Ryan Rutan: Welcome back to the episode of the startup therapy podcast. This is Ryan Rotan from startups dot com, joined by Will Schroeder, my friend, the founder and CEO of startups dot com. Will we talk to lots and lots of founders? It's kind of most of what we do, right. And a lot of them are raising funds, planning on raising funds, think fundraising is somewhere in their future, but we want to unpack something really important today, which is that not only are you out chasing funds to get things done, you're really committing yourself to a very specific path for your startup and one that doesn't have a whole lot of exits except for the obvious one, right? And, and so this is something that I feel like founders don't really understand all the time or do they understand that they think there's more optionality at the end? But is that really the

Wil Schroter: case? Not really? I mean, it's kind of a one way street that, that's the problem. I think what we should talk about today is there's nothing wrong with raising capital. We talk about this all the time, but for folks that listen to this podcast. If you've been listening for a long time time or uh this is your first time listening. We just try to challenge the common narrative because what we find is people follow blindly along a certain path. And then later on, they get hooked somewhere else and they said what just happened, it's all we're ever trying to do is just trying to make you understand the entire continuum of decisions here. And when it comes to raising capital, the raising capital part always makes sense at the beginning. Right? That makes a ton

Ryan Rutan: of sense. Have no money, need money, raise capital, have money. Great. Yeah.

Wil Schroter: Right. It's great. Gonna be a party, pop bottles of champagne part. Everybody enjoys what we're gonna talk about today is the hangover man. Everything that happens thereafter. All right. So before we get into this next topic, I just want to let you know what we talk about here is like 1% of the conversation, you know, really, this conversation is going on all day long on online at groups dot startups dot com where Ryan and I pretty much talk endlessly with founders about every one of these topics. So if by the end of this discussion, you like the topic and you want to dig into it a little bit more with Ryan and I just head to groups dot startups dot com and we'll pick it up from there. So I think what we should talk about we should talk about once we decide to go down the road for raising capital, what can't we undo what is permanently changed? What can, can we not get out of later? Because I think if we haven't done this before, we just don't know, why would you, how would we know what could change about the company or our path or optionality that we can't, you know, make better later. And I think that's probably worth digging into right away.

Ryan Rutan: Yeah, I mean, we, we did an entire episode on talking through aiming for the probability of an outcome versus just the size of an outcome. And I think that where that relates here is that you exponentially or at least geometrically reduce the number of options that you have for the end of your startup or how it continues to run the minute you decide to go down the fundraising path, right? So this isn't as much of a probability in terms of the, the, the singular outcome, this just reduces the number of even potential outcomes that you have, right? By definition, when we begin this fundraising process, we sort of have to continue, right? We, we jump on the, the expressway and now we skip a lot of exits that other people may have been able to take. We get where we're going a little faster potentially, right? Fundraising goes well, but it certainly limits all of these other potential options we had. Right? And, and we can maybe walk through some of those so that people understand a little bit of what they're giving up. Not just what they're getting, what you're getting is obvious. You're, you're getting a very different balance in your bank account. That's great. But what are you giving up when you do this?

Wil Schroter: Well, one of the biggest ones is that we're fundamentally limiting our outcomes. So let's play a couple of scenarios out, Ryan, you and I do a new startup and there's three outcomes aside from failure, which is the most probable,

Ryan Rutan: we just skip the largest probability go on.

Wil Schroter: Right. First outcome is we end up building a $3 million business that generates a million dollars of profit per year and you and I just take our distributions in that profit, right? And we're living good lives. Second outcome is we get an opportunity where somebody wants to buy the business for, let's say $10 million. And that would be a life changing amount of money for us. And, you know, we don't be all about doing it assuming there are no other, you know, barricades. The third of course, is that exponential exit. And that's the one we're thinking about when we're raising money. I just want to point out from a probability standpoint if we were just trying to think of like a funnel at the top of the funnel is the probability that we're gonna have that, you know, $3 million business throwing up a million dollars exponentially higher than the next one. Which is, we'll build something that somebody will pay $10 million for, which is exponentially higher than the, we're gonna go. IP O so every single time we decide to raise money or even really the first time, but certainly each time we start upping the ante with successive rounds, we make that funnel, smaller and smaller and smaller. What's funny is that's not how we're thinking about it. We're thinking about the more capital I raise, the bigger my outcome is going to be. Yes. At a net dollar standpoint, it's a bigger outcome. But what we're talking about is the probability. You are shrinking your probability for an outcome by expanding your probability for a big outcome. Those are not the same things. They're, in fact, they almost kind of run in opposition

Ryan Rutan: and you're eliminating the other two outcomes. I think that's the, this is the part that we just don't really think through at the time. It's a one way street. Once you pass that exit, right. Once, it's like we can no longer take that $3 million business and just sit on, you know, these lovely distributions every year. We talked about this other podcast, right? If you get $500,000 every year over a 20 year period, that's the same thing as that $10 million exit, right? With additional benefits, right? Uh, from a tax perspective, if there's, there's all kinds of things that happen in there, but you can't do that right. You raise funds. Uh You go back to your investors and be like, hey, you know, thanks for all that money we took on in the beginning. It was really sweet of you guys. Uh We really appreciate it. It's now built uh will and I a lovely lifestyle business and, and we're just gonna coast from now on, you know, be sure to follow me on Instagram. I'm gonna be taking cool pictures of my meals and my vacations while collecting distributions and we're not gonna pay you anything because it doesn't really work that way. Uh You guys cool with that. What's the typical response to that

Wil Schroter: will? Well, here's the thing we have to understand, there is a big spectrum of types of investors and our outcomes change dramatically. So it's not one size fits all. So for folks listening, they may not understand that I just wanna be, be clear if we're investing with friends and family, Ryan, you and I build that $3 million business throwing off a million dollars. We just may send Uncle Guido his $10,000 every year and he may be happier than hell that he got it right. And that could work. It doesn't mean all investors will have this capability. However, chances are as we start moving up the stack, as we talk to funds, as we talk to syndicates as we talk to angel groups, et cetera. It doesn't quite work that in that way anymore. What a lot of folks don't know. A lot of founders don't know is you almost can't give distributions to venture capitalists. This is not the way their funds work. They have a very limited cycle where they have to take in all the profit or not distribute it back out and go. They're not long term partners. That's not the way it works. Now, you might find some high net worth angels that are kind of cool with that deal. They're like, hey, well, the company didn't become what I thought it was gonna be, it's not gonna distribute. So at least let me get some ongoing cash. That's not the worst outcome for

Ryan Rutan: me didn't lose like my other five bets. So this is

Wil Schroter: OK. Correct. And really what we're talking about is once we get past pre seed, which is the very, very, very first money you raise usually 2 50 K or less. And we get into seed, which is anywhere now from like 2 50 K to five million. Right. There's a big, big range in different players at each end of that spectrum, we start to lose some of this optionality, we start to and once we get to BC, there is no other optionality, there's no distributions being had or anything else like that. And when we look at startups, the founders in the early stages, we don't want to miss the opportunity. We want to raise that money because what if this is that billion dollar opportunity? And we love that. That's awesome. It's super exciting. We do whole podcast talking about how exciting those times are. But what we're saying is we have to understand that now it's go for the moon or

Ryan Rutan: bust. Yeah, you're throwing the Scale Mary at this point, right? Like you only have one shot, right? You got to go for it at that

Wil Schroter: point. And have we seen instances where the founders have gone and like bought out early stage investors? Yes, it happens. It happens. So rarely, I could probably name on both hands the exact companies I've known that it's happened to. So it's not that common. Are there cases where a company will go on to raise a small amount of money, let's say less than a million dollars, but actually have a pretty good exit after that. Sure, because it only raised a million dollars and you could return more than a million dollars on say a $10 million sale. But for most startups for most founders and this is what we keep coming back to. We have to understand that once we go down this path, we have to just keep going down this path because our options don't change. We might as well just raise more money for sure.

Ryan Rutan: I wanna touch on one more thing here. One more thing that actually limits all these decisions and this one is way less obvious, but it happens all the time. And that's the, the founder doesn't feel comfortable, right? Emotionally. They're like, man, you know, Uncle Guido gave me the money, you know, that angel group invested in me. I can't just sit on my hands and collect distributions, right? A lot of times it's the founders themselves who don't feel comfortable with that outcome because they feel like they let everybody down, they may not even consider it right. I've seen founders push right past that $3 million business. And again, throw the scale marriage, they're like, I'm just gonna, I'm gonna risk everything I've built, right? And we talked about this a couple of weeks ago about creating these save points so that you stay safe, right? Keep yourself whole from this point forward, then push the risk uh tolerance a little bit further, but make sure that you're gonna land. Ok. I've seen founders completely throw that away such that they can try for that larger scale so that they can achieve that agreed upon outcome that they have with those investors. And so whether or not they're even getting the pressure externally, they do it themselves, right. And it's such, it's such a hard outcome to watch.

Wil Schroter: Right. Well, I think from our standpoint, of course, in the early stages, we don't have money, we need capital, we're seeing those big opportunities. It seems like all upside. We just have to recognize that if we're going to go down this path, we're committing to that, that one outcome lifestyle and then the other options aren't very good for us anymore. Whereas everyone else gets to, to enjoy success at a lot of different levels doesn't mean there's little get as big. They just have a more a higher probability for that success. I think the other side people don't think about is when we raise capital, when we take out any debt whatsoever. But specifically when we raise capital, we have a new boss and as people founders who don't like being told what to do. Having a new boss is kind of shitty at first. It doesn't sound like that. Here's what it sounds like. Well, no, I'm raising from smart investors and they're gonna help me grow my business and they're gonna give me great advice because I don't know what I'm doing. So all these investors are gonna jump

Ryan Rutan: in and the smart money, the value add investors. Yeah. Oh yeah,

Wil Schroter: they're, they're gonna, yo to the shit out of me, right? And, and we, we, we honestly believe that that's going to happen because the person we're talking to sounds smart, they sound more successful, they sound more sophisticated and in our minds, we're not getting a boss, we're getting an advisor, we're getting a mentor, we're getting a teammate that's on our side of the table

Ryan Rutan: that Yoda analog actually carries out as long as you only include the parts where he's clinging to your back and shouting into your ear while you run through a jungle. Right? That part's accurate.

Wil Schroter: Yeah. No, look exactly what I was thinking of too. But the thing is what we don't realize is that person sitting across from us, the person who we're thinking is going to be our ally or partner or what have you. Is our new boss? Why is it our new boss? Hold on a second. What? No, that's not true at all. That's not our boss. Our boss has to have 51% of the stock because I think about the world like 19 twenties monopoly. It's not at all how it works. Here's how it works. It's the golden rule. She who has the gold rules, it's the, they have the gold. You do not. And when you say, oh, well, once they've invested, it's my money, et cetera. You gotta read that, that operating agreement a little bit more closely understand how voting rights work. Just for a quick pass note that when an investor invests, they often, in almost every case, get a whole set of rights where they can basically determine whether or not you can make key decisions. Now, it's for their protection to be clear, it's so that you don't take their money and screw them. Right. So it's there for a reason, but those are decisions you are not solely allowed to make anymore. Er, go, they're the boss. Anybody that prevents you from being able to make your own decisions is by proxy, a boss. And I don't think founders understand how that actually works.

Ryan Rutan: No, I, I don't think so either. We see this, we see this fairly frequently, right? Where founders will come back and they're like, look, everybody was cool at the beginning again when we're popping bottles of champagne, everybody's excited about the idea. Cool a year into this. We haven't hit the benchmarks when we haven't hit the scale that we thought we would. When you know, we're thinking, do we need to raise some more money? Lots of other things are happening. Those investors are gonna review those protective clauses and they're gonna start to say like, do I need to step in? Right? I think this is another important part. They're like, they don't want to, right. This isn't something they're like ha I I wrote this into the contract so that I can begin making. I can become the puppet master. They don't wanna do that, right? This is not what the intention is, this isn't investors being evil and sneaking stuff into the operating agreement so they can future control your life. They don't want to do that. But if they lose faith in your decision making ability or they see that you're not, you know, living up to their expectations and they see an opportunity to do so. They will take that Right. They will defend their money before they defend your pride 100% of the time. Right. And why wouldn't they?

Wil Schroter: You know, by the way, I just want to mention if, what we're talking about today sounds like the kind of discussion you wish you were having more often. You actually can, you know, we're online all day, every day working through exactly these types of topics with founders just like you. So any question you would have or maybe some problem you just want to work through. We're here here and we love this stuff and we're easy to find, you know, head over to groups dot startups dot com. And let's just start talking, you know, it's so funny. I don't think founders appreciate what just the influence of an investor has. I'll give you an example. Last night, I was watching a documentary on HBO that Elliott turned me on to about the life and times of Carl icann, the corporate raider and I can, would go into companies as a minority shareholder, but be so annoying, so contentious that he would get founders fired on a regular basis for decades, right? In his mind, you were doing the wrong thing. He wanted to exercise a lever of control over you over his money. Now understand in his mind, he's doing it for the right reasons. He's just, he comes in and he says, look, I put money into this company. I'm a minority shareholder. So be it. But I think you're doing things wrong. I want to give you a kick in the ass. That's exactly what investors can do. I can own 2% of the company and be as royal of a pain in the ass to your life for the rest of your company's life as if I had 50% of the company. Trust me complaints cost the same through email no matter how much of the company I own. And I can a lot of other people, including all the other investors, we are not on our own anymore. It is no longer our ship. We are at best a copilot and in many cases, we're in the back seat to true decision making. I people understand that. You know what I

Ryan Rutan: mean? They don't, I mean, obviously, like Carl managed to pull this off for decades, right? You have to wonder like at what point were people like they find out that he had bought a minority stake in the company that had just grown, right? These are publicly traded companies, you can't block it, right? But again, like just to, to point out kind of how, how blind we can be to these things as founders, this happens serially, right? And Carl is not the only person that's doing this kind of stuff again, like, you know, he probably wasn't mal intended. He just thought like I'm, you know, this is, this is my money I'm investing in, I want to exercise this modicum of control that I do have and I'll use whatever pressure points I can find to start to influence and control decisions. That was a really, really extreme example where he was actually ousting CEO S and founders, but this kind of stuff can happen, right? And that's, these were, these were big companies with lots of other eyeballs and lots of other investors. So imagine what happens when the one person who's put money into your company wants to come down on you, it's gonna happen,

Wil Schroter: changes, everything changes everything. And it would be totally unrealistic to think that nothing will change. They'll just put money in and go away silently. It just does not happen. If things go really well, they're wanna know your every move. If things go really horrible, they're gonna wanna know your every move. Either way, they're gonna want to know exactly what happened to their money and they're gonna be very present in that entire discussion. The second point I'd make up or present rather is that it's just not our company anymore. The analogy I would use Ryan is once we take on investors, it's like taking on a roommate like it was our apartment. But now it's kind of our, you know, our apartment solely. Now it's our apartment collectively. Right? Is it a roommate

Ryan Rutan: or, or did you invite a vampire across the threshold? Would be my question, right? Like how, how, how how extreme is this? Right? And it can be. And I, I think this is a and is it just, here's, here's a question for you will because you've got far more experience in this than I do. Is this a situation where this is a continuation of that control of the investor or is other things happening at the same time where this is no longer just our company? Like what else is going on? At that

Wil Schroter: point? I think when we first get started, it doesn't occur to us because we haven't lived it yet. How many things we're not necessarily gonna agree on again. It goes back to the roommate at first. Uh This person's really cool. He used to hang out all the time, but living with them is very different. I can have 10 great investor conversations. But the moment they invest, everything changes because real things are on the line. It's just no different than when people get married. Once it's real. Once there's kids involved and everything else like that, the relationship changes completely. This is that and all of a sudden, what was ours? Not just our decision making capability but but our outcome, et cetera is now also someone else's outcome. And all the decisions we have to make can't be solely aligned to what we care about. It also has to be aligned to what they care about which by the way may be things that we don't agree on whatsoever.

Ryan Rutan: Right. Not that we just don't care about them. We might care about them in the opposite direction, the opposite direction like we care to not have that happen. But this is an outcome that they're gonna try to dictate.

Wil Schroter: Let's take our podcast. We don't run ads on our podcast other than our infinite loop of uh founder group promos. Right. Yep. And so we don't run ads now, if we had investors that said, look, the podcast does well, that should be a big revenue source for you. And we think you should be running ads. Ryan and I don't want to run ads. That's the point. That's why we don't have it, right? We don't want guests, right? That's why we don't have it. And so we get to make those decisions because we own our company, we get to do whatever the f we want, right? The moment an investor comes on board and they say, hey, you guys are behind on your objections, et cetera. They get to meddle in stuff like this. They get to make us do shit we don't want to do and it doesn't make them bad people.

Ryan Rutan: Next thing you know, will and I are selling mattresses uh online like I how many, how many mattresses are sold by podcasts? You, I want to know this. Like everyone, I listen to somebody slinging some, some airship mattress to me. Like I just

Wil Schroter: don't, I'm sure of it. It's not our company, that's the point. We're a participant in the company. We're part of the team, but it ain't our team. It's everyone's team and I can guarantee the other new players that we just recruited and we just, you know, sold some of our stock to are not going to be aligned with us from time to time, we'll be aligned. But generally speaking, what they care about is getting their money out. What we care about is having a good outcome for ourselves and for our people that's not necessarily aligned. Both those sound positive, but how we get there or what we give up to get there are very different. Ryan, you and I wanna run startups dot com in a very specific way that suits us. We wanna make sure all of our team gets to live a life that they really enjoy. We don't want to slave drive our team and push them, you know, harder than, than they're supposed to be. And because of that, because of that, we get to make those decisions, we get to make those determinations. If we had an investor that felt very different, that thought we were behind plan that we were giving up opportunity that we have a fiduciary duty to be able to drive more revenue, et cetera. And they wouldn't be wrong. By the way, we wouldn't get to do half the stuff we get to do. We'd be in a very different position and frankly, I don't think we'd love working here.

Ryan Rutan: No, that's the thing. It completely changes that thing. I I want to drive at a slightly subtler point here that separates this entire thing from the investors just a little bit, of course, that influence is still there. But I want to talk just about the impact that acceleration has, right? So forget about whether this is being driven by the investor or not or just the fundamental desire to grow the company faster. This can also drive this feeling of it's not our company anymore, right? You reference this, well, when you go back to the blue diesel days, when you guys went through these really rapid scale periods, you all of a sudden were riding up in an elevator full of people you didn't know, right? So this also drives a huge amount of this feeling that it's not my company anymore. I don't even, I don't know these people anymore. I don't know all of our clients. I don't know everyone who's involved in in this from a production standpoint or on the receiving end at the client level that can have a massive impact too, just this decision. And again, once you decide you're raising funds, you're committing to this accelerated path, right? We gotta, we gotta scale, we gotta grow and we gotta do it fast. And that alone has this somewhat hidden agenda of taking away the feeling that it's our company because things start to grow fast. We're no longer involved in decisions in the same way. We were. To your point, we may not even be able to do some of the things we wanted to do as a company because we don't have the luxury of time to do it in the way we want. We have to do it in a way that's most cost efficient, most time efficient, most scale efficient. Right. This takes away some of these decision points within the company that can make it a joy to run or make it the opposite. So I think that's really important as we consider all the impacts. It's not just gonna be some ham fisted investor telling you, right? This is just now the nature of the path that we're on and it's going to change how you feel about your company. Right? I I know very few founders who were just like took on funds and to this day, it still feels like the small team I started with and everything is just, you know, perfect all the time. I don't hear that very often, right? It always fundamentally changes how the company operates. Ergo, how the founder feels about it, right? And how we feel about the company has a lot to do with how much we enjoy running it and the final success of the company too. Right? I

Wil Schroter: think we think about what this will be like, we've raised money and things are positive. You've got to understand. They're typically not very positive things go horribly every single time and this isn't a doom and gloom. This is just the nature of running startups. There everybody goes through it. There's nothing wrong with it. Right. It's part of the business. You talk to any successful hyper successful startup. They're gonna tell you about a dark time in that startups history where things weren't going very well and they had to eat some shit. Now, imagine those are the best startups, right? What that looks like for everyone else. What happens is we take on the capital and at first we can't do anything wrong because the greatest thing about raising capital is at first it erases any potential mistakes. We make a hiring mistake doesn't matter. We got a bunch of money in the bank and we just got started, right. Everything feels like a victory, but then things settle in a little bit. Pixie dust wears off a little bit and all of a sudden all of a sudden as, as the founding team set up, we actually have to make tough decisions. We have to let go of people, we lose customers, we have to raise more money and all of a sudden things aren't so, so shiny and rosy

Ryan Rutan: anymore. Not quite as fun as it was before,

Wil Schroter: right? And this is what it means to raise capital, this is what it means to take on investors. Not at the beginning when we're getting to pay for stuff to the other side of it once we're into it and what the day to day operations look like

Ryan Rutan: once we've paid for all the stuff and we have to show that paying for all that stuff actually had an impact. Right. This is where it gets less fun and

Wil Schroter: statistically whatever we said we were gonna do, we won't do. Right. It's easy to put in a pitch deck. It's really hard to pull off because there's a million unknowns that, you know, no matter how hard we, we plan, we just won't know until we actually get. There. Point is though, once we get to a point where the business is starting to kind of hit some rocky periods. Now, all of a sudden that's where investors start to make us understand that it's not our company that we have a fiduciary duty to them. We have fiduciary duty to all of our employees, which we've always had. But this, this one gets a little bit different. At least when Ryan, you and I run the company, we can make key decisions that we think are in our best interests as well as the employees. Now, imagine we no longer have that, that decision making capability. In other words, now, we have to grow startups dot com at three X per year or else or else you'll find someone else that can

Ryan Rutan: when we're running the company, right? It's, let's just say we're running it based on cash flow versus, you know, we're bootstrapping and we're bringing people on. Right. We're usually bringing them on with the understanding that we'll be able to continue to pay those folks. When you take on capital. In most cases, you are going to accelerate spending beyond your income. And in fact, a lot of funded companies have no income yet or they're not even close to break even they just continue to raise, to make up those shortfalls. You are essentially inviting people onto a sinking ship. So that fiduciary responsibility has a far greater outcome if you don't get things. Exactly. Right. Because when you have a burn rate, there's an end date. Right. There's an expiration to this whole thing and you're inviting people to come on board and work for, you, work with, you grow the company and if it doesn't all go to plan, then some of them go to pasture. Right, or all of them. And, and this is a very, very different scenario and in terms of the, the, the monkey on the back feeling this one's pretty damn heavy.

Wil Schroter: It is and we have to, and going into it that again, this is part of the package. I think the problem is, you know what we see in the, in the store window is just the nice part where we're getting money. We don't understand the entire package. Like it's a bag

Ryan Rutan: of money.

Wil Schroter: Yeah, exactly. That, that comes with it and this is what every founder deals with this. This isn't like, this is a worst case scenario. This is just the way it goes. Everything we talked about here just now was exactly what will happen. There's almost no other version and that's fine. Again, if we know what we're signing up for, if we're getting to a point where we're thinking, hey, you know, I think I want to raise some capital but boy, some of these things sound kind of gnarly to me. Maybe I won't deal with them bullshit. 100% bullshit. It's gonna deal with all of them and probably worse than we're describing. And that's OK. That's part of the process. So long as you know what you're signing up for what we don't want to have happen. And the reason we do shows like this is we don't want people with broken expectations where they hear the startup narrative, the best case scenarios, the big outcomes, et cetera. And they have no idea what actually happens within a company ready to raise capital right now and you're looking into it or you're close to signing a term sheet. Just know that this is the cost of that capital. It's not just the equity, it's everything that we just described and if you're down for it, great, just know that it's pretty much a one way street. All right. So that was fun. But let's actually keep this conversation going. You've heard what we think about this, but, you know, Ryan and I would really like to hear what you think and we're online like all day long, pretty much talking about every startup topic you could think of from fundraising to customer acquisition to just really how to get all of this crazy startup stuff out of your head. And there's tons of other founders just like you, they're weighing in on these topics. So you'll get a chance to just hang out and meet some really smart founders. We're also super, super easy to find you head over to groups dot startups dot com and let Ryan and I hear what's on your mind. Let's get to know each other a little bit and let's just start having more of these conversations.