Startup Therapy Podcast

Episode #22

Ryan Rutan: Yeah. Have you ever asked yourself do I need to raise capital to be successful? You wouldn't be alone. Not by a long shot. The answer is not necessarily if you're surprised by that? You're also not alone again by a long shot as founders. We can get focused on capitol as the key ingredient success, but capital is only an accelerant of a well executed strategy. It's not a replacement for execution on today's startup therapy podcast. We'll talk about why you probably don't need to regret not raising capital at least not yet. This is Ryan Rutan from startups dot com back for another episode of the startups therapy podcast joined as always by my partner and Ceo of startups dot com Wil Schroder will, we've built some businesses were building one Now, should we, uh, should we really regretting not raising capital would be worth a trillion dollars now and and calling each other from a boat.

Wil Schroter: God, I hope not because not only was he a shitty episode, but this really makes me wonder what the hell we've been doing for less seven years. You know, I think, I think all of us that I think all of us as founders as, you know, as entrepreneurs, we, we get to this point in our business where we started asking ourselves the what if question, right? You know what if we, we read about someone we sort of knew or didn't know that, you know, maybe took capital or maybe sold the business or did something extraordinary in our question, you know, inevitably? And it's not like a shock, why this would be a question is what about me? You know, what if invariably when you started asking that question, part of that question is what if I had more capital to do something bigger? Right? And and I I think this this is where it starts. When people say, should I regret not raising capital? They're they're asking themselves the what if questions? So I think that's, you know, sort of worth unpacking today.

Ryan Rutan: I think all you have to do is go watch the Lorax to understand the answer to this. Capital just leads to being bigger and bigger and bigger, Right? It's such a good movie.

Wil Schroter: Yeah, it is.

Ryan Rutan: So, yeah, no, it's a it's a question we face all the time. Right? The not necessarily the the what if I had right? But the one that we see all the time is should I raise capital? Right? And it's it's the other side of that same coin. You know, the the question is, can I create really different outcomes or would have I would I have created very different outcomes. Had I had I taken on capitol?

Wil Schroter: Yeah. And and none of us knows. But what I'd like to talk about today is what does that path look like? Or more specifically, what does capital by you that you can be 100% sure that you are or aren't getting right. So let's let's break it down from kind of the beginning. The first question is how do I raise more capital? You know, would I be infinitely more successful? And that's to Assumpta I've right, that that feels to me like, like it's bridging too much of a gap as if capital alone were the only thing you were missing, right? There's a whole lot of, you know, parts in between the execution, the competitive forces, you know, and everything that comes with it. Yeah, Capital is an accelerant, but it doesn't necessarily mean you would have done better. It just means you would have had capital to do something, right? And I'm gonna say whatever we talk about capital and start ups, you know, we have Ryan you and I, and, you know, startups as a whole, we sometimes have a little bit of a counter narrative, right? And, and I get the sense that sometimes folks thinks that maybe we're anti capital would be foolish to men not to mention that we do run a capital raising platform

Ryan Rutan: there is that there is that small detail, right? Like, Yeah, yeah, we we may, we may talk about capital very practically, we do also in a funding platform, so we're definitely not anti capital, We're just

Wil Schroter: About capital. $1 billion. Yeah, like that would be the biggest hypocrites in the world. Uh, if we were saying, you know, don't raise capital. So listen, everything we're going to talk about today, let's not look at it as, you know, some argument against capital? I wanted to be a counterbalanced argument again against the what if, Right? Because I do ask myself what if in the business as it relates to capital all the time, Right? I asked myself, you know, what if we had more money to put towards marketing? What if we had a big, bigger engineering team? What if we could follow some of those initiatives? You know, that that we'd otherwise put off and what I keep coming back to, at least for us. And again, I can't speak for other startups, is not having capital, so to speak, as far as having raised a big round has forced us into some decisions, right? I can't even begin to think of how many good decisions did that force on us? How many things that we have to

Ryan Rutan: say? It didn't really, it makes you pick and choose, right? I think that, you know, you talked about capital being accelerated, I think it can also be broadening in terms of now, you can start to take on a lot of different things at once. And I'm not saying that you're necessarily prepared to do that, right? But it broadens the scope of what you can attempt, um which is a division of focus, which often ends up, you know, leading to bad outcomes, but again, not an argument against capital, it's an argument against knowing what to do with it when you get it right, if you're not crystal clear on on why you need those funds, then often the things like, oh, well we could just do more, right? Like we could spend more on marketing would spend more on sales team. We could spend more on, on developers. Um, but if you don't understand what the clear and that is, it's, it's dangerous territory. Something else I want to dig into before we go down through this topic is the genesis of this question because we're talking about a specific point we're not talking about. Should I raise capital? We're talking about people who are saying, should I have raised capital? Right? And what is the genesis of that question? Why are you thinking that in this moment? Because that may also be, you know, analog for, should I raise now? Right. If I didn't raise in the past, should I regret that? Which may or may not be equal to? Should I go do that right now? So let's talk for just a second. Well, in your opinion, what leads people to to that question? Is it all external factors, all internal factors blended this too. And if so, what are

Wil Schroter: they? Well, okay, so I think it's a few things, I think it's, it's often kicked off or initiated by the fact that at some point and then not too recent past, some event occurred where they felt like there was this fomo, right? Where they missed something in their business, right? You know, either a competitor took money or competitor sold or a friend of theirs did something. There's typically some like event that kind of gets us thinking about that, you know, again drives that. What if discussion. But I think the the part that we tend to forget as founders is we tend to think, well we're infinitely needy, right? Like to your point, we need more marketers, we need more developers, we need more budget. We need, we need more everything. And it's kind of like, of course you do. Right? How would you be in a startup in not have to have all of those things. Right. I mean, it's like damn near impossible. Right? So

Ryan Rutan: startups are the are the the the locust swarm of the business world, right? They will consume all resources. You throw at them without question.

Wil Schroter: Right. So, so if you're sitting there going, man, well, I really know I could have used money like no ship. That's like saying I could have used oxygen and food. Like saying that that you should have raised because you needed it is kind of a foregone conclusion. Of course you needed it. Right. The question isn't whether you should have raised because you needed it. The question is if you had raised, how can you be so sure that that would have changed your outcome and had you raised and it doesn't have only the fairytale outcome that you're probably thinking about, what would your life be like right now?

Ryan Rutan: No, no. Well when you raise capital, it always works out fine. It always gets spent exactly where it should be. There's always, you know, at least a five X return on the money spent. You know, it's, it's just great every time.

Wil Schroter: And so it's kind of like, you know, when you're thinking about your personal life and you're like, oh, you know, maybe I should have dated that one person or maybe married that one person or what have you? Yeah, maybe based on a very small amount of information you have at the beginning of that relationship, what you're not thinking about is what are all the things that would have happened along the way. Here's what would have likely happened. And this is just statistics. This isn't, you know me, you know, pontificating on what one person may or may not have done statistically for folks that raise money, There was a 50% chance. This is, I'm broadening a bit. But bear with me, there was a 50% chance that you're going to fail and go out of business. So let's be clear about that part. Right? Beyond that. If you're in the other 50% of folks that just didn't fail, There's a 25% chance out of 100% again, out of this pie chart that you're just going to do okay. And you would join the Walking Dead, Walking Dead would be companies that raised money, never hit their next milestone and now have no meaningful way to operate a business because they owe investors and they can't take money out personally happens all the time. No one talks about that

Ryan Rutan: can't grow no liquidity in current state,

Wil Schroter: Which is almost as bad as failing because can't grow, can't liquidate means that you also can't quit and go do something else. I mean theoretically you can, but it's harder than people think it is. Um, the last 25% is, there is some level of success. Now, here's where it throws people off like, okay, well, you know, so long as, you know, I'm not in the 75% that doesn't do something. I'm the 25% of success then I'm good. Not really Because the 25% of success part and again, these are for funded companies, let's say it comes in the form of some sort of acquisition, etcetera. Well that spectrum of outcomes has a huge, you know, variance in where you land on the worst end of that spectrum, you get aqua hired, right? Which just means you got to, you got a job out of this, not an actual payout. Of course

Ryan Rutan: I'd go one rung lower man and we've seen this, we've seen this happen, which is that there's not even an aqua hire. It's sort of like we'll take this on and you can walk away and keep your dignity and that's literally all you walk away with.

Wil Schroter: That's a great point that you don't even get a job out of it, right? You get to hand the company to somewhere else. Yeah.

Ryan Rutan: You've you've spent time building it. You've run out of options for growing it or or or cash flowing it. And so you have to hand it off to somebody else At essentially a Net zero transaction.

Wil Schroter: Which happens all the time. Right? And so, and usually by the time that happens, that was your best case outcome for raising money.

Ryan Rutan: Mm hmm. But none of us are I got rid of the company but I got to keep my house right? Exactly.

Wil Schroter: Right. What most of us are thinking about, what most of us are contemplating all of this isn't that I'll be able to to sell the business. You know, basically get my dignity and and get another job out of it. It's this thing is going to go public. This thing is going to have some massive outcome. What you're saying though is that I wish I raised money so that I could have this tiny fractional chance of that outcome. Now I got to produce a counterpoint to this, right? Because if there were a V. C. Sitting in the room, they would be quick to point out, yeah. But that's like saying that if you don't raise money, things are going to be roses right. You know, not having money doesn't pay bills either and I would agree with that, right? I'm not trying to say this is about raising money or not raising money? I'm trying to say that saying that I should have raised money ergo I would have been more successful is a dangerous path of thinking a line of thinking to go down because it's really untrue,

Ryan Rutan: right? And this happens to start ups all the time right there. They're not at a place where they wanted to be post deciding and there's usually a specific decision, right? It's not kind of like, well, I just didn't decide to raise capital. There was usually some point along the way in which they said, should we raise capital now or not? And they went through the calculus and they decided not to. And now there are six months a year down the road, they're not hitting the milestones that they had set forth for the non funded route. And now they're simply saying, well, gosh, if we had only, you know, chosen, you know, the blue pill, and so the red pill, everything would be roses. And that's just far, far, far too strong a generalization

Wil Schroter: It is. And so so we definitely want to preface all of this by saying if if we're going through this thought process, we just have to make sure that we don't quit raising money to success, right? Because that's rarely the case. And again, if we raise money and things aren't wildly successful, we actually tend to box ourselves in and we often have a little bit less optionality. But the opposite part of that question though, is do I need capital to be successful? In other words, can I not grow this business without capital? Right. And, and of course that varies depending on the type of business. If you're in a wildly capital intensive business, then, yeah, you know, of course you're gonna need capital, but if you're not right, if really what you're talking about, and I see this more often than not, is that the difference between raising capital and not is time, Right? I wanted to build this business and make it huge within two years. Capital would have accelerated that. I would have gotten there quicker, agreed, your timelines could have been condensed, you would have paid some sort of price in the form of equity and having a new boss called an investor, etcetera. However, if what you're saying is Time isn't an issue and it's really anybody saying that, but if you're, what you're saying is time isn't an issue, right. I'm willing to take 10, 20 years to build this business, then how often do you think capital still comes into the equation? Right. I tend to think that capital forms this compression vehicle in a place that that were were so concerned with. Like we can only get there fast with capital. A lot of the things that we've done Ryan at startups dot com have been more long term focused, we say, look, it'll take us longer to get there because you know, as folks know we're bootstrapped company but I don't know that that's always been a bad thing and I don't I haven't felt like we're in a time crunch even though we moved pretty freaking quickly.

Ryan Rutan: Yeah, No, I I don't either. And I think there's there's something that you said at the at the top of this that was really important. Which is it increases it may decrease the optionality, right? It increases your pace, but it may decrease the number of options that you have. I think something else that we forget that it tends to do is it increases the it decreases the amount of time it will take us to get somewhere. But it also decreases the amount of time we have to get there. Right. And then there's this really weird thing that happens because now you may have been in in perpetual runway mode and you say, yeah, but we want to take off faster. Let's let's accelerate with capital. Cool. It still comes down to execution because you've taken on that capital. Now, the other thing you've done is put a runway in front of yourselves, right? You've now cut off the end of that road. So yes, you can get somewhere faster. And now you also have to because if you don't and you exceed your runway, you know, your burn exceeds your ability to survive it. Things end very poorly right? And I think this is something that we forget about that right? It may accelerate our timeline but necessities only. So right because now we have to pull up by a certain date or we're upside down.

Wil Schroter: Yeah. And I think for a lot of folks they don't understand that that to your point, capital has a timeline to it right? Like you can't just take all the time in the world you want you know with start ups dot com we're not a funded business. We can take 10 2050 years to build this business and that's on us. The moment we take capital we've got a 5 to 7 year window in order to build this into a big excitable business to fit within a. B. C. Timeframe. And that changes you know the decision criteria we can make now in all fairness for a lot of folks that's okay for a lot of folks there saying hey if I get it done faster why would I want to wait? You know that sounds wonderful. It does but it but it's all predicated on something you just said a moment ago. Ryan it assumes that you executed well right. The concept again is I took money and I had a lot of opportunities. I could have hired a lot of people and resources that I couldn't have otherwise gotten on my slow boat that I'm taking now which is bootstrap that's true but you have to assume in that, in that new version that your execution was, was flawless, right? Chances are it won't be, I don't, I don't see companies that took funding that executed even mildly, much less poorly still come out well, I see capital consistently become the reflection of a poorly executed management team.

Ryan Rutan: That's exactly right, and it just accelerates that, right? When you accelerate a poor execution, you're just pointing yourself off the cliff that much faster. Right? And I think that, that it's important to know there's only one guarantee in funding, there's only one thing that you can be sure of when you take on funding and that's that you have more money to spend. That's it. There are no other guarantees that come along with funding, you have more money to spend, whether you know how to spend that and you can execute well and, and and leverage that investment against growth of of, you know, the offering or the quality of the product or the revenue or whatever it is you're trying to do is not a foregone conclusion, right? You'll try and you'll have more money to spend and that's the only guarantee,

Wil Schroter: you know, there is a case where, where I picture raising money and I've been down this path myself, where I'm a little less concerned about whether or not I raised money, this is gonna sound odd. It's what I don't care that much about the company and that sounds stupid because who would start a company, they don't care about you and pour everything into it, but I've got to say, and this may resonate to some of the folks out there startups dot com for, for you and I, right, and a lot of folks that work here is a very different company, something that we're very passionate about, and, and while it's, you know, it's become a big company and that's great. I guess that's not really the intent. The intent wasn't to just, let's just build it big so we can get it and get out of this thing in businesses that I built before, that was the intent when I was building other companies where I wasn't as personally attached to the, to the business itself really, I think in the back of my mind, I did want to get out of it as fast as possible, right? Like I actually, it was disposable to me, but I don't feel like for many of the founders and folks listen to the show, that's the way they feel, I don't think they're saying, let me get through this process as fast as possible. So if it doesn't work, I can please go and do something else there saying, I want to build something great, but I'm also hoping that capital can help me do it.

Ryan Rutan: Yeah, I think there are plenty of of build and flip entrepreneurs out there, but we tend to see that more at

Wil Schroter: a,

Ryan Rutan: at a different level, we're not really typically talking about startups, in that case we're talking about businesses, right? Like you may, you may build and and flip a local service company or something along those lines. I think the, the intention to build and flip because even if it's there at the startup level, there's so many damn uncertainties. Even if you were to tell me like, well, I'm just gonna build this and flip this around be like, cool, call me what happens. Right? All right. We'll see because there's just no certainty around that either. So yeah, that's, that's a good point.

Wil Schroter: When I look at it first hand, when I look at our business and you know, we looked at raising capital gazillion times whenever I look at our business, I'm so fearful of capital steering us in a direction that won't be good for the longevity of the company. But I just can't see us doing it right. I'll paint a scenario. Maybe it'll maybe it'll apply to others, maybe it won't. But Ryan, you and I have talked about this with our management team and numerous occasions and so for folks listening, you can get a kind of insight as to what happens in our internal discussions when we asked this, you know, should we raise money? My biggest concern and this is kind of like our constitution building this company is, I don't want to have a boss, right? And if you've never had an investor before and you think investors aren't your boss

Ryan Rutan: think again,

Wil Schroter: they are anyone you owe money to is your boss. I don't care if it's the bank, I don't care if it's your best friend. Whoever whoever you owe money to you will be answering to. It could be your customers for that matter. And we didn't want to be in a culture whereby we had to answer to some third party that didn't have the same kind of vested interest in the DNA of the company that we did, right? And so when we think about not raising money, we think about budgets. We didn't have, we think about resources, we didn't have, we were able to overcome a lot of those and just execute. But what's interesting to me is that all along, we were pretty resolute in capital equals boss. Ergo we don't want boss right in our mind the moment someone else is in control of this thing. We sacrifice what this thing could or could not have been right. We we've we've given our baby to another set of parents, right? And I think for us that has been just a nonstarter.

Ryan Rutan: Yeah. And and it's not just the there's not just human bosses, right? I think when you take on capital, one of the things that tends to happen is you develop a burn rate, right? You're spending starts to go up. You now have a finite runway that isn't defined by, you know, your investor necessarily. It's defined by trying to create an outcome for that investor. And they may have a lot of input on that. But you start spending differently. You start trying to turn that raised capital into growth and the closer and closer you get to the end of that runway, the more and more critical the decisions start to feel right when we make a decision in marketing at this point, it's not life or death, right? We're saying, I think we can create a meaningful improvement in how many people we can help by bringing more folks in by making this change, right? But it's not a matter of and if that doesn't work, we're screwed right. Right. Once you have a burn rate, you start to make decisions very differently because of that impending pressure of needing to lift off. There's a finite time period in which things have to happen. And if they don't, it's a fucking disaster, right? And making decisions under that. Yeah, it does. I mean completely changes your thinking. Even if the investors not on your asa about this stuff. The pressure of knowing that there's a there's a finite stop where we just, it's over. Uh, definitely does. And I think that's something else that has to really strongly be considered. And I'm glad every day that we don't have that hanging over our heads. And then it's not, you know, we're not, we're not going okay, pull up, pull up, pull up right there, not in that situation. And it feels good.

Wil Schroter: It also has a lot of impact on our product decisions. You know, we get to do a lot of things as a non funded company because we just think it's the right thing to do. This podcast is one of them. Yes. If, if we're sitting across from say, our investors and by the way, I don't want to demonize the investors, the investors position would have been very legitimate as to what their ends were, right. And we would have had signed in blood on that day that were, you know, aiming for the same ends. But if we sat across from them and say, Hey Ryan and I are going to put together a podcast and they'd say how many people will reach, how will it affect sales? Are answers would have been, we have no fucking idea how many people it will reach and it probably won't affect sales.

Ryan Rutan: Not

Wil Schroter: exactly the kind of answer that, that most board members or investors would want to hear much less support. I'm not saying it would never happen. But I'm saying this is about one of about a million projects that we get to work on that doesn't solve a financial end, but we don't have to confer with anybody about it. No, that's right. And when we talk about regret, not raising money, a lot of what I tend to think about is what decisions or what paths or or what, what agency would we have lost. Had we no longer been able to make these types of decisions. It really concerns me a lot. And if you've never raised money before, you don't know what the other side of that looks like. You don't understand what those controls and what those pressures are. So all you tend to think about is here's where it would have helped me in a lot of my decisions you tend to not think about and here's where it would have cost me regardless of the outcome. Sure,

Ryan Rutan: go back. So here's a very specific situation that would have impacted greatly write this story may have ended very differently had we been a funded company when the, when the opportunity to acquire searchable came along, that could have ended very, very differently. And I think we're all satisfied at this point, that we made a fantastic decision to acquire that company. Um, but if that had meant, you know, rallying our investors at 3:00 AM and getting everybody on the same page right, it wouldn't have happened.

Wil Schroter: Yeah, I mean, I guess now that I'm thinking about it, maybe half the decisions we would have made as a funded company wouldn't have gotten made. Now, maybe some of them would have been, you know, terrible decisions that that would have avoided. But while we do care about growth, we, we do care about building things that will kind of extend, expand the, expand the market that we're trying to get into, etcetera. What I like is that, that's not all we're about, right. We get to make a lot of decisions that have more to do with what makes us happy, What makes us satisfied. Not just what makes us money. And, but however you'd all say in other businesses that I've run, I don't know that I would have felt as passionately about this point. You know,

Ryan Rutan: I

Wil Schroter: yeah, yeah, yeah. I was, I was running a company years ago. I've mentioned this on the podcast before. It's just, it was a company way ahead of his time, uh, called afford it dot com. That's not around anymore. I don't even know who owns the RL and the idea was was we were going to sell products using weekly payments. Doesn't really matter. The point is I didn't care passionately about that business. We did take on investors because I was like, hey, if you guys can grow the company bigger faster and we can sell it sooner. Cool. Like I don't have any personal attachment to this thing, right? Yeah. And what do you know, it failed? So I did raise money. I know what it looks like if you raise money and it failed horribly. But I think when we were looking at that business and we were saying, do we raise money or not? That was the type of business where we're going to to sell products for weekly payments? We had to buy the products and carry the cost of that inventory for weeks and months in order to be able to get our money back. It was a wildly capital intensive business, right? There was no way we were going to be able to grow that business without capital wasn't a hard thought process. Right? And I do think that there are certain businesses that you can confidently say, unless we raise capital, this business actually doesn't stand a chance, right. A good example would be Uber and lyft, right? There's, there's, there's no version of those businesses that would have existed in any capacity in a bootstrapped or non capitalized way.

Ryan Rutan: Yes. So what you're talking about now is, is head head competition, Right? So if it's a capital intensive business. Yes. If you've also got a competitor out there who's either raising capital or had a lead in some other way that you think you can overcome with capital. This is another reason to consider it, right?

Wil Schroter: Well, it is. And what's funny is, at the time, I'll bring it back to one of our, our situations at the time. You assume that if you don't raise capital, you're screwed. Do you remember? I know you do circa 2011 at the dawn of the crowdfunding era when we were spinning up a company called fungible dot com, that's part of our platform, how many companies in that first year? All got funded? Everybody but us.

Ryan Rutan: Yeah, like literally everybody was just like, money, money, money

Wil Schroter: and the whole time People have short memories, but you have to remember that circuit 2011. The story of the narrative around crowdfunding was that it was going to fundamentally change everything, right? I know, because we're telling it, we're there right in every single person. I know crowdfunding was a fairly nepotistic industry. Everybody knew everybody. They were all raising money, right? And they were raising money on what would become billion dollar companies. Do you know how many billion dollar crowdfunding companies? There are none, right? None,

Ryan Rutan: ironically irony. Most of the capital raised via crowdfunding went into crowdfunding platforms would eventually

Wil Schroter: failed hoops. Right? And so the whole time we were sitting there with, with, with our with our little fungible company,

Ryan Rutan: right? You know, trying

Wil Schroter: to get companies funded and watching everybody and their brother raise money for their business. Right? Thinking, man, like, is everybody thinking something we're not because we just don't see a big enough tama total addressable market For this to be raising capital against right now. It didn't stop other people. I mean, there must have been 30 or 40 companies that raised capital in the course of a year. It was banana. Yeah,

Ryan Rutan: Approed 1st year, I would

Wil Schroter: say it

Ryan Rutan: Approaches 100 companies by the time we get to the end of it. I

Wil Schroter: would think it's crazy millions and millions of dollars right? And a lot of people also don't know while they've heard big names of companies like a Kickstarter or Indiegogo. Like f Y. Those are very big companies right there. Great companies, wonderful cos I'm not knocking the companies but I'm saying compared to whatever he thought it was going to be it just wasn't that big of a market. The problem was at the time, all the funding was getting done at the initial start of the market. You know, people were starting to see the trajectory but they didn't know where that thing was going to crest. Nobody knew that that whole thing was going to top off 24 months from then right. The point is, at the time it's really easy to get hung up and caught up in all of the hype that this thing is going to be a huge outcome. You know, a huge business. And if we don't raise money like they do, it's a foregone conclusion that we're going to lose right every now and again when you're in that kind of maelstrom of funding something does happen where it turns out your Uber there lift or in this case you're lifting at Uber probably should have raised more money right. It does happen. The probability that it's going to happen in your specific industry is so damn low. You got to get that out of your head. Everybody thinks that their industry is the one that everyone is going to just throw capital on and become the next big I. P. O. Industry. Look, if you're overtaking the hotel industry in your freaking Airbnb then yeah, maybe that's an issue, right? But if, if you were the mobile social app for dentists in in florida, you're going to be okay if you didn't raise a ton of money, right? It's hard for people to calibrate though when they're in the moment. You know what I mean?

Ryan Rutan: Yeah, because you feel like you're in a race, the reality is you're, you're in a race to execute against your plan not to not to beat the competition, right? And being bigger and being first. Um, and I throw them out as an, as an example about every four weeks it feels like, but ask my space, how they feel about having, you know, been initially better funded and bigger, uh, and then ask facebook, how they feel about it today. And I think, I think they would, they would agree how that works.

Wil Schroter: I think it's a great example of where, what we're really talking about the differentiator isn't capital its execution now, ideally you have both right? You know, you take a company like stripe, which had both capital and execution, right? Just did amazingly well just smoked their competitors in an industry that was incredibly poorly run, right? That, you know, that's the perfect example, which kind of brings me to my next question that people tend to ask, which is, well, you know, don't all successful companies raise money, you know, isn't it? When I look at all the I. P. O. S. The commonalities they all raised money. Man. That's a that's a misunderstanding, right? The chances that a pre IPO company raised money are are almost 100% right. What you're missing is when they raised money and more importantly, how much execution it took while raising that money in order to get to an I. P. O. It's not like they were a shitty company that just happened to raise money and that's what made them successful

Ryan Rutan: Like ink dried on Napkin raised funds eight years later. Did I.

Wil Schroter: P. O. Right? Yeah. The the story in those companies has nothing to do with with the the capital. The truth is if you can execute, if you can continue to execute well, capital will will come to you. Right? That's the nature of what those businesses do. We're not that special company as far as like the most coveted company, the hottest company in the world. We calls 2 to 3 times a week from VCS and PE firms trying to put money into our company just because we're executing right prior to that, had we rewound back seven years and we had our pitch deck and we were, you know, trying to pitch to raise capital, No

Ryan Rutan: one was calling us your cash, right, not only were they not calling this, they wouldn't have answered our calls that we called them. They'd be like, oh, that's cute. Go away.

Wil Schroter: Exactly. You know, the top athletes in, in every different sports aren't the top athletes because they went to the NFL or, or, you know, or or the NHL, etcetera there, the top athletes because they've been executing every day. And that's how they moved up the ranks, Right? That's how startups attract the capital if they need it. Now, the whole point is some of these folks executed so incredibly well that they have the optionality for capital, Right? And that's what I think a company when they're, when they're saying, should I have, you know, raised money or not, They should be thinking, have I executed so well that that's even an option. And, and, and right now I just want to harp on this point for a second. Go ahead. I think at which point people are saying I needed capital to save me, then you've already lost. If you're saying that, you know, I could have done this this, this, but capital would have saved me, then you're missing the execution part. If what you're saying is I'm executing like it's nobody's business, my, my dead deadlines are on time, My marketing is on point, My customer acquisition is on point. I'm hiring good people. I'm just missing enough capitalization to get to the next level and I'm willing to take on. You know, whatever costs and liabilities are with that, then yes, if you're willing to take those on and you're executing, then you should absolutely regret raising capital because that was the only thing holding you up. But Ryan you and I looked at thousands of companies, how often is that the case?

Ryan Rutan: Very, very rarely. Right. And that's, it's, it's usually this idea that somehow capital will help them fix an inherent flaw that they don't have the answer to you. And to your point, if you're already executing like nobody's business, you're a great company to put money into because it's going to accelerate something that's already working. I think that when we look at trying to use capital to, to fix another, our fundamental challenges that you need to solve with capital sometimes. But if you're a capital intensive business, if you're manufacturing, if there's something that it's enabling capital rather than accelerated capital, right? It turns on an ability that you didn't otherwise have that you absolutely need and you know why different story, but that's just not the case for most. And when you throw capital into into a company that's not executing, um and then they're going to try to go figure out how to use that capital to turn to turn on the goodness rarely ends well. Right? And I think it leads to this behavior and this is something I see a lot, I always I always lean back a little bit more when I'm talking to somebody about to fundraise and and we start to talk about their use of funds and their use of funds is literally spread across every category possible within that company going, There's no fucking way that you know how to get our oi out of all those points at this stage in your company. I just know there's not because it's it's it's extremely hard, Right? So this is the other thing that we see people do a lot, which is kind of a curious behavior they try to raise so that they can accomplish everything they might ever need to accomplish. Like, why the hell is that the behavior, Right? Tell me what, you know, you can put cash into tomorrow that would turn into more cash or growth of some sort or improvement within the company in a reasonable period of time, Right? And, and a lot of founders will have an answer for that. But then I talked to them. So what you actually raising, oh, eight times that and we're gonna spread it here, here, here, here and here. Like, why are you doing that? Right? You're reducing your likelihood of success at that point?

Wil Schroter: Well, so a perfect capital raise, as most folks know, is when you found something that's working and you just need more gas to make more of it work. A flawed capital raise is when you don't know what you're supposed to be applying capital toward, and you're using capital to try to go figure it out. Yeah, it's not, that's what doesn't work. It's just not the right way to raise capital.

Ryan Rutan: Right? And, and even from just from an investor perspective, you know, this is something that, that Elliot says all the time, investors want to invest in capacity not in demand, right? And I think you can look at that pretty broadly and and say, you know, rather just looking at purely as demand in discovery. All right. Unless you have something that's so damn novel, that discovery feels worthwhile, right? Like we're going into a new frontier and it's very exciting and we understand we're putting our money 100% at risk and we're willing to do that. Then what you're really hoping to invest in its capacity, right? A dollar in is a $25 out. We know that equation already more money equals more buck 25 out, right? And that feels good. That's, that's the rays that you want.

Wil Schroter: And so to that point, if you are at the point where you figured out your demand curve, if you figured out this is what my customer acquisition costs are. This is what my lifetime value is. The numbers are on the right side to your point. Ryan, I just need more gas in order to drive more of those outcomes, then hell yeah, you should probably be raising capital again, if you're willing to take on all the caveats that come with with capital, having a boss, having delusion, having a longer outcome, uh, or bigger outcome that you need to earn any money, all of those things then yes, great. Short of that. You're probably just asking the wrong question, the right question should be, have I executed at every last position and if so is capital, the only thing holding me back, that's rarely the case.

Ryan Rutan: Yeah. So I would say at this point if you're looking back in time and feeling any regret about whether you raised or didn't a revisionist history, usually a waste of time. But so like I, I hope anybody listening today who's been in that situation is feeling a little bit better about the fact that yeah, it probably would have changed the outcome, but not necessarily for the better,

Wil Schroter: correct Yeah, I would have had a new set of conditions, whereas capital would have been one of them how to pay it back. How I'm upside down on the cap table. How I'm never going to get paid in distributions would be the questions. And the question you'd be asking at the time is, hey, should I regret having raised capital?

Ryan Rutan: That's a wrap for this episode of the startup therapy podcast. This is Ryan Rutan on behalf of my partner Wil Schroder and all the startups dot com family. Thanking you for joining us and we hope you'll continue to join us. Be sure to subscribe, rate and comment on ITunes or wherever you love to listen to startup therapy. You can find all of our episodes at startups dot com slash podcast. If you're looking for more amazing resources to launch or grow your startup, be sure to head to startups dot com and check out startups unlimited. It's everything we have to offer from our online university to our amazing community of experts and founders and even all the tools we've built like biz plan, fungible and launch rock. It's everything a founder needs visit startups dot com slash begin that startups dot com slash b e G I N. You'll thank me later.

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