Startup Therapy Podcast

Episode #28


Ryan Rutan: yeah, mm hmm. Yeah. Does the idea of building a business worth millions that leaves you as the founder broke seem unfair or as Kanye eloquently put it win the super bowl and drive off in a Hyundai on today's episode of the startup therapy podcast. We'll explore why building something of great value doesn't directly or immediately turn into value for us. As founders welcome back to another episode of startup therapy from startups dot com. This is Ryan Rutan joined as always by my partner and Ceo of startups dot com, Wil schroder will, we're going to talk about what it's like to be worth millions and billions and trillions on paper and still not be able to pay your mortgage. Right. And, and this is probably a more familiar story than we'd like to believe. But yeah, I know you've got some, you got some stories man, we both have friends who have been through this, we've seen this firsthand. So what's the deal man? Why? Why? Why can't we reconcile fake money and real money?

Wil Schroter: Well, I think part of the challenge is that we have this notion that once the startup becomes worth something that some of that money turns into liquidity and I've seen so many instances where the founders have gone through the entire development process and evolution process of their business and yet 567 years later when they're supposed to be reaping the benefit of the largesse of this business they're broke and nobody seems to understand this, but I'll give you a couple case in point, I can't reveal names, but, but again, you'll have to bear with us on the state of these different businesses. So the biggest example I can think of which is a couple of years ago, I'm having lunch with a friend of mine and he's walking me through the new offices of their massive company and it's a business all of you have heard of you certainly used their products And at the time it was worth about $4 billion. And he's walking me through their executive cafeteria. I mean they're big enough at this point that they have an executive cafeteria. The entire company's meals are paid for, which isn't that unusual for sF based company that's venture funded and things are going great on paper and so so we sit down with our company bought meal and he starts explaining that he's going to get married in a few months and he's terrified because even though he is a co founder of the company, The company is worth $4 billion. He doesn't have enough money to pay for this tiny wedding. He's basically broke and I'm just sitting there, we're laughing about it. Although it's not that funny in his case saying everybody here gets to eat for free, but I can barely afford to eat myself,

Ryan Rutan: wow, we're going to hold the reception in the in the executive cafe where all the meals will be paid for

Wil Schroter: the only place we can pay for it. I'll give you another example, I just kind of give you some, some points of reference. Another friend of mine, this one based in Los Angeles. He and I are sitting down, he's the founder of a company that was doing about 80 million in revenue. So uh you know it's a venture funded company doing extremely well and he really built an amazing company, but at the same time he didn't have enough money to be able to afford a house. Now, granted a house in Los Angeles is pretty expensive but that wasn't really the point. He wasn't really making any money. He was making a salary but it didn't make up for the fact that he hadn't made any money, you know, leading up to the business getting venture funded etcetera For like seven years.

Ryan Rutan: That's exactly right. You're making even an okay salary now, it's probably okay enough to at least keep up with the minimum payments on the debt you accrued over the last 5-7 years. Alright, so the salary does not make up for um at least not immediately make up for that deficit and that's that can be a really tough one to swallow.

Wil Schroter: You know, I experienced this the first time myself when I started my first business and the business started to do really well And I went to the bank and I was trying to buy my first house and this was in columbus Ohio back in the 90s. I mean houses cost a lot less than they do now. But even still I remember going to the bank and any business owner that's listening to this that's tried, this sounds like a very familiar tale and I sit down at the bank and I'm excited by the way, I'm excited by the fact that I finally I'm making some money and you know, I've got some wealth what have you. And I sit down with my banker and I'm trying to explain that I want to buy this house. It was $167,000. It was it was not this was not the playboy mansion, it was just a standard three bedroom house. And I remember she sits across from and says wonderful. All we need are your W2s and your bank statements, your personal bank statements. And I said, well I don't really have w. two s because I'm a the owner of the business and I take distributions and she starts to grumble and I said in my personal bank balance isn't that much because I put all of my money into the business. The business has money and she looks at me, she's like, I'm afraid that we can't help you. And I'm thinking to myself, the business is making millions of dollars. Everyone else at the company is getting a salary on W. Two, they can afford to buy this house, I'm the owner and I can't afford to buy this house and not much has changed since then. And so we get this very common theme Ryan, where all of these startups, all of these founders, even if we get to the point where our startup is worth millions, we have no liquidity, we have no ability to buy stuff and it is maddening.

Ryan Rutan: All right, So you're sitting down across from your banker and she's saying you're worth nothing or they can't lend you money. But what about your investors? They're telling you you're worth your worth millions. Will

Wil Schroter: Yeah, They're saying that asset is worth millions that, you know, there's a difference in.

Ryan Rutan: But we always say there's no separation between the founder and the company. Right existentially true, financially not so much,

Wil Schroter: we're in one of the few businesses where we can be told we have millions without anybody actually giving us the millions. It's like an NBA player gets signed to the league and gets millions of dollars. Now, sometimes they'll have $100 million contract that will extend over a period of years. They don't get all that money up front, but they still get millions of dollars. Yeah. Right now they have something to show for it. We're in this weird freakish business where we can go years building wealth and yet we have no way to spend any of that wealth. And if you're a business owner put it this way, if you're an existing business owner and you've been in business for five years or longer, this is the bane of your existence. If you're a new business owner and you're about to get into this, this will be the bane of your existence. And so, you know, let's talk a little bit today about what those challenges look like, why they exist. And some ways around them, right? And it's not perfect. But we can kind of demonstrate what some of the ways the methods of liquidity might look like,

Ryan Rutan: yep. So this is really a challenge liquidity, Right? We're we're saying that the investors say it's worth millions, and and, you know, of course we believe what they're saying. Well, we we see the same thing, but literally nobody else on the planet sees it the same way. So what's the deal here? It's not the case. The investors are wrong. Um and we're talking about future value, but how is it that we can't get any kind of reconciliation between the way an investor sees this. And let's say, an underwriter to bank sees this?

Wil Schroter: Well, it covers a few different areas. The first area we talk about is the fact that investors themselves are all about future value. Often when they're investing in their valuing a company evaluation is often based on what the company will be worth. And and part of me saying that isn't that they're not using a present valuation, there's a present valuation of future valuation, it's also that they don't need it to have liquidity right now. So Ryan, if you don't have an idea, this idea is fantastic. It's got a patent around it, it's incredible and it's absolutely going to have some market value. But we haven't sold it to anyone yet. We haven't created any kind of cash transaction out of its kind of stuck in this weird netherworld of lack of liquidity. And so while we know there is a value, there's no cash coming in for it so we can't exactly borrow against it. And I think that's one aspect where the investor will see an asset as what it can be versus what it is. The second part of it from an investor's standpoint is they can put tons of cash and money into something that's losing money and be perfectly okay with that. Uber being a perfect example, right? Tesla being a perfect example.

Ryan Rutan: I'd like, I'd like to go about 100 and $50,000 over the assessed value and by the way that the neighborhood is tanking right now, would that be okay? Would you guys wanna you guys wanna write that loan?

Wil Schroter: And I think we get caught up in that as the entrepreneur in a world where everyone around us can see future value, a bank doesn't give a ship, you know, I learned this a while back. I actually joined the board of what's now a public bank. I think we're about to get bought by a public company at the time and I spent three years on the board essentially reviewing commercial loans, which is kind of a big part of the process in understanding how banks think and at the end of that three year process, here's what I came away with. I don't understand how banks lend to anyone. When I started to learn how little banks made and what their margin of error needs to be. I was not only unsurprised when they said no to me, I was surprised that they could say yes to anybody in the commercial lending business because it makes no sense. But from a bank's perspective as a bank, I don't care how much this thing might be worth in the future. All I care about is if things go sideways and they will, how do I get my money back?

Ryan Rutan: Like for anybody who's ever tried to fire sale a startup company, it doesn't go well, it doesn't go well at all and that's for the founder who can tell the best possible story, right? Imagine a bank holding. It's going like, um, well, it's a, it's a, here's the pitch. They don't, we don't even know how to explain it, right? They wouldn't even be able to begin to show the value of that company, nor would they be able to extract any from it. So it's totally understandable, not the right kind of asset for them.

Wil Schroter: Startup is not a commodity commoditized asset commoditized assets, that the bank knows how to sell if things go sideways our homes, cars and land short of that, your startup could be doing $10 million dollars a year in revenue. But as far as the banks concerned, if things go sideways, the bank's not a private equity company, they're not going to come in and run the asset. The bank doesn't know how to sell your asset. If things go sideways, the bank is just going to watch all of it go away. And so when the lender on my mortgage was looking at me in mind, you mortgages in particular have very strict underwriting rules, especially now when the lady of the underwriter was looking at my mortgage, what she was saying is, look, we have one way of looking at the world, we look for W two S and we look for collateralized assets. If you don't have that ended. Well, I'm

Ryan Rutan: thinking about the time in which you were talking about doing this well. And the irony is that you, me and other business owners were probably the only only people in the United States at that time who weren't getting loans. I mean, they were just like if you could fog a mirror, you could get a loan at that point. Alright, you walk through the door and stand upright is long enough to sit in line to to sit down with an underwriter, you were probably gonna get alone,

Wil Schroter: what was it, the ninja loans arrested development, that no income, no job application. Yeah, well in, so what I learned in that process was the value of the asset value of my business as a bank would see it now, mind you, there are other folks that you can turn to and we'll talk about those, but as a bank would see it was damn near zero. The funny thing, if I turned around and got a job at my company and I wasn't the owner anymore, I'd be good to go get a proof. No problem. And I'm thinking to myself, but I'm the one who controls that money. Wouldn't I be more capable than anyone else in the company of ensuring that that that W two gets paid, nope, not too much logic. And you know, in all fairness, It's also how they ensure some consistency in the process. It's also how some of that underwriting gets backed in general. So I understand why it exists. It's just kind of hilarious how it works. So if you, if you've ever been a independent contractor of any sort, anyone in a 1099 or distributed income capacity trying to apply for any sort of credit. It's a total nightmare. Just banks don't understand it, but you have to ask, There has to be someone that understands this business, right? There has to be someone that can look at your business and say you're making $5 million dollars a year. I have to be able to lend against that in some capacity, which brings us to outlet number two. And that would be some sort of revenue based financing

Ryan Rutan: factor dancing merchant cash advance and

Wil Schroter: yeah, they exist now. I

Ryan Rutan: like that. Yeah, this is,

Wil Schroter: yeah, I'm trying to, I'm trying to ease into this with the best of intentions here. I have a handful of friends, founder friends who have started business in the revenue based financing industry and they're good people. However, at which point you're going to a revenue based financing model as far as an entrepreneur or business, it's usually not your first stop. If these guys had these guys had store frontage, they would be in a strip mall next to a nail salon, a pawnbroker, you know what I mean? It's not your place to be honest. Yeah, probably. But let's at least talk about what it is and why folks go there and it's not that we're not recommending it, we're just saying it's probably not your first place to go. Uh the way these folks work is they look at what your receivables are mostly the consistency of those receivables. If you have a really lumpy receivables, if one month it's really high, another month, it's really low, et cetera, they're gonna get a little concerned about that. But if they can see that you have consistent receivables, All they're going to do is lend you some money and use those receivables as the collateral in most cases they're going to lock those receivables so the money actually goes to their bank first to ensure payment and then to you, not surprisingly these often come with extraordinarily high and egregious terms. Yeah, I was gonna say

Ryan Rutan: yeah, yeah. Yeah, that's the other side of right. And I guess the reason why is because you don't have other good options, right? And and so therefore they can they can retain that chokehold on the rate. But the the other side of this is that for anybody who's really, you know, if you're listening to this right now and you're saying like, you know, I need some liquidity as as the owner um this I'm struggling. I'm going through my, my mental database here trying to think of anybody I know that's used this type of funding for for liquidity at the, at the founder level. I know plenty, plenty plenty of people that have done this to, you know, create some cash flow um in order to, you know, service a larger client or or buy more inventory, things like that. But I don't know anybody that's used this for founder liquidity and and part of it would just be the terms that come with it are fairly egregious and often you need your leveraging this, right, you're going to use the money from this to leverage it up into additional revenue. So therefore you would need to be spending it on things that are directly associated with cost to get sold or something. Do you have examples where anybody has used this as liquidity?

Wil Schroter: Well, usually in businesses, let's say that aren't venture fund that I have to point out that if you have investors involved in your venture funded this isn't even close to an option as we've talked about in past episodes the moment you have other folks in your cap table, particularly investors, they have no interest. They don't, they don't care about your personal liquidity. I'm not pointing them as bad people. I'm just saying they invested in the business under the terms that you were broke and they're generally okay with you sticking to those terms. You know, that's what you signed up for and therefore it's your problem,

Ryan Rutan: You can end broke, we'll both get liquidity together. It'll feel that much better guys if we all

Wil Schroter: get liquid at the same time. And Ryan, I hate to say this, but I've heard different investors tell me point blank that they don't actually have a problem with the founder being broken hungry because they feel like that's more motivation said differently.

Ryan Rutan: I've had, I've had that argument before too.

Wil Schroter: Well, you know, I've gone out and I've tried to raise for businesses after I'd done a couple of businesses beforehand and what I mean by that is I had made some money so I didn't need the money personally. I was able to go without a salary and you know, have a little more flexibility and I had more than a few investors tell me flat out that that is actually a red flag for them. They said that if it doesn't look like you're hungry for the money, then our investment isn't as safe. And they're

Ryan Rutan: like, yeah, yeah,

Wil Schroter: yeah, okay. Kill me not to point this out. MR, investor particularly VC, let me just make sure we're saying the same thing. You want to make sure that I have skin in the game to make sure your investment works. But you're raising a fund using other people's money, taking a total of nearly 20% of that fund off the table to pay your mortgage to make sure none of your bills are missed. You're

Ryan Rutan: not a little gated to this process, very little little upset.

Wil Schroter: Oh my gosh, I just come on man. If you're gonna, if you're gonna make that argument, make the full size of the argument, let's talk about how we both feel. Not just how

Ryan Rutan: I've said this quite frequently that hypocrisy is my least favorite flavor of ice cream, right? It's, and it's,

Wil Schroter: it's, it's rife, but I get it like at the end of the, they're making investments, you know, they can have whatever thesis they want because it's their checkbook. The point is there is no part of the investor mindset where they're saying, boy Ryan, I understand you've had a tough go of it. Let's just give you some extra money to make sure you're doing okay. No one cares how broken you are. That is your problem and it's going to, it's going to continue to be your problem for a very long time. Where that gets particularly challenging for us though is when the startup starts to go longer and longer and I'm talking about 4567 years and more at which point a lot of founders are going to start to go through very different epics in their life. They're going to start families, They're going to need to buy their first house. They're going to have real life events that maybe they were in their 20's and they could get around those. But now they're in this weird place. It happens a lot, Way more than you ever hear about where I'm 32 years old. Let's say, let's say I started the business fairly young and I've been at this for seven years, I make $175,000 in a salary, which, which is a lot of money. I'm not debating the amount of money. But Hey man, for the first four years I made no money and all I did was rack up debt. A lot of debt. Then I made, you know, the first year we were seed funded. I made 75,000 and then we got a little more money. I made 100 and 25,000 I make 100 and 75,000, But I haven't been making 175,000 for seven years. I've been doing nothing but cranking up my debt. So my net take home with all that debt Is more like $100,000, which doesn't mean I'm starving. But if you look at what the value of the business is, maybe the business is worth $7500 million dollars now and I don't have enough money that I can even buy a house, cheap house, much less any house that starts to grind on you a bit. It's really doesn't seem there's another version of this and let me try to point this out. You didn't take on money. You're running, let's say a services business and you've been running it for six or seven years. Business is doing pretty well, businesses doing $5 million dollars a year, which is reasonable revenue. You're doing about $300,000 a year in profit. So you're making pretty good money. But you go to the bank and you say, hey, I want to buy that house or I want to even finance a car and they look at you and as far as they're concerned, you have almost no revenue. Right? And you're scratching your head. I don't understand, I went from $0,5 million dollars of revenue and yet I can't buy a car yet. Anyone that works for me, can anybody my peers who are making half the amount of money I am can easily get this finding, I'm considered broke. So what a lot of folks are thinking is, how is it that I can build such an incredible asset And it seems to work the least for me unless I sell it, right? And let's say either sell it and or I. P. O. Et cetera. And the truth is this is kind of how it works, frustrating as hell, but it's kind of how it works. And so a lot of folks are trying to crack this problem in different ways. Some folks are looking at how to do founder liquidity rounds, but you know, we should probably talk about that, but that only works for a small number of people, right? That's that's not a one size fits all,

Ryan Rutan: that kind of thing. Yeah, that's not like there, there's not a storefront for that option.

Wil Schroter: No. And there's a bunch of folks out there that are trying to do these small private equity shops. And if you're not familiar, these are folks that are looking for businesses that are say $5 million dollars in revenue and higher And they'll come in and they'll buy a portion of the company, usually a minority stake, like 30-40% and take the uh take that a lot of that cash and give it toward the founder for some liquidity. But the challenge with that is they actually they buy for pennies on the dollar. So you're back to the pawnshop model and now you're in bed with a private equity company and you're basically working for them on a go forward basis, right? And like that's not the best thing either.

Ryan Rutan: And you've traded a bunch of future value and maybe not because you know, you again, you hit these new life milestones where maybe kids are happening, uh college is happening for kids, who knows, you may have needs at that point where the liquidity then isn't necessarily optional. It's like I just want to pad my bank account, I just want to feel whole um you may need some of the money, right? Life happens. And in that case you're now trading a bunch of the future value of your company for pennies on the dollar. And we talked about this in a previous episode around paying people with equity, right? It's really expensive money, right? It's a really expensive currency. And so you know, even if it does provide you with the liquidity that you need, the terms are rarely rosy for the founder.

Wil Schroter: Oh, they're brutal because at that point, similar to pawn shop, you're going to whoever is still willing to pay you for some of that equity. And it's it's only people that can buy the equity at such a cheap price that there's almost no chance that they can't get back out of it. And so the idea for private equities by it as low as possible, pawnshop by it as low as possible. So if you sell it for anything, you're going to make money. Well if you're the recipient of that transaction, the founder guys like us. Yeah, that's not a very good transact.

Ryan Rutan: And unlike a pawnshop, you don't get a ticket, you can't just go buy it back for them 45 days later if you change your mind.

Wil Schroter: no you can't. And so that's a really tough one. So akin to that is the idea that if I raise more money, the investors will allow me to take some money off the table. That does happen. But I think I think we need to temper some expectations on that one here are all the reasons it can't happen and bear with me here, I'm not trying to be negative about this, I'm just trying to kind of put this in a very yeah, I want to frame this because I think people hear this, we we saw that the co founder of, we work took $700 million off the table so far and they haven't even gone public yet like oh my God, there must be so much money out there dude, there's not the only way those deals happen and I want to make sure people understand this is if you are killing it to the point where the people who want to put money in feel like they need to be compelled to offer you money off the table to essentially bribe you to take their money because it's a very competitive deal.

Ryan Rutan: Just a caveat to that we work one too because that is also that they're growing like crazy. Sure that business is doing very well. Something else is very interesting about that business is that it's highly asset backed and it's one of the asset classes we talked about in the beginning, it's buildings and dirt, right? So there's a very

Wil Schroter: different reason,

Ryan Rutan: very secure right there. They're not buying funny money equity in a fast growing startup that could just fall apart tomorrow. There's a shipload of asset behind that company.

Wil Schroter: There is and there's also something within that. So there's, there's two ways if you're taking off and things are going really well. There's two ways you're likely going to take money off the table and I caveat all of this by saying if you're in this position, you know it, no one has to let you know by this point. You have so many signs that tell you you can do this. So if let's say, it's definitely, if you're not hearing any of those signs, you're not in that position. So one version is on your next investment round as part of the round, you take a little bit of money off the table, they buy some of your stock directly, you take some of that money home and that's wonderful and it is, it does happen in funding rounds. It happens more now than it used to do. But it's rare and it's, it's sort of reserved for only the most elite of folks in raising money right,

Ryan Rutan: just back up on that number for a second, right? Because the number of people successfully raising money is a tiny percentage of the people that are trying, the percentage of the people who are raising funding, who fall into the funding elite is a subset of that number. So this is a highly, highly, highly unlikely outcome.

Wil Schroter: We're talking about dozens of companies. Now, the problem is those dozens of companies or the article that you saw for, we work, everyone reads them and they don't really understand how pervasive or not pervasive that is. And so they get a bad understanding of. No problem. The second way that folks get liquidity is considered where folks are selling stock in a pre IPO basis. Again, if you're at this point, it's not like you don't know it, but it's just worth understanding for everyone else. Before Uber went public, they had multiple rounds. Were insiders, mostly the executives, but some of it trickled down to folks earlier in the cap table or later on the cap table, uh, we're able to sell their shares to folks that we're looking to buy huge swaths of the stock, Same thing happened with facebook, et cetera. Now those, those transactions do happen, but not until you get to a massive scale. My buddy who I mentioned got to the $4 billion. They're much bigger company now has certainly done what they call a secondary transaction where folks have put money in in order to basically buy stock and create some liquidity for folks internally. That also rarely happens. And it's usually on path to be able to go public, which is how the people buying that stock, you're going to get their money back

Ryan Rutan: out. Exactly right. Once it, once it gets to a stage where inherently it's going to be liquid for everybody involved. There's no real challenge around liquidity anymore. Right? As the founder is anybody that owns a piece of that when it goes public, this is no longer a challenge.

Wil Schroter: Right? So you only have a few options as the founder of a business trying to create some liquidity. One option is you can try to use some, some part of your asset to create some sort of revenue based, you know, loan back to yourself, not the best option, but it does exist. And and frankly, to be fair to those folks that are out there, I'm seeing a lot more businesses get into this business and trying to come up with non predatory ways to make this work because everyone understands this problem right now, Ryan, like everyone understands that all of these founders and all these businesses exist in this liquidity is zero. There's all this tied up capital and all this type of value. And when you have those things available, there's plenty of people that are going to try to work a new system to make things a bit more available. Bit more reasonable. And I got to say these types of loans aren't just the merchant cash advance, predatory folks. As far as the name, Paypal offers them. American Express offers them, I mean it's, it's everywhere because they know they can get paid back. They understand the collateral, but they're often not on great terms for the founders, but I just do have to point out that, that they do exist. Another portion is often to find an investor who just wants to buy a piece of the business. They just want in on the business and they're willing to use the investment as mostly founder liquidity. That's not uncommon. For example, Ryan you haven't you and I have this $5 million dollar business and we're just looking to take on an investor who wants a portion of the business, but we don't necessarily need their investment capital. And so Person comes in and they say, Hey, we'll buy, I'll put a $250,000 check in order to get a percentage of this business. Ryan you and I split that and that's it. A really popular example of that happening. That's what Jason freed And ehh did with base camp of all people, Jeff Bezos came in and gave them a check for at the time to create some founder liquidity for them to be an investor in D. H. H. He actually wrote about this in one of his best articles, something called the day I became a millionaire. And and he's talking about what happened when Jeff wrote him the check and what they were able to do with it is actually a great article. If you can find it out there, I'd I'd highly recommend it. But that's an interesting option. But you gotta understand the only people as as investors that are willing to buy into a business is if the business is pretty successful already, Yeah,

Ryan Rutan: they're basically buying future cash flows or access to a customer database. There's some some existing true asset that has real commercial value to them and that's why they do it right and that and that's easy to understand. But again, it's it puts you in the minority of businesses that have made it to that stage. And and the other side of that is that by the time you've gotten to that stage, your need for liquidity may have also diminished. If you're at a point where somebody's willing to come in and drop that kind of check on you, you're probably accelerating it, but you're probably gonna make that money anyways, right? At that point, the business's cash flowing, um you have the ability to put that money in your pocket. Um So what you're doing at that point is accelerating a bit because as you said, you don't really, in that instance, you're not taking that money because you need it for the business. The business is already doing well. The business is growing under its own steam. You're not taking that cash on to accelerate the business, You're taking that cash on to accelerate your own wealth and basically accelerate that payback period from that time that you put in early on where you're getting paid nothing.

Wil Schroter: Yeah, filling the potholes as I call it. I mean, all along the way you were racking up all this debt, maybe you have student loan debt that never got paid off properly. Maybe you had credit card debt most certainly that didn't get paid off any kind of personal loans you took to get there. It wouldn't be uncommon for a founder with a 3 to $5 million business to be sitting and it can be any size. But I'm just pointing out 3 to $5 million business to be sitting on $100,000 in personal debt and I'm not, I'm not even talking about car loans and uh, you know, mortgages, I'm talking about actual real debt that they own.

Ryan Rutan: Well, let's, let's play that out for just a second because I just wanna, I just want to point out something and I are in the area. So yes, that's not a great situation to be in, but you're $100,000 in debt and you have a $5 million business, put this into context. I don't want to go off on a, on a tangent here, but you end up in the same situation with most undergrad degrees now.

Wil Schroter: Yeah. And you don't

Ryan Rutan: Have a $5 million $38,000 job, so maybe that'll make everybody feel a little bit better about their lack of liquidity.

Wil Schroter: Well, I think, you know, the challenge too, is often we have businesses, let's say they're doing fiber could be $10 million dollars and even more, but the businesses aren't necessarily making a lot of money yet. And so there's not a lot of cash out liquidity. You know, the base camp guys were able to build a business that had a ton of cash out liquidity. So they were a different boat. But there's a lot of folks, especially early in the business, there's not a lot of distribution liquidity or cash out liquidity because you still need all the money that you're earning to put back in the business. And then some,

Ryan Rutan: yep, that's, that's the gas that continues to run that machine,

Wil Schroter: you bet, but that doesn't necessarily change the founders lives again. They could be getting to a point in their life where they need to buy their first house. They need to be able to pay some of this debt back so they can get on top of their funds for the first time, I think once this timeline starts to extend and I'm talking, 57 sometimes, 10 years. the lifestyle miles that it starts to put on these founders is brutal. In the issue of non liquidity starts to become really painful.

Ryan Rutan: Yeah. And this is where if we circle back to that, you know, that argument around keeping them hungry with the investors, that, you know, you can make a strong case that at some point you're not doing yourself any favors by, by making the founders live or run to lean. Sometimes there's no options, right? Like um, and, and of course, you know, an investor may not want to throw money at someone just to help improve their lifestyle when they're saying, well, hey, look, improve the business and your lifestyle improve alongside of it, but you and I both know that healthy, happy, energetic, well rested, you know, emotionally sound founders tend to do better with their businesses.

Wil Schroter: Yeah, we're talking about the difference between making this, the startup hungry versus starving it all together and being surprised that it lives. I don't believe in the fact that a startup Founder needs to be broke in order to be viable. Now, don't get me wrong. I think that we all need to have something to work for. But I think there is a point where if you starve the founder too much, The founders focus becomes 100% focused on survival, not focused on growth. And I think, yeah, because at some point we can go so long saying, oh, I guess my rent's not paid my mortgage and paid. I guess my bills are stacking up. But at some point that comes home to you and now your spouse is talking about it, you can't move on with your family once you're dealing with those problems. I don't think those are healthy ways to grow a business. I don't think those are healthy focus areas. I think you become dangerous focus areas.

Ryan Rutan: Yeah. And the long suffering merit badge that you earned, it just isn't worth it right? Like there's, there's no badge of honor to be had there for suffering and suffering and suffering.

Wil Schroter: Yeah. And I think it's a dangerous tactic for investors to take because I think at which point we've got these distracted founders, they're harder to manage at that point. They're thinking of how to get out of this thing and not necessarily in a way that you're thinking about it. Like how we're going to maximize profits in looking at lots and lots and lots of businesses that we've coached, some that we've bought, some that we've looked at in looking at all their different situations where they were looking to get to an exit. It wasn't always a, hey, I'm just, I'm going to be happy about this until this thing comes to a great end point for some of these folks are tired. I just want to get the hell out of this thing and I'll do whatever it takes to do it, that is not that the investment

Ryan Rutan: that

Wil Schroter: you want to, the

Ryan Rutan: analogy of. And so I was just getting ready to go there. I was just getting ready to say, you know, we often make this analogy, you know, they don't just bet on the horse, they bet on the jockey and they don't have any any real concern for the jockey. That's not always true. You know, you and I both know some some really great investors who do take personal interest in the people they invest in, which there are more of those out there, hear us investors, do you hear what we're saying? Um and so yeah, I think that's that's a very valid point that we, you know, there would be some merit in in thinking a little bit more holistically about this, given the long odds on these things anyways. Anything you can do to improve those odds seems like it would be worth, at least thinking about making some investment. And so hopefully we'll start to see this change

Wil Schroter: the way I see it is. There's nothing we can do to fundamentally change where we stand in the liquidity position until we sell the business, we're not going to get liquidity until we bring on an investor, we're not going to get liquidity. There's not a lot of options. The only focus that I put in front of all of us as founders is just to keep our heads down, try to push for a faster exit if that's what we're really intending on and don't think about anything else until we get to that liquidity.

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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