on the past. And we say, hey, everything was fine. My M R R is $50,000 a month. I'm good. Shouldn't be a problem. And then all of a sudden this funny thing happens. It's not always as dramatic as what I described at the agency. Funny thing happens all of a sudden it's 49,000 month and you're like, oh, ok. Well, you know, maybe it's just a down month and then all of a sudden it doesn't go up, but then it goes down to 47,000 month, like, ok, 3000, we can adjust it. And before, you know, it, by the end of the year you're at 26,000 and it's death by 1000 paper cuts and you didn't see it coming because you didn't understand what was happening. These changes, some of them are big and dramatic. Like, you know, somebody does a massive layoff, et cetera or 4% of our revenue cut. Yeah. Right. But the real effect, the real net effect for all of this is tiny. It's just a nonstop assault of tiny. And as founders, we don't see it. We see it in little ways at first, but it takes us a while to get our arms around. Kind of the net effect.

Ryan Rutan: Well, it's funny but sometimes those things are so small, they almost feel reassuring. Right? They feel reassuring because their smile is like, ah, it was only two or 3%. Right. And we don't assume that that's gonna compound. I, yeah, I think one of the hardest things to navigate is we have these little changes or, or, or big changes. It's, it's not necessarily that it leads to the outright collapse and failure where I see founders struggle is that they don't adjust the mentality, they don't adjust the planning for the new context. Right. It's like, ok, yeah, we didn't outright fail, but we're probably gonna have to change how we're thinking about how the business is going to grow. The trajectory just changed and now we have to strongly adjust for that and when that's out of our control, right, when it wasn't a trajectory change that we have a lot of control over, right. It's again, like your customer base just lost 20% of their income. So you're going to eventually lose 20% of yours. Those can be really, really hard to factor in when you've predicated your entire existence as a starter for the last 345, whatever years, it is on a specific path and trajectory and now the market no longer supports that. It takes a lot of rethinking to, to recalibrate and move forward.

Wil Schroter: Yeah. And the, the first step is, hey, we have to switch to defense, defense isn't fun. Defense sucks, right? And they say, oh, defense doesn't win games. Well, right about now, if you don't play, you will lose. Right. And so, so what does that specifically look like? The first thing smart companies do is a higher freeze and they said, you know what, we're not gonna add any long-term liabilities there. I would have also said that they cut out office space, but we kind of did that two years ago. The world kind of did that for us, but we're immediately putting like the shred to anything that we can put the brakes on. Not because we're not trying to grow or we don't believe in the business because we need a minute to find out exactly what happened that 49,000 to 47,000 to 36,000, et cetera, it won't happen overnight. And that's the problem if we don't prepare for it, if we look at this and say, oh, it's just a, it's just a, a drop coming out of the ceiling that won't add up too much. No, the first few drops aren't a problem. But before you know, you realize that, that the uh, the tub in the, in the bathroom above you is falling through, right? But that's where you start to see it. And so we have to act early. We have to act fast. Doesn't mean we have to cut our staff half and half in some cases. Yes. But, uh, let, let's assume we don't for a second. At the very least. We need to be prepared. We need to be over prepared. You know what's funny, Ryan at the beginning of COVID, which based on when we're recording, this was about two years ago, we sent exactly this email to our entire staff, all 200 people. We said, look, we've been here before we know exactly what's about to happen. Now, I gotta admit, I'm shocked it took two years for this to actually materialize into the implosion that we're about to go through. Yeah.

Ryan Rutan: Yeah. The rate of change in this was way slower than I thought it was gonna be. Yeah, I think we all braced for a much faster decline. Yeah,

Wil Schroter: but we even did an episode on this and we had a very specific message to our staff. Our message was this and I think this is something that, that our founders can take away. Number one, here's what's changed in the market. Here's what it used to be, here's what it is today, here's where it'll probably go, we will be ok if we take these measures with that said, all the things that you expected or felt entitled to yesterday. All of us, you know, from founders all you know, all the way through the org are off the table. We have to kind of reset and look at where things are and plan to get through this. You bet you bet we are going from offense to defense for as long as we need to in order to see this through all we care about is runway. All that matters right now. It's not how big we can grow, how fast we can grow, et cetera. We need runway because right now everything is going to implode, right? The the tidy bowman is swirling the toilet. We just not be the first person that goes down with him. And so we got to hang on, this is, this is all about defense right now. And so we're gonna go be leaning on staff, we're gonna be leaning on expenses. We're gonna be a little less aggressive on maybe some of our marketing or sales or, you know, other things that might grow our company. But it's not because we believe in it less. It's because we genuinely believe in what the market conditions are telling us and we want to be around, right? We wanna

Ryan Rutan: talk about this, right? Like that of time and, and, you know, being able to weather a storm like this is, is massive and you pulled a couple of examples earlier will. But that, you know, when we saw, you know, these situations tend to be a really, really good crucible in the startup space, the really strong companies, the companies who batten down hatches, you know, circle the wagons, whatever you wanna call it, weather, the storm come out of these things stronger better, right? There's a bit of a, uh, a bit of a, a brushfire effect here where there's some cleanup done, right? Some of the, the weaker competitors get weeded out of the market and, and the ones that stick around are in great shape after the fact

Wil Schroter: and the over funded ones, right? You know, the, the ones who overshot it. And by the way, a lot of times, you know, people like to pick on the over funded companies will we forget that at the time, what they were doing made the most amount of sense at the time when the conditions were what they were when, when they were, you know, heading into the, into the distance and all of a sudden it didn't look like there were storm clouds on the horizon. They, they looked behind them like, oh shit, that's rub. And so yes, those folks get hit pretty hard. Right. And that's part of this. But everybody sobers up, everybody gets down to business. And frankly, we become better companies because we're doing most of the stuff we're probably supposed to be doing all along sober in re in reasonable times. So the way I look at this is the downturn is tough. It's tough if we don't recognize it. Number one, if we don't say, look, this actually happened and all these things that are happening, they will affect me if, if we don't consider that, if we don't plan for that, we're in a difficult spot. Number two, it is a good time to clean house. It is a good time to be able to get everything in order and prepare for, uh you know, a nuclear winter if you will because we'll build a better company from it. And then from the outset when all this passes and it always passes, we'll be much tighter of a company. We'll have much more chance of success than we've actually ever had before. So, in addition, to all the stuff related to founder groups. You've also got full access to everything on startups dot com. That includes all of our education tracks, which will be funding customer acquisition, even how to manage your monthly finances. There's so many much stuff in there. All of our software including BIZ plan for putting together detailed business plans and financials launch rock for attracting early customers and of course fund for attracting investment capital. When you log into the startups dot com site, you'll find all of these resources available.

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