Startup Therapy Podcast

Episode #168

Ryan Rutan: Welcome back to another episode of the Startup therapy podcast. This is Ryan Rotan joined as always by Will Schroeder, my friend, the founder and CEO of startups dot com. Will we all know the part of the narrative where we struggle, struggle, struggle, struggle and startups are really hard? But like when the hell do we actually get paid as the founders? Like when does that part show

Wil Schroter: up? Right. Uh As soon as never? Yeah, perfect. But I think it's funny because like we keep talking in a lot of these episodes, we talk about the early stages and the struggles and the stresses and, and all that's accurate. It's real. But then we don't spend a lot of time talking about the stuff in the middle, talk about the stuff at the end. What happens when I exit? What happens when a big IP O and things like that? But what about kind of that middle part where OK, I've, I've got it down. I've been struggling for a while and I definitely not anywhere near this IP O or whatever the hell people are talking about, but I sort of need to get paid at some point like how does this thing turn into that moment? You know that, that montage moment if you will, which I love, I, I love the montage moments in movies where like my favorite is, is uh Wall Street where Bud Fox is like coming up as the young broker and showing him, like getting his, like his penthouse apartment and everything else like that and the whole place is getting decked out and, and I love that moment because it gives you this sense that, that this happens fairly quickly. And I think what we'll talk about is it takes a minute, like a minute. I mean, lots of years. So let's dig into that. Let's talk about what this process in the middle is from the I'm struggling and going really broke to. Huh? I'm making money. This is my little scene of life and kind of what does it look like Ryan? Where do you see it? How do you see it starting?

Ryan Rutan: Oh man. Uh it's, it's slowly and kind of accidentally and by surprise in my case, the first time this happened, I recognized it was happening, right? I recognized that we had started to take in significantly more revenue than we were paying out. And all of a sudden the the coffers were filling. And even then I remember like thinking this isn't real, this isn't going to stay sure. We had a couple of months, but like, let's not call this like a new phase which it turned into and it went into, you know, two more years of, of that before I sold it. And, but it was one of those things where, like, even when it was happening, I couldn't believe it. Right. There was no montage moment. If anything, the montage playing in my head was like I went and spent it and I spent it, I mean, I paid down the credit card debt that I had accrued to get us to that point. Um And then all of a sudden things came crashing down around us and like I was, you know, living under pizza box or something, right? So that was the montage in my head even though the factually, you know, from based on revenue pipeline that we had, you know, the consistent clients that we had the amount of money we had in the bank, I still wouldn't even accept it when it happened. Took probably a good 69 months before I was like, ok, this is a bit of a trend now. So, yeah, there's, there was no ticker tape parade, there was no montage. It was just me questioning whether it was real or not and that was several years into the business. But there's

Wil Schroter: another side to that too, which is we keep thinking like, when do I get rich? Meaning like when does a bunch of money fall out of the ceiling? But actually when it happens is when you start to get less poor. Yeah. Where all of a sudden exactly. Payroll gets made. Right. And you're like, huh? Well, that wasn't as hard as it was last time. It, it never feels geometrically easier than it did for the last payroll period. But all of a sudden we make payroll, we have enough cash flow coming in or, you know, we maybe raised money or whatever we did. And we're like, huh? Ok. we actually did that and then the next payroll period comes around and we actually do it again. And it's not again, the ticker tape parade moment where everyone's like, you know, celebrating. It's more just like, huh? It hurts less today or, or at the same time. And really, you're thinking like you, you've got your savings, you're not burning through for a minute in the first time that you write a check, payroll, whatever or more specifically, one of your own bills, your rent, your mortgage or whatever, out of active income. That's the first time you got rich in startup standards now, in the rest of the world, to the, to the reasonable world where you get paid on a regular basis and you pay your bills ideally on a regular basis, none of this has much fanfare. But to a founder, if you're wondering when that turning moment might be number one, no one sees this coming because they're expecting something else. The turning point moment is subtle and it's just when you're basically alleviating some pain, alleviating the pain of not pulling out of your savings for a month. Alleviating the pain of being able to make payroll on a consistent basis. Those are actually the signs, the early signs that you're making it problem is at the time. Kind of doesn't feel like it, it doesn't feel, it still feels pretty shitty, dude. I'm still broke. Right. I'm still $50,000 in debt or I'm still, you know, whatever, it doesn't feel like that. I've added

Ryan Rutan: myself to payroll now, but it's still relatively a joke amount. Right? Like that, that was my thing was like I had added myself back into payroll for like three pay periods in a row and, and it was like a pittance, right? But I was on payroll, like everybody else had been getting paid and now I was actively getting paid three times in a row. Right. Probably, you know, a third of what I would have given myself at the time had I had all the money I needed, but it was something, right. And it was one of those things where that, that did have that there was no ticker tape, that's for sure. But that did actually feel good because it meant that I, I didn't have to stare at my savings account or my credit cards anymore and go, oh God, like it was at least a little bit coming back my way. Right.

Wil Schroter: And so the way I'm looking at it is I'm thinking ok, as the business is starting to kind of catch a little bit of stride, it's not linear. That's what people are expecting that they're expecting that in year three or whatever, that, that line of demarcation is that in January it, it gets better and then it just keeps getting better each, each month until December, not the way it works. And you kind of intimated this as well. It looks something like this. We have a killer January and we're super pumped and then February is kind of shitty and then March is a little bit shitty and then April, it's a little bit better. And then all of a sudden, you know, we have a great May and then we have a disastrous

Ryan Rutan: jet June drop kicks us right in the face. Yeah, that, that was exactly it. That's why I refused to recognize it when it did come along and the pattern started to form. And the thing that you can't see at that time is that prior to that there were all of these kind of one off things or things that we decided to spend money on or invest in that. We had to, right at one point, we had to buy new machines for everybody because we literally couldn't do our jobs with the, the equipment that we had, you know, laptop servers, all these things that we needed. And so there were these all of these one off expenses, you just assume that this will just keep happening and keep happening and keep happening and they will, but they become a less meaningful part of total revenue. That was the part that again, it was just these, you got these two undulations that are working in unison to kill you. One is that the revenue is going up and down and the other is the costs are going up and down. And when those finally start to develop some sort of harmonic vibration where you can actually plan around it, that's when, if again, if things are going well, that's when this, this sort of starts to form into a pattern that you can see and feel and say, oh, this might be that thing they call net profit, right? Like we, we're actually there and we're achieving it. Yeah, it's, it's tough to spot though,

Wil Schroter: but it also comes in a timeline that you can't predict, which is when the product matures to the point where you can keep selling the same thing with the same process to the same people and make repeatable, predictable income in the first few years. It looks something like this just to kind of give it a timeline the first few years is we have this great idea of exactly what the product is going to be little. Do we know that? It's a terrible idea, which is OK. That's, that's how every product starts. It's a terrible idea. And we're gonna have to make 900 adjustments which cost us time and money in order to kind of get that product market fit. And we're gonna go through a whole bunch of iterations of what we think is the right answer. Only to find out it was maybe 10% better or maybe 30% worse. Again, I think we have this expectation that it's kind of this linear path, not just the profit and everything else like that, but also the progression of the business and our understanding of the business and the reality is it's like this weird kind of cartoon like path that's going in circles behind itself and doing like four leaf clover and everything else like that

Ryan Rutan: in anything but a pattern.

Wil Schroter: Yes, it's anything but a pattern. First three years are a shit show. That's exactly how to describe the first three years.

Ryan Rutan: Everything's uncertain, right? You, you don't have two data points in any given category where you can start to draw lines. It's just all over the place, right? You're getting everything wrong. Like you said, it's your, your product is not what it should be. Your team probably needs some work. Your pricing is off. That was a huge one for my company was we figured out that I was under undervaluing projects by 50% right. So even when everything else had gotten into a good position, it took me some time to realize that that we could be charging more for exactly the same amount of work. And guess what that helps you make money turns out it does.

Wil Schroter: And now think about the, the broken expectation amongst all of us founders in those formative years of wondering why we're not getting rich or, well, why things aren't taking off or why we keep digging into our savings or debt or everything else like that. When fundamentally, we kind of still have no idea what this business is except we keep thinking that everybody else does that. Like, I must be the one person that hasn't figured this out and all these other founders must be super smart and they figure all this out. Well, guess what? We've been those founders, we've talked to all of those founders, no one knew shit. Everyone was as confused and lost as you are. It's like

Ryan Rutan: taking the S A T in the first grade, right? You just don't have all the information, you don't have all the answers, you're just figuring it out and it's just in a live fire exercise. It's tough. Right? And then we start to compare ourselves to your point. We start to compare ourselves to other founders who maybe are two or three years ahead. That's light years and startup time, right? You will figure out a ton of stuff in 2 to 3 years. And so, yeah, again, we've talked about this in another podcast. Don't compare yourself, right. Don't look around and go, everybody else has this figured out one they don't. And if they have anything figured out it's because they've already made all the mistakes you're about to make. You have to totally fine. You have to. So

Wil Schroter: after the first 1 to 3 years where you're doing everything wrong, you don't realize you are, you'll later come to realize you are. And that's ok. It, it sucks, but it's ok. There's no way to make money doing that. You're also going very broke in that process. So if years one through three, you're wondering why the cash isn't tumbling out of the sky. It's because this isn't the time for cash to tumble out of the sky years four through six. And of course, we're generalizing, but this is actually fairly consistent if you spread it across enough startups years four through six, something interesting happens. You find one part of the business, one part of the product market fit one of the price points, the customers, whatever, maybe part of the team that finally clicks where like I said, you could have consistent repeatable, assumptive revenue, which is really what we're talking about until you have that you're not going to get rich. If you're still wondering how you're gonna find customers, you are not going to get rich, right? It's not gonna happen right at all until you start to see a pattern of how you execute the business. There's no version where, where there's money to be had. It's not like, oh, we didn't know what we were doing and so much money started falling out of the sky. Like it's not the way it works. Um, and it takes years to establish that pattern and mind you years past your first three years, first three years are stumbling around in the dark doing everything wrong, trying to figure out what does work years, four through six looks something more like, ok, we haven't, we don't have it all figured out, but we're starting to see some patterns that we can map toward and replicate.

Ryan Rutan: Yeah, we've got a vector at that point. There's enough working, we've got enough momentum in a singular direction where we can see that there's some returns that we start to focus, right? And we get that little bit of clarity that allows us to proceed in a more singular direction and start to achieve some success with it. And

Wil Schroter: we don't know how big it's gonna be yet. This, this could be AAA million dollar thread we're pulling or it could be $100 million. We just don't know yet. That's the other part of again, not knowing everyone is like, well, I'm going after this big market so I guess it's gonna be a big company. No, it's not like maybe you're going after the market and you have a product but the buying potential, the actual buying potential, what people are gonna spend for that product for that problem for that time is like a million dollars. And hey, that's how we find out. But with within years four through six, we're just trying to figure out how to get something repeatable, which is why most startups when they finally catch their stride. More specifically, the founders behind them start to get paid is years 7 to 10. It's a big part of, you know, this discussion where everyone's thinking about startups are big and fast and successful and that is big and fast and successful, right? I want to point this out just because the timing is, is, is kind of fruitful. We just celebrated our 10 year anniversary at startups dot com. It doesn't 10 years feel like 1000 years,

Ryan Rutan: it feels like 1000 years. It feels like 3.5 long weeks. It depends on the day. It's a blink when we compare some of the other things that have happened in that same amount of time. Like the fact that our kids are both entering middle school next year. What, like, what

Wil Schroter: too fast they were born when we started, right? I know, 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 have 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. My father-in-law, uh we're in a successful printing business. He's 95 years old. It took him 35 years to get to the point where we are now 35 years in a way harder environment with much less uncertainty, right? Which meant he went like a decade for every three years that we spent on something with all kinds of things. We had, had kids, had family, you know, the whole difference situation, right? And so my point is in a previous generation or other types of businesses that aren't traditionally startups where we classify as small businesses for them taking 10 2030 years to do something is just kind of how you build things by the way. It's also how you build careers. So they take that long. But we've built this bizarre narrative within startups that we're entitled to all of this success in like three years. What's crazy is there's so little proof to show that. That's true. You have your anomalies, which are, which are wonderful, they make great stories. But if you talk to the average founder trying to build a business, right? 7 to 10 years. Yeah, we

Ryan Rutan: don't get to decide to be anomalies, right? That's not a decision we make like, well, I'm just gonna do it the anomalous way. So it only takes three years for me. Cool, good luck. So

Wil Schroter: what happens is, it's, it's not till year 7 to 10. Where if you figured shit out in years, four through six, you start to get paid where we're saying, hey, when do I get rich? That's when you start to get rich. If you start to get rich and sometimes longer, the reason this is so different than I guess, you know, narrative or what folks have heard is if, if we sat you down, which is kind of what we're doing in year one and said, hey, look, you're gonna go kind of broke for like the next six years. People like whoa whoa whoa No, that, you know, that can't be the case. You know, I'm gonna be different. I'm gonna get things figured out in the next 18 months and you know, things are just gonna go crazy, call me in 18 months and let me know how that goes. We're in the business startups dot com where we are there at 18 months for all these businesses. We know exactly what that next milestone is gonna look like and we wish it were sooner, we wish that, you know, you could, you could have what you wanted in 18 months. That sounds awesome. Yeah,

Ryan Rutan: I'd love to be throwing ticker tape parades in 18 months. Yeah, it just doesn't work. Right. Not gonna, we're

Wil Schroter: not trying to say we don't want it to happen. We're just trying to say it's probably not going to happen. And that's ok. And my other point with this, with the 10 year thing is if you could build something of, of value and meaning within 10 years of your life, you won, you don't have to do that twice. Right? You won. So, the fact that it took 10 years and it's a brutal 10 years, you talk to any startup founder at year 10 and they look like they're 90 years old. They, they've been through 100 lives, right? Just to be clear, 10 years at the rate we run startups is a very long time, especially if it doesn't work. If you're at year 10 and shit hasn't been working, you might as well be 1000. You look like Yoda at that point. Right. But what I want to illustrate is, you know, when do I get rich is that it takes a fairly long time compared to what you think it is. And that's ok. You know, that, that, that's, that's really what I'm trying to get at is that if you're in year five, which, you know, hopefully you are, you, you've made it that far. But if you're in year five and you're still at a point like damn. And I'm still not getting paid et cetera. That's ok. I'm sure financially it's not ok. It feels awful. So, I apologize for that. However, it does take that long for things to come

Ryan Rutan: around. Yeah, it's not a signal that it's not going to work. It's an obvious signal that it's not yet working. Right. But those are two different things.

Wil Schroter: I think that startups have been so conditioned to defy the laws of physics, you know, financially and growth wise and all these other operationally and all these things that when we don't have this superstar kind of catapult launch that we feel like we must have done something wrong. And I'm kind of like, no, you didn't do anything wrong. Like this is actually the process. In fact, if you got it done in five years, you're way ahead of the curve, yeah,

Ryan Rutan: way ahead of the curve. But sometimes the other, the other thing we want to talk about there is sometimes the cost of getting it done faster is significant, right? If we look at some of these companies that have done that, yes, they got there sooner, but there were significant costs. Uh and, and I'm not just talking uh monetary, a lot of things happen uh to founders who've done this very quickly. But, you know, if you go through just the fundraising process, you might have been so squashed down on the cap table that after five years, you'll have less than you would have at 78, 10 had you gone a little bit slow, different, different podcast, different day, different point. But we can't just look at that and say faster is better, right? And when, when we say they're anomalies, we don't mean that they're just somehow the, that top creme de la creme, the 1%. It's not what we're saying either. Right. It's important, I think to, to, to pause this for a second faster, not necessarily better being poor, less time. Sure. But we also have to think about those final outcomes. And you know, we, we talked about this other podcast, let's optimize for the probability, not just the size of the outcome. And a lot of that has to do with how we approach the process as a whole, but different topic. Different day.

Wil Schroter: Yeah. The last thing I I'd love to dig into is order of events. When do we get paid? Yeah,

Ryan Rutan: because again, you're the longest lying you've ever seen and they'll picture yourself at the end of

Wil Schroter: it. This is uh something they don't put in the startup brochure, right? They, they forget to mention we get paid last, we get paid very last and in some cases, not at all. It's funny when we talk about this podcast, we talk about so many like tough topics and this is definitely one of them. And again, nobody sits you down and talks to you about, but you and I Ryan, we talked to founders all day long we're usually the first person to tell them this and they're like four years into the business. Like, man, like everybody else seems to be getting paid. Like, you know, we raised some money and like we hired all these people and sales people are making a ton of money and engineers are making a ton of money, but like, I still can barely pay my mortgage. Like, did I do something wrong? It's like, no. Right. That's actually how it goes. So let's talk about why, why do we get paid less? Here's why we need a ton of resources that we don't have enough money for and all the money needs to go to them and we're willing to get paid last to do it. It's that simple. In summary, we're willing to get paid last to have our

Ryan Rutan: outcome said differently. No one else is willing to work for us and not get paid. Pretty simple.

Wil Schroter: Simple. Imagine this. Imagine Ryan uh you and I start startups dot com and we tell the entire staff that they'll get paid real money in about seven years. But in the interim, you and I are gonna take fat salaries. How long do you think that? Heard

Ryan Rutan: them all leave the building? We just, I just heard everybody go.

Wil Schroter: We would make it to the end of the day and yet that's exactly what happens. It's exactly what happens for founders. You know, we get to a point, we almost forget that we're supposed to get paid. We're so used to being able to kind of like kick the can. And this happens all the time. By the way, it also happens pretty consistently with funded founders where founders take on cash. We did this actually with all three of my last companies that I did venture funding for where I thought the noble thing was we'll raise money and I'll take like a bullshit salary when I say bullshit. I mean, like in some cases, zero, in other cases, like $40,000 so that all the money can go toward the company and it was a noble thing to do. And later on, I realized I was the only person doing it. No one else was dumb enough to say, hey, I'm gonna do this for free. Some people might have subsidized, you know, I might had a developer come on and say, hey, I'll take a portion on deferred comp or, you know, through stock or whatever else like that. Investors weren't like, hey, I'm just gonna work here and not invest, right? Like in other words, you got my time, right? But uh you know, I'm not gonna any stock for it. I mean, the, the reality is we are on a freakishly deferred plan that's largely self imposed if I'm gonna call it, what it

Ryan Rutan: is it is I kept using mine is that like as a buffer, essentially, it was there, but it wasn't really, uh, and I was always willing to bet it to buy some of the thing that we needed to pay some other person or do something else with it. Right. And I never, I never treated it as a permanent line item. It was always just there as like my salary was essentially the slush fund. Right. Whenever we needed money, it was the first thing we would dip into because it was the only flexible line item, right? Rent, not very flexible team, not at all. Flexible, right? Electric utilities, like not flexible at all. Right? So when, when it push came to shove, it was like the one place we could cut back and when we needed to, we would and yeah, it becomes, becomes a bad habit that you

Wil Schroter: can always convince to say yes, right. If you try to go back to the staff and say, hey guys, we all make 20% less, you're gonna have no staff anymore. Like it doesn't really work that way. But if you have to uh go back to yourself and by way that maybe your co-founder, your spouse, you know, whomever you might have in your life that you, that you're working with supporting or whatever, ideally, you can have that conversation and it works out. But that's the point like we're willing to say yes to that. And so by way of that, we keep getting abused and I'm gonna call it abuse. But here's the interesting part. The abuse is self inflicted. I'm not pointing the finger at anyone else, right? I'm saying it that's on us like uh that, that is like self, you know, abuse in that case, but it's very consistent, it's very consistent. And then we start to see it much further down the line in ways people don't expect. For example, for those of you that either have raised money or may raise money or have sold a business where you've raised money, you're gonna be well aware of a concept called liquidation preferences or preferences as a whole. And without going into a lot of explanation, it's just simple. It's when investors get paid before you do. That's simple. So a million dollars comes in, they have a million dollar liquidation preference, they get that million dollars and you get nothing. If you're not aware about how that works,

Ryan Rutan: sometimes very collective groan in the

Wil Schroter: audience. And so when we're, we're raising that money and we're signing those docs and we're kind of overlooking those things like, ah, liquidation preference, you know, preferred stock, blah, blah, we don't think a lot about it. But if you want to find out what getting paid last, looks like, look at a founder that's had to go through a startup for way too long. In other words, probably had to take down around money or take, you know, kind of leverage cash, had to raise it on some, on not great terms. Which happens all the time. It's about to happen a lot right now, but it happened a lot right now you're gonna see a whole bunch of this and then later on they make it through, they do what they're supposed to do, they make it through and they go to sell and really the money is all going toward the investors, that entrepreneur gets paid less and they know it by that point. So here, here's a quick example because I just want to point out kind of how this works. A lot of folks don't know Ryan, you and I start a company, we raise some cash, we raise the cash and the investors invest $2 million on a one X liquidation preference. All that means is that in the event of a sale, the investors are going to get paid their $2 million first and let's say things don't go that well. Right. You know, and, and so we get to a point where we sell first say $3 million. Well, in that case, the investors are getting the 1st $2 million and then we're splitting and this could go one of two ways. I don't wanna get too deep into it. We could also be splitting the remaining million with those same investors for their pro rata share as one employees and everybody else. And all of a sudden, we're like, oh man, we, we're on this a long time and we wound up with like $200,000 before taxes. Like what the fuck just happened. That's what I mean by getting paid last. Like there are so many ways for us to kick the can

Ryan Rutan: last and less, right? Last and

Wil Schroter: less. Yes. And there's always a place to put the money. That isn't us 100

Ryan Rutan: percent. Yeah, that was the problem. That was, that was the consistent problem.

Wil Schroter: And so, you know, my thing is from a founder standpoint when we think about, hey, when am I gonna get rich? Well, there's a few things we, we've got to remember. Number one, you won't know when it's coming. That's the baseline. So if you're thinking, hey, is it around the corner, who knows? None of us see it, see it coming until it does. Number two, it takes way longer than you think it does. There's no version in this game where all of a sudden two years in, you're just getting paid crazy. And if you think you're three years in and it might take four, just double whatever you think it's going to be, that's, that's probably where it's gonna be. But the final point I would say is that's if we let ourselves get paid at all. I think the number one thing that holds us back from ever being the company, the profitable company we think we should be or the profitable enterprise we think we should have built is ourselves. We don't let ourselves get paid throughout this process. And I think that above and beyond everything else is what prevents us from ever getting to the point where we get rich. 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. They're so 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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