Startup Therapy Podcast

Episode #77

Ryan Rutan: Welcome back to another episode of startup Therapy. I'm Wil Schroder founder and Ceo of startups dot com along with my co host Elliot's near the C 00 of startups today. We're going to talk about something. We've lived over and over and over, Which is how to translate what investors say to us. Some of you may know by now that we've been helping thousands of startups raise, I think over $600 million dollars of capital up until this point through refundable platform. So it's a topic we've discussed with countless founders. So in your experience, having worked with many of these founders yourself, why is it that you think founders have such a hard time understanding exactly what investors are saying to them.

Wil Schroter: Look, it's kind of two fold and the first point here is rightfully or wrongfully, founders have this unwavering sense of confidence in their idea. So even if they hear what appears to be a no, they just don't buy it, by the way, That's not the worst thing in the world. You want some level of confidence. But what we run into more often than anything is these are founders that are pitching investors for the first time. So they actually quite literally don't know what a no sounds like. Okay, investors are notorious for giving you kind of a cryptic No. Right,

Ryan Rutan: right. Of course, it's interesting because in any other part of life, when you ask people for something and they say yes or no, You assume yes or no means yes or no. We're in this weird Netherworld, that is fundraising where startups. Founders going through this process are expecting your common yes or no, but they don't really get it.

Wil Schroter: That's exactly right.

Ryan Rutan: Right. So they wind up on this bizarre path where in their mind everyone is actually saying yes, um, when in fact the answer is no. So I think let's start there. Let's start to kind of break this apart a little bit and talk about kind of how to decipher and translate some of these responses because it's all counterintuitive and I think it messes with all of us if folks are listening right now and they're going through their own capital raise. My guess is they're going to lean in or if you haven't raised yet, you probably should lean in because we're going to give you a very different roadmap as to how to think your fundraising is actually going. So with that said, if we start with what are the most common knows that sound like yes.

Wil Schroter: I mean, I can speak both as an adviser and from personal experience, but but they've got like this hedge No. Right. And the hedge no, is Elliot. We love the concept. This is a really cool idea. It's just a little bit early for us if you can push to $1 million dollar run rate, we really want to have another conversation.

Ryan Rutan: Let's stop there. Let's talk about why they said that. Alright, because I think it's important to understand the investors motivation for saying things the way they said them, they're not necessarily trying to deceive us per se, they just don't have the luxury of providing a hard

Wil Schroter: no, that's exactly right. In this case, this hedge no concept. If we're kind of reading into this cryptic language, they probably do think it's a relatively interesting idea. They see a lot of ideas, but as an investor, they're looking to hedge their bets, so to speak. So they're saying they're not at a point right now where we feel comfortable investing, they haven't said differently, they haven't proven enough or proven the market enough in this case to be able to say there's a real opportunity here. But if you Elliot and or other entrepreneur can prove that market out, we'd love to have that additional conversation. So what they gain here specifically is they're not telling, you know, this is a bad idea. So you still have some glimmer of hope around the relationship bearing fruit. And secondly, on their side, if you end up doing incredibly well, and you're able to hit this specific milestone, they're going to probably have first or second shot at the deal

Ryan Rutan: well, right. And so from the investor's standpoint, they don't really have an incentive to say no, right? Because from this, here's how the investors thinking about it, the investors thinking if I say no to this person, even if it's an absurd idea, even if it's the dumbest idea I've ever heard. If I say no in heaven forbid, that idea turns into something amazing later, why shut the door, Right? I would rather tell everyone, hey, not now, even if that really does mean no. And it does by the way, and always leave the door perpetually open. You've got to understand as a, as a founder, you're thinking that investors are making a single moment in time decision. That's not the way they think they think you're going to be fundraising if this thing's working many times in the future. So even if I pass now, the next time you go to raise your next round, I still have to pass the hat to all these investors. And if you're raising the next round, it probably means that you did something really well. If that's the case, I want to make sure when you pass the hat again that I'm getting the hat passed to me, I do that by never telling, you know, I always want to kind of let you know that we're interested if the terms are right. But what we're really saying is if we're interested right now, we have already been investing,

Wil Schroter: I totally agree with you and it's their job. Well, a few things that are important to note if you got in the room right. If you've got a VC pitch you're actually doing something right? Truly right? There's a pretty large barrier of entry to actually get in and pitch even analysts within a VC. So if you're actually in the room, you've already kind of put yourself into a different category of you have the connectivity and, or you have the concept that at the very least will get you into the room okay. There's a lot of people that, you know are trying to get into the VCS and actually have those conversations that can't even get past the gatekeeper and get into the room. So now that you're into the room, it's their job to your point to start the conversation, but keep that conversation open as you progress

Ryan Rutan: right? And so I think that from the entrepreneur's standpoint, we have all these mixed messages going in, right? So let's say that we're beating our fundraise and we start sending emails out or however we're doing our initial outreach, you know, to some venture firms, it's important to understand whether that adventure firm is gonna work a lot differently than an angel investor with an angel. You're typically just talking to the angel themselves, you're talking to the person who probably made a bunch of money in their own startup and they're making the investment decision a few things notwithstanding, like angel groups that are more formalized, but with the VC Elliott, as you were saying, the VC is going to get on there and they're going to send you through the analyst process, which is their lowest level kind of salesperson and then they have to kick it up to what's usually a junior partner or maybe even a partner. And then we're hoping as you get that next level pitch. How many times did we go in our own fundraising life? How many times did we go would you say from the analyst to the partner pitch?

Wil Schroter: You know, this is actually, you know, to our credit, this is something we did. Well, I think, I don't want to say we batted, But I'm willing to guess 90% of the time that we got in front of an analyst and or an analyst reached out to us. Our idea was big enough and compelling enough that we got a seat at the table to talk to some of the partners or some of the decision makers.

Ryan Rutan: And that's what messed us up because we thought because they really liked what we had to talk about and they wanted to send us to the coveted partner meeting where you speak with all the partners usually on a monday, pitched the entire partnership for a deal. We thought they were interested. We learned later and certainly no. Now, given that we run a fundraising platform, is that they do that all day long now, mind you not, everybody gets to the partner pitch right? So there's some, some filtration, but the partner pitch is just one of its just something they do every monday. So they're seeing lots of deals all the time. Getting to the partner pitch again, these are all these signals, you know, that are hard to translate getting to the partner pitch means it's better than a hard no, but it's far from me. Yes.

Wil Schroter: And I think your point around us and this was kind of our first run back in the day at pitching venture capital firms. You and I did have a certain level of confidence that because all the analysts were so incredibly interested and we kept getting accelerated to these partner pitches that we had something really special. I would venture to say that our bubble got burst in a much tougher way because we came in with a certain level of hubris and we thought, you know, we're getting accelerated every single time. This is a great opportunity. This is a great deal. And then when we finally got to a point where there was some decision makers across the table, it was always some version of no.

Ryan Rutan: Right. And that's the problem. What we didn't understand and we certainly know all too well and we talked to founders about this all the time is that unless you're getting an overwhelming yes. Meaning that the person you're talking to, it doesn't matter if it's seed or angel or VC, what have you, unless they're jumping out of their seat to chase your deal down, it probably means no, Now again, there's flavors of this along the way. But if you had to bet as to whether what you just heard when you walked out of the meeting was a yes or a no. If they emailed you within the last 24 hours, it's probably a yes. If they, if they weren't dark, it's no, there's just no version where someone is really interested in doing a deal but just forgot to email you. Right? So it's kind of, it's kind of important to understand how these things work. So investors are looking at tons and tons of deals. What they're trying to do is they're trying to say no to as much as possible just so that they can focus on yes, they don't make any money on. No. So they have to be able to weed out no, as fast as possible and get all over. Yes. Here's the thing along the way. All of those knows that the founders hearing also sounds like yes. It sounds like what you said at the top of the episode where you're saying, hey, you know, if you can only hit a million dollar run rate, et cetera. And so we start processing this stuff, right? Like we start thinking, oh man, like I talked to this investor and they said, if we just had a million, I talked this investor and they just said, once the product launches etcetera, man, everyone's interested in my deal Andy, what does that really mean?

Wil Schroter: Well, what it really means is that you've entered just like if you're running an internet business or startup you have a user pipeline right, whether it's business or consumer, all that, it really means in their eyes, is they also have a pipeline of potential end users and in their cases deal flow. So you've made it to a certain part of their deal flow where you haven't been able to show enough traction and or momentum to be able to be an investable company. So if there's kind of a bucket of B bucket and a C bucket for these investors, a bucket is they just haven't given us enough to react to to say we're comfortable making an investment, a B bucket. Is there really, really, really damn close? We just need to see a little bit more or we need to see somebody else lead the round hole, different conversation or the C bucket, which is the absolutely, this feels like a slam dunk, we're ready to write a check

Ryan Rutan: and it's obvious when you're in the sea bucket. I think it's less obvious when you're in the first two. And so when the investors providing this info and they're saying, hey, you know, we think we'd be interested at x, y Z milestone, it's not out of bounds to be able to say, is there anything that would get you interested right now, In other words, if you're driving the binary decision. And what you want to say is is there something that's specifically not happening now now revenue can be it, etcetera that we can talk about a little bit right now. Part of that is trying to force arguing or are you not? Because investors often aren't pushed the other way. So they kind of like kind of a dick you around a little bit, it's not out of bounds to be able to say, is there something specifically missing now that we didn't talk about etcetera? And you're trying to say if we're gonna talk about where we are in the future? Dude, like, we'll talk about that a year from now. We need to talk about what's missing, right? This second?

Wil Schroter: I think that's a great point and there's actually a lot of value in asking that question is not only just to get to a point where they're giving you a more decisive. No, but as you remember, as we've gone out and raised and certainly other founders have gone out and raised, If you press the investors in some cases, you're going to get really, really good actionable information such as we invested in someone else that was trying to solve a similar problem you guys should connect. Right? Right? How is that powerful? Now, let me say this founders are incredibly selfless with information, investors aren't as selfless with information because it's not really their job. So they, it's interesting, they have this wealth of diligence information on all these different companies on all these different themes and there's no version of them being incentivized to push all this information out, but they still have it. So going back to what you said, which is okay guys, let's get really specific what do I need to do or where is this thing breaking? You might get a very specific answer and it might be something to the effect of Well, we've noticed there were regulatory issues the last time we tried to invest in this, you should talk to ex founder, going back to the concept of talking to ex founder, those conversations can be really, really meaningful to your startup.

Ryan Rutan: And that's a great point that actually think about how when we were raising money, how many times that actually led us on a very powerful path. I think a good way to assist to rephrase that would be if we don't think that the deal is going to happen or what have you, we can extract value from asking some kind of deliberate questions around what else should I be looking at? A great one I always use is, if you were me, how else would you be? You know, taking this thing further and it allows them to kind of provide advice versus having to defend why, why they're not investing.

Wil Schroter: And look, the reality is just as in any business when you especially when you've got kind of analysts acting as the front line or the runners for this. Sometimes founders slipped by through a relationship or just the analyst is really in love with the concept and you'll get to a point where you're talking to those investors and they'll give you a hard no, and they want you out. So in those situations when they say, hey, I'm not investing in this specific theme, I do think it's appropriate to ask some questions around why aren't you investing this theme or, or is there a pivot that we should be making? But they'll be pretty transparent in their feedback if if they say we're not investing in this theme, thank you so much for coming in, take the queue, right, right, get out of the room, save your pride.

Ryan Rutan: Absolutely. Let's talk about then what the yes answers are, I think, you know, kind of like what momentum looks like, you know, kind of how you can translate things are working. Here's what I would say. Not that it's hard to understand when things are working. I think we should talk about what it looks like when things are working. So you can tell when they're not.

Wil Schroter: I think that's a great call.

Ryan Rutan: So I remember specifically in one of the capital raises that were doing, there was a guy named tom Ball from Austin Ventures and remember Tom said something to me that always resonated. He said these things have a cadence and what he meant by that because I was pushing back. I think they had given us a term sheet at the time and I was trying to understand why it wasn't moving faster forward and we would learn later that they were actually bailing and what he said was these things have a cadence when things are going well, they tend to just fly along and if they're not flying along, it's a problem. And that was with someone who had even already issued us a term sheet and they were having some consternation within the partnership as to whether or not they were going to honor it, not their fault by the way that the world was changing a lot of the time. But here's the thing when folks are interested, they are blowing you up. Here's why If it's a deal you're interested in and you're going to say, take the other 99% of nose and push them off your plate and say, I'm just going to focus on the yes. Then why would you be taking your time getting to it now? Mind you might have a couple other deals you said yes to that. That's totally fair. But generally speaking, the moment you see a yes, you clear your plate And get 100% focused on that. And here's why if you think it's a good enough deal to be able to put all your focus in, you don't want to lose it because you see so few good deals, this isn't like your processing mortgages and they're all the same. You might find one deal out of 200 that's worth leading in on. And so you're going to go all over it. If you're the investor as importantly, if it's that good of a deal to you, your first instinct, it's as good of a deal for everyone else as well, meaning it's competitive meaning I can't wait because if I wait a day, two days a week, I'm going to lose the deal. And that's a huge issue. So if you're on the receiving side and you're the entrepreneur and all of a sudden investor says that this sounds great, we're sending you to the partnership to pitch or you pitch the partnership in the case of a VC. And they say, hey, we want to do a deal, then you know, what's working. Can you think of any use case that isn't were ready to move quickly? That's still a yes,

Wil Schroter: It does happen. But to your point, time kills deals and you can actually kind of watch the reverse percentage of chances of getting funded the more days that go by that you don't have a term sheet.

Ryan Rutan: That's a great way to put it. Time kills all deals.

Wil Schroter: Time absolutely kills all deals. It certainly killed our deal. But it can mean a lot of different things as you're in that kind of purgatory that we were certainly in, which is everything from, we're not as confident in the market, We're not as confident in you guys, uh, you need to bring in other people. So look, man, it can happen, it can absolutely happen. But the likelihood just goes down that much further. What you said before is so accurate, which is VCS are writing thousands. Is that an accurate number of checks a year?

Ryan Rutan: All of them combined

Wil Schroter: thousands. And they're seeing hundreds of thousands of deals. So if there are 1500 to 2000 deals that seemed to check all the boxes to say these are investable and we believe there's a return to be had on these. They're a handful of VCS to write, there's hundreds, you gotta hustle up and, and make a deal happen and kind of guard that gold nugget with your life, so to speak. As you mind that thing out regarding what happens if you're kind of in that purgatory phase. I think that, that founders should be open to the feedback, but again, also recognize, know when to say when in this case

Ryan Rutan: right? And also know when anything but a resounding yes is pretty much no. And I think that's the purgatory people get stuck in because it always looks something like this. Hey, we talked to five investors, three of them said they're interested when we hit these milestones. Another one said the timing isn't great for them right now, but check back later and another one said, hey, this could be interesting, let's talk again. So I think we've got five interested parties, you've got zero interested parties, you've got five people that just told, you know, in a whole bunch of different ways. Conversely, what that would have looked like if things were going well is we talked to three people and they didn't say a resounding. Yes. It doesn't matter what they said. They said, you know, whether it was the, when you hit a revenue milestone, we love it. We're interested. Maybe we'll talk later if it's anything but resounding. Yes. You can just assume those people were No, the other two that said, hey, I wanted to get my partner involved or hey, I'd like to start talking about terms unless you're hearing buying signals like that. They all know there may be a few exceptions here or there. Like you've talked to tons of founders, have you seen kind of the same pattern?

Wil Schroter: It's so rare. You know, you mentioned before we've helped through our fungible services, we've helped founders raise over $600 million dollars and in every one of those cases they get to, yes, quickly, they get to terms quickly. They get to funding very, very quickly. So I mean, I hate to put a number on it, but if you don't get a fast yes. And you're not looking at a term sheet relatively quickly, you've got about a 1% chance by the way, that 1% chances, even if you've had incredibly fruitful conversations in multiple conversations with Vcs and, or VC partners, you're still at a 1% chance because until you see a term sheet or until you see some of those really, really, really loud buying signals, you're still a no, you're in no town. Yeah,

Ryan Rutan: exactly. And the truth is, if you're not sure what you're hearing ask other investors, you know, if you've got a mentor friend, if you've got an investor in your cap table, read them the email you got or convey to them what they said, they'll tell you the same thing again as we said, kind of at the top of the episode, there's really no incentive for investors to tell, you know, ever. So you as the founder us as founders, we have to be in a position where we can kind of take the hint. And I think part of where that starts to fall off a bit is we don't know how to translate it. So we get into this mode where we just start harassing investors for an answer. Right. Which give me your take on it. I've never seen a version where harassing investors led to a

Wil Schroter: deal. Yeah, There's no car dealer version where you're like, come on, lean on the pen, right. It ain't gonna happen, especially as you go further and further and further along and at some point because you know, investors are appropriately busy. You actually might get to a point where you annoyed that investor and or other investors and you can put a little bit of blood in the water that investors also talk to each other and co invest in deals that this founders really, really effing annoying. Yeah. You might not want to work with him. He's blowing up my email. He's calling my personal cell phone. I've told him no. Several times. I'm worried that if he can't take this type of hint, he might not have the awareness to be a great founder.

Ryan Rutan: That's a really good point. And you know, it's not like investors are sitting around saying, oh man, I totally forgot this deal that I absolutely wanted to invest in out of 1000 deals that I looked at. Thank God, I got that one follow up email that reminded me how to do my job. Right. I mean, that's not really what they're thinking. Now. A couple of different use cases that that could potentially apply a follow up email is just a professional courtesy. Thanks for taking the time. You know, here's what I learned. I would love to work with you type thing. And maybe maybe if the situation warrants a second follow up email in a couple of weeks just to kind of to shake the in box a little bit and see whether or not, maybe we crossed streams and that's it. If the investor isn't getting back to you. There's a reason you don't have to sit around and wonder what they're thinking. You can pretty much assume. But if they're not emailing you that the answer is pretty much no. And at that point, all you can really do is your, to your point, it's caused more damage.

Wil Schroter: Absolutely. Now look, there's an edge case here, which is where you fade away and you go through kind of the appropriate and civil communication of, you know, thank you for your time. But businesses change quickly. You know, in six months, you might land a monster partnership or make a big technological breakthrough or some marketing campaign just catches fire at that point. Absolutely. Now, the important thing is it better be newsworthy. Don't email an investor and say, I just hired a killer CTO, right? That's totally subjective. They're gonna be good for you. But if you do email them and you say, we just signed a meaningful partnership with amazon, that's worth it, right? That's worth the investor getting on the phone and digging back into your progress.

Ryan Rutan: You know, that's a great point. There are some milestones that are so significant. Now as the founder, we sometimes have a tough time calibrating those because we're like to your point, I just hired a CTO and that actually was a huge higher for me. But you've got to try to get in the mind of the investor a little bit and say, what's a big deal to us isn't necessarily totally changing the investing landscape for our deal, right? And so like we have to think about it in terms of what would prove that since the last time we talked, our share of market is just changed dramatically or what would prove that some major customer you mentioned amazon Has given us the social proof that was clearly lacking to, to show that this was going to matter. And you know what, it's got to be pretty significant. You know, hiring or signing on 10 customers may not be it unless one of those customers, you know, is at an enterprise level could fundamentally change the business in the next six months.

Wil Schroter: Yeah, it's an easy way to say it. And I've said this to a lot of other founders is if you can show an investor that you have drastically changed demand for your product, they're interested, Right? So that the hockey stick of user acquisition, if you can tell an investor that you've drastically changed capacity and unless you know you're in manufacturing capacity is a big deal, That's not what they're interested in. Right? So, you know, bringing on more staff are getting more efficient is irrelevant because they want to see more users. So investors are very much demand generation focused. And that's what's really newsworthy to them

Ryan Rutan: and wouldn't be the case that you kind of have like a very limited window to provide that one big update. And if it's not big enough, you sort of lose your bullet.

Wil Schroter: Oh, definitely. And don't use it, right? Don't feel like you have to use it. Don't feel like you have to torture something in six months? You know, it's funny. I think that it's a combination of not being able to gauge what's an appropriate update or what's a meaningful update. That's one piece to it. But the other piece is, I hate to use it. It's the girl or guy that wouldn't go out with me and I'm gonna show them how well I've done. So you email anything you can six months later. You know, it's basically your version of a facebook picture of you on vacation just to show them look what you missed. Now it better be something big that they're missing. Otherwise you just look like an absolute fool.

Ryan Rutan: Yeah, I agree with that. Now that I'm thinking about it, we've spent a lot of time here talking about why investors say what they say, how we translate it, etcetera. You know, it's kind of worth. Just also talking about from an investor standpoint. We talked to a lot of investors as well. We give them a lot of advice about how to talk to founders and kind of, you know, how to approach these things differently. So I think if we're going to talk about how founders should behave a certain way. I think it's fair because we actually have a lot of investors who listen, let's talk about how investors should behave a certain way because I think these two things are correlative. What do you think?

Wil Schroter: I think that's Pandora's box. I think it's, it's wildly appropriate and I will do my best. You know, I've been an angel investor, but I've certainly never been a venture capitalist in the traditional term. So I'll have to do my best to think on both sides of the table here because look, we've gotten, I have gotten, you have gotten friends of ours have gotten some really shitty nose and really shitty feedback from investors.

Ryan Rutan: You know what pisces me off is that I feel like investors feel at any level that because I have a check, I have some carte blanche here to be able to just be a jerk or said differently. I can take all of the common respect level things that you'd have in a conversation and throw them out the door because all of a sudden I've got a checkbook and I hate that fact by the way because you see really smart people who have a lot of value to offer acting like arrogant jerks when in fact they should be doing the exact opposite. There should be a massive level of humility in my mind.

Wil Schroter: Now let's go fully robotic here. Right? And let's say that the again, the investors, it's their job to assess and invest in good deals. Okay. And in their mind, the more good deal flow the better. Okay, so if a founder comes in and they act like a total dick, that founder might be wildly talented founder, that was just onto the wrong thing. Okay, actually, here's a real world example it went right, but it could easily go wrong if you remember we were advising a really tremendous apparel company and the Athleisure space, right? That great traction, really solid social proof. And we arranged a pitch with a very notable VC and I distinctly remember we actually help, we hosted at our office and they were in columbus. So they flew in, they were incredibly excited, rightfully nervous, got in there. The pitch was short and the founder who I won't name came out kind of shell shocked and I was like, what's up? You've got a great business and he's like they said, we can never get to 100 million. This is hyperbolic, right? It's not a ventura ble deal, right? It's not a venture backed deal, totally hyperbolic. Now two ways said founder could have gone with this and I'll circle back to why this is important one is he, She says, screw you. I'm going to build this thing big anyways by the way they did and they sold to a private equity company. So so shame on you. VC. That was a dick. But the other is you take this talented entrepreneur. They got their company to about $2 million dollars run rate and he takes his ball and he goes back and works in the corporate world, right? You basically eliminated the founder by being hyperbolic and being a dick that could otherwise help bring more deals. I can't imagine how many founders that were relatively talented. Heard one of these hyperbolic statements or one of these asshole statements from a VC that went back into corporate world, you know, never to be seen or heard from again in entrepreneurship world, Right? So what they're doing is they're actually shrinking the funnel of deal flow anytime they say something so dangerously hyperbolic to push somebody away from entrepreneurship.

Ryan Rutan: Not to mention you couldn't possibly know right. I mean, here, here's what killed me whenever we'd raise capital, let's say for our own deals and we raise capital for lots of different companies. We'd sit in the meeting. This would always happen. We explain kind of what the idea is, what the addressable market is, all the stuff that you do. And within like five minutes there's someone on the other end of the discussion. The investor telling us how our business works and look, if you had just come out of that business, you know, like you literally came out of that industry makes total sense. I'm all ears. I'm taking notes. But if you have literally had five minutes of instruction on how this business works and now all of a sudden you're telling me how it works. That's complete bullsh it, it's complete bullsh it and it happens all the time again. It goes back to this entitlement of, I'm an investor. I've got a checkbook or I read something about your industry or I heard something about a competitor and therefore I know how your business is going to end. No, you

Wil Schroter: don't. You

Ryan Rutan: have an opinion and you happen to have a checkbook attached to your opinion and you can take that opinion and choose not to use the checkbook, but don't pretend to predict the future. And to your point, it's destructive as hell. And it kills me when founders take that to be gospel.

Wil Schroter: You know what man? It's, it goes back to just stay in your lane. Um, you know, I remember getting strategic customer acquisition advice from a newly minted partner that had never done customer acquisition and I was thinking brother, stay in your lane. You know, you've got certain things that you're looking for in what would make a deal investable and how you can pay LPS back, but don't talk to me about customer acquisition. You've never done it into your point. It's destructive. So from an investor standpoint, if there's a level of transparency to say, you know, this is what we're looking at. And this is where we're challenged. Right? So let's go back, let me just go back to the apparel company. Look MR apparel founder for us. We need to make these astronomical returns because we've raised a very big fund. So $100 million is very much our bottom of the portfolio success story. Okay. That's our single and in our research, we very rarely seen in apparel company that can get to that type of multiple. That can create that type of liquidity to pay us out. So that's where I'm hesitant. Wouldn't have been kind of a cool answer

Ryan Rutan: or how about this? Just ask questions, pretend that no matter how much you think, you know that this is an opportunity as an investor to learn more or it's often very hard to offend people with questions. Right? In other words, if you already know the answer and by the way, we coached countless founders and even if I know the answer to what they're going through, whether it's fundraising or whether it's customer acquisition product development, whatever it is, I always make my statement in the form of a question here is why because if the founder is smart enough and they almost always are, they'll understand why you're asking that question, but it doesn't make them feel like a jerk. For example, if it's clear that their customer acquisition budget is way too low for where they're trying to go. I would ask a question like, how are you calibrating your customer acquisition budget? Great question, right? You're saying you're going to get $200 million, but you only have $50,000 in customer acquisition. Can you explain to me? You know how you're thinking about utilizing that. And this is a leading question and how maybe you need to increment that in the future, right? That's very different than saying $50,000 is ridiculous. There's no way you'll get to $100 million, right? That's an accusation.

Wil Schroter: And you buried some good advice in there to within that question, which is, you know, help me understand how you can scale on this type of budget. What you're really saying is, in my experience, I've seen very few companies scale on this type of budget, but you did it in such an elegant and kind way and you'll get some interesting answers to. So let me keep beating up the apparel company for a second in a positive way because they've done so damn well when john q investors said there's no way you guys will get to $100 million if he would have said, It's hard for me to imagine this company getting to $100 million Y&Z. And that's why it's challenging for us to justify an investment based on kind of our economics as a fund, right entrepreneur rightfully would have said, actually, There are here are 3-4 analog companies that are now doing 26-28 million dollars a year. Here. Here are the investors that were in those deals and one of these companies is being primed for I. P. O. Well, investors know a lot. They don't know everything, right? So that's just meaningful diligence information for the investor to get as he explores this theme or this vertical a little bit further.

Ryan Rutan: You know, something we did in one of our capital raises that worked so damn well. We provided a document pre pitch and during pitch that basically said, these are the questions you should be asking, right? It was brilliant because it essentially gave them permission to dig into things without having to look silly because we told them to ask those questions and they weren't softball questions. They were really specific questions that showed that we were confident enough to be challenged on the premise.

Wil Schroter: Well, I love that and we did do that. We had, yeah our prop level diligence stock that I toiled away out for the better part of three months. It was like 400 pages and I knew everything that was in there. Every page to reference. Every diligence supported factor reference as well.

Ryan Rutan: It was great about our Torah level diligence stock that we carry around with us as well as the the F A Q so to speak that we carry around with us was that we said, please ask us good questions right. What was interesting is I wonder there's no way of knowing, but I wonder how much of that not only invited them to ask questions which showed we were willing to be vulnerable in the right way, but also prevented a whole bunch of ridiculous statements that would have otherwise come if we were trying to fill that same hour.

Wil Schroter: I agree we got in front of well said differently. We educated them on a fairly complicated space in the company that you're talking about specifically, which avoided some of those gnarly hyperbolic accusations and or passive aggressive questions.

Ryan Rutan: Okay, let's stick with the passive aggressive because you know, that's my jam, right. One of the things that I learned through getting our asses kicked over and over was that it's not out of bounds. Two respond to a statement with a question. For example, Junior partner goes in and says there's no way you'll get to that market valuation within three years. And instead of responding to that defensively, the best way to do it is help me understand in your experience,

Wil Schroter: we're we've seen that to be true because I've seen you do this so many times

Ryan Rutan: and how often does somebody come back with what their experience

Wil Schroter: actually was Absolutely like

Ryan Rutan: never. Right now there's a couple ways you can, you can play this one. You can say, well, I don't want to be like, you know, a caustic jerk. A couple of things that are worth noting first. If you don't show that you can stand up to inquiry and again, in a very respectful way you lose. Remember, the investors are testing your ability to stand up to inquiry. It's a big part of what that meeting is about. The second part is the moment you basically force somebody in a very polite way to check their work to show their notes. You mysteriously don't get many of those out of bounds questions anymore.

Wil Schroter: Also very true. I hate to call it a weapon in some cases you've yielded it as a weapon, but I think it's more of a tool and I agree with you. What it does is it starts to put some rules around the conversation.

Ryan Rutan: It does. And the problem is if left unchecked, anybody can start going off on a huge, this is how the world's going to end. This is how I know the answer to everything, etcetera. But the moment you say no, no. It's just because it says whatever ventures on the nameplate doesn't mean you actually know that. And it doesn't mean just because you made a couple investments that you have the foresight to know where they're all going to go. If you did, you'd make all good investments and most of your investments are going to fail. So that's clearly not true. So if we're going to talk about why you believe this statement is true, it's within bounds. In fact, it's actually a really smart technique to start to dig into why they feel that. And it turns out by the way that in many cases when we did this, we found that the fact basis they were using for what was about to be a very errant assumption. Just needed a little bit more info. Right? So maybe they didn't ask enough of the right questions before they made that statement. This isn't about proving them wrong. It's about to say, you know, maybe we didn't fill in all the blanks.

Wil Schroter: Sure, Right. Yeah, absolutely. And

Ryan Rutan: this is an opportunity to see where we missed. But again, the other side of it is it's a great defensive judo move so that you never necessarily have to get stuck. However, every now and again, the investor will say, well, I actually made an investment almost identical to this. You may have heard about it. It's called Ebay,

Wil Schroter: right? You're talking about a real conversation we had.

Ryan Rutan: Yeah, yeah, we are. And which gives you another opportunity. Okay, again, that's why the questions are so powerful. It gives you an opportunity to say, you know what? That's a really good point. But it's been 10 years since ebay went to market, here's some things that we've been thinking about that we think have changed and by the way, great way to respond to these types of questions are. It's funny, you should say that that was the first question I had. So we're thinking the same way and here's how we started to do that diligence. If you put yourself on their side of the table, you don't have to defend it anymore because now you're saying yes, I actually had that same thought that it's a very logical place, ergo we think the same way also about to give you a very specific answer because I thought about it the way you did. All of these little techniques are all about shaping the conversation, but also starting to figure out whether or not yes means yes, no, means no.

Wil Schroter: Absolutely. And look, there's a something that investors do that comes off as being kind, but ultimately can be detrimental. Specifically. We talked about it before to folks like us, which is saying maybe which just kind of drives you right into purgatory town.

Ryan Rutan: It doesn't. And you know what again, we talked about this top of the episode, people are saying investors are saying maybe because they don't want to say no, because they don't want to shut themselves out of a deal that could be something later. But look, if you're an investor a better way to articulate this would be. And this is about being fair to founders and I think it makes you a better investor right now. The answer is no. And with but that doesn't mean we won't invest in you ever, but right now we don't see ourselves investing in this round. Um, here are the types of things we like to see and know that our door is always open. This isn't the last conversation we expect to have right, you know, who told me that the first time rule off Botha at the managing partner now of Sequoia, I'll never forget this is before he had done the YouTube deals, this is a long time ago. This is like maybe a 2001, he had just come out of paypal as the CFO working for Ellen and Peter Thiel and we sat down with him, We were pitching a business we're doing at the time and we got through the partner pitch with mike moritz and in that whole crew we got eviscerated. To be fair. I realized about five seconds. I was definitely not the smartest person in the room. In fact, I was

Wil Schroter: like the dumbest person in the

Ryan Rutan: room. I learned a lot of lessons that weekend. But here's what he said. This is why I think they're so good. He said will, by the way, this was the same day. So we pitched in the morning on a monday by monday evening. He was calling me with this feedback. He said, will, we've pitched it. We thought about it, thought through the answer right now is no. And I love the way he said it. The answer right now is no, he said. But things changed quickly and we like you. We like, we like the business and we want to stay attached to this. What a brilliant way to say no, elegant in definitive.

Wil Schroter: I liked it a lot. And the challenge is when an investor does the kind no and gives a relatively pie in the sky or ambiguous instruction, which is two extra run rate or three extra users or come back when blah blah blah all of a sudden as entrepreneurs, we take that as our North star.

Ryan Rutan: Exactly.

Wil Schroter: And in some cases, you know, you're talking about the wrong North Star, you have a vision for the business, you have a vision for how the business is gonna grow. And all of a sudden you have a conversation with an investor and he puts a very specific metric in front of you or they don't really put it in front of you, they dangle it a little bit and then you shift and we did this by the way, and then you shift the entire focus of what you're trying to achieve within your business just to accommodate That check box and you can lose 12 months of work.

Ryan Rutan: Yeah. And without realizing that they weren't being that serious. That was like after a bad day, call me someday. You don't really mean call me. It's a platitude way of saying, don't call me. But I think from everyone that that we've spoken to investors startups, etcetera, we generally want to believe that there's a deal that there's an opportunity there. But I think that the dialogue that we've learned to create kind of the narrative between the investor and the founder, it's just so fundamentally broken that it's just do kind of like a new set of options. I think those new sets of options would be one investors being more definitive in there. No. You know, it's at the very least because you know, you're talking to a first time founder. She's never done this before. Don't try to like play your mind game with her because you're gonna mess with her. Like you said the right. I think another is from the investor's standpoint. We are your customers, right. We're not just some person that happened to wind up as a side note to your business. We are your business, treat us with respect, ask questions, don't pretend you know everything. And I would say the last piece to this and I really can't emphasize this enough is When we walk into these meetings, Let's agree that there's a 99% chance that the answer is no right. And that's okay. And that's how things go in the unlikely event that we fall in love when we're going to get married. That's awesome. But let's not assume every day has to lead to marriage. Let's assume that we're going to go on lots and lots of dates to find out who we're looking for in hopes that eventually when all the stars align we nail it.

Wil Schroter: 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

Ryan Rutan: hope you'll continue to join

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