Ryan Rutan: Welcome back to the episode of the startup Therapy podcast. This is Ryan Rutan joined as always by Wil Schroder, my friend, the founder of startups dot com, uh will hypothetically speaking, hypothetically everybody listening to this hypothetical uh we run out of money and nobody wants to give us any more, what do we do

Wil Schroter: run for? The hills were in the No man's land of funding time to go, You know, no one ever told me I was there. That's the worst part, right? It's like, I I I thought like we'd raised a bunch of money, it's just for multiple startups. We'd raised a bunch of money and I thought at that moment that, you know, we're just gonna get more money, but you go out to the market and then like anything else in life at some point, you start to look around and realize it ain't happening differences. We've talked about this like long ago in another podcast was no one tells you right there, you're waiting for that moment where somebody comes in and they're like, okay, you know, you pull you out of the game, you know, coach has got a sub you out kind of thing and and it doesn't happen and you're just left their like again in no man's land and it sucks and I think we should talk about, there's a lot of people that either are in that spot right now or think they might be and probably will be, it sucks, but it happens. Uh and what do you actually do about it, right? And so let's let's walk through it, let's let's let's talk about, you know, kind of what your options are and what people tend to do and, and what's realistic. Alright, 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 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 had two groups dot startups dot com and we'll pick it up from there.

Ryan Rutan: So can we, we start by talking like how, what are the, what are the early signs here? What's the Canary in the coal mine at this point? Obviously running out of money all the way, um, is one of them. But is there anything else that gives us the sort of heads up that, hey, this, the situation is about to occur, we're, we're sort of in that spot,

Wil Schroter: given that nobody's

Ryan Rutan: gonna tell us

Wil Schroter: one, people don't expect. It's when you ask your investors, your existing investors how much they're going to put in the next round and they don't give you a straight answer, they say no, right? Because just to be clear the whole point of investing is that when things are going well and or you believe in the company you want to put more money in because the stock is going up, you want more of it. Right. That's the whole point of this thing. Conversely, if you're not putting money into it and look, there's sometimes other reasons, sometimes, maybe the next round is bigger than what you invest in. You know, it's outside of your preferences or maybe you don't have more cash, who knows? Uh, but generally speaking, when you're sitting in the boardroom and you're asking everybody, hey, how's this next round? Look and everyone's just looking at each

Ryan Rutan: other and

Wil Schroter: they don't have a real answer, what's what's, what's that saying that um if you don't know who the sucker is at the table, it's you, it's you exactly. That would apply in this very case.

Ryan Rutan: Is it, is it safe to say that this is, this is typically an issue for funded companies, Right. That were, you know, and, and it's your your companies that are, were already intending to go on and raise the second round. So this is that that gap between funding rounds, that then there isn't really a gap because there's no second funding round, um this isn't a problem that exists. If we're not actively trying to go from like Series A two series B, two, series C.

Wil Schroter: Right. Right, Right. And the thing is once you raise money, you just constantly raise money, that's the whole point of this game, folks that haven't done it before. I think that that, oh, I just raised a round and that's sort of just it. Right. And then I guess we make a ton of money and we never need more money. And that sounds awesome. But the kind of the general saying is if you if you raise money the first time, you only have two outcomes, either things go really shitty and you have to go raise more money or things go really well and you have to go raise money because you need more money to keep the party going in either way you're there. But what winds up happening invariably as we all hit a point where we're ready to raise the next round, run around and we started talking to investors and talking to our own investors and trying to get people fired up. But nobody seems like that fired up. Right? You can tell like, you know, you went on a date and you're not quite getting that call back, you're sitting waiting for the phone to ring and, and and everybody kind of feels it, but nobody talks about it. That's that's the worst part. So as a founder, here's where your head is at right now, you're thinking, well, I'm just waiting for a few investors to call me back. That's really, you know, that's that's all this is and yeah, some of the existing investors probably not good timing for them, but that probably happens all the time, right? And you don't realize you're in no man's land and you also don't realize that there are only three options to get out of it. And we'll talk about what those options are in detail, but that's it. There's nothing else you can do. And the whole point is you have to quickly indecisively exercise one of the options and there's no other questions. So let's, let's get into the options. So option number one and I like this one because it's a bit of a curve ball. It's what a lot of people don't think of. But I love it when founders talk about it, it's to buy it back, right? Because Ryan, I'm trying to think, remember we talked about this in another episode where we said there's this interesting spot where all this money goes into a company, right? All this venture funding, etcetera, you know, all this investment to build this great asset with the intention that it's going to be this big venture fungible thing. But then it doesn't become that outcome, right? It doesn't become like $100 million billion dollar business. And so we can't raise more money because they're, that outcome just doesn't exist proved the total addressable market wasn't big, but still a pretty cool asset and every founder thinks the same thing, they think Boy Ryan, if you and I had just not raised money and we had the same asset, this would be a badass business? So the ninja move here? Buy it back, yep,

Ryan Rutan: right, because you're not allowed to, you're not allowed to have that business as a venture funded company, right? Because then it's a lifestyle business and it falls into that particular purgatory if your venture funded. Um So at that point, yeah, buying it back is sort of the only option you have in the scenario that you just, you just laid out um because that's, that's an entirely different type of no man's land. Right, Well not, not, not really, I guess because that's, it sort of puts in that same spot, right? They've figured out there's a good reason not to go get more money, that's actually something I think we should spend a minute or two on, which is why is that other funding round not coming through? Right. Sometimes there's really good reasons for that. The example that you gave was that the tam just proved to not be big enough for this thing to be able to scale and dr venture type returns also doesn't mean that it can't be a good business, but it can't get more capital to try to become the business that you originally thought it could be and so this leaves you, right happens all the time. Um and unfortunately it often leads to to death instead of just some sort of a restructuring, which is, I think what we're talking about now, um but what are the other reasons that, that other bookend, it just doesn't doesn't exist. Alright, so why can we not get these other funding rounds? So you know, there's, are there times and I can think, I can think of a few cases where uh there were legitimately businesses that I felt like you had a good case for additional funding um and just didn't manage to pull it together or didn't manage to pull it together in time um and ended up in this in the same situation. But what else occurs? They're like, why do we end up in this position?

Wil Schroter: You know, I can think of two different examples of venture funded businesses, friends of mine um 11 team had a $2 million business, the other team had a $5 million business. But the problem was for what they were trying to accomplish, you know, at the venture funding and funding scale The $2 million 2.1, the next year, 2.3 the next year, 2.5, right The moment you do back to back, you know, 10% year over year growth rounds, you're not telling a venture story anymore, right? Um It's like anything else in this world, the moment, people know the ending, You can't craft a new one. That's a very specific problem. Uh and then the other, the other team, How they built a $5 million $5 million, a fair amount of cash, you know what I mean? In their formative stages and early on, like year 123, that starts to look really good. You're like, oh damn. If we're five million already, you know, then that's 50 million in a couple of years until it's not right. But, but a $5 million $5 million dollar business, It's a big enough business that like, you probably don't want to let it go, Right, the $2 million dollar business is tough enough to swallow, but you could wind it down. Five million is a real company at that point. It's not the biggest company in the world, but very few companies make it to that size regardless of what startup laura might tell you. And it's a lot harder to say, I'm walking away from it. But, but, but here, here's what I'll say. And, uh, and I love to hear your thoughts on this. What folks don't realize is that when we get to the point of this, no man's land of funding, we're in a tough spot. But the investors are totally fun, right? Because they can't run the company. They can't, they're not gonna buy it back and run it like that's not what they do.

Ryan Rutan: They can't, they don't have that option,

Wil Schroter: right? What we don't understand, um, as the founders is, we're also the operators. And if we leave, then it's game over, right? Like it's, it's at that point, right? It's curtains. So we actually control the final final outcome. Although it doesn't really feel that way at the time.

Ryan Rutan: Exactly. Well, so let's, let's circle back and let's talk about how do we actually do this? Because I think that the the in this when we have these conversations with founders, invariably they're like, look, I don't have any money. That's why I needed more investment. What the hell are you telling me to do? Buy it back with? What? How am I actually going to execute this? And so let's, let's walk through the mechanics of that because I think there are a lot of people listening who are going to be surprised at how possible and plausible this actually is. And uh, and it's, but it's not obvious, right? So let's let's walk people through it.

Wil Schroter: Step one for all of these, all the options we're gonna talk about today is to admit we're fucked,

Ryan Rutan: right? Because

Wil Schroter: what's gonna happen is we're gonna be like, listen, I don't think we're in very good shape in a good spot. And the investors are gonna be like, no, we're good. You know what I mean? Like we're going to find that one, that one buyer, that one other investor, etcetera. And it's like bro, that's easy for you to say, right? But I'm the one who actually has to drag this thing through the mud and I'm not willing to do it anymore. Founders P. S. A. Once again, you don't have to drag yourself through the mud. Yes. You have to get beat up a little to make sure that this is the outcome. But there's a point, it's way sooner than you think it is when it's time to be like, okay, enough is enough. I got to go fish or cut bait here. So what the buyback looks like. Buyback starts with, hey, it's game over, Right? So, so chapter is closed. I'm leaving unless, unless these circumstances prevail and those circumstances look something like this, I'm leaving unless, uh, we recap the company, which essentially means we, we take all the equity back and we redistribute redistribute to the people that are gonna stick around to see this thing through. You're basically taking the equity back. Now the investors don't have to agree. But Plan B is you shut it all down. So Plan A is you get nothing. Plan is you give up something Plan B is you shut it all down. And by way of that, that's the leverage that founders don't understand they have. And I've seen so many founders go through this successfully painfully because no one wants to hear that they're going to get recaps. But you can go back to go back to the investors and come up with a new deal, a fresh deal That says here are the conditions that, that I would stick around and run this company on a go forward basis, it's not the outcome you wanted, but it's the only outcome we have left. And if it's a $5 million company There's money to pay people, right? There's a real business there. And yeah, it's not a big venture funded business, but Ryan, if you and I own, it might be an incredible business for us, maybe make that a $10, $20 million dollar business and we retire with amazing lives. 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 everyday 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 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. Yeah,

Ryan Rutan: for sure. Yeah. So the mechanics of this, again, not obvious, but also not difficult. And, and to your point, the, I think most founders don't realize they have any leverage in the situation because they feel completely leveled up until that point, right? I have to do these things. I have to make it work. I have to make this thing grow. Um, it's not working. I failed, I failed, I failed. Um, so therefore I have, I have no leverage, uh, well you don't, if you continue on that path and that path, that path now being dead. Um, you get to turn around and go the other direction, which is to say that now we're just, we're not going to try to scale this thing to that extent. We're not going to try to grow this thing under, under the constructs of venture capital and we're just going to build, you know, a reasonable business or a great business for, for the ownership. Um, and it leaves the investors out in the cold, which not awesome. Right? And it's not like you intentionally did this. It wasn't, yeah, none of it's awesome. Right? But it's far more awesome for the remaining staff for the founders. Um, and, and of course there are things that you can do. You know, we've certainly seen scenarios whereby you don't completely push the investors out of the cap table, but you put them into a more appropriate seats. Um, you work out profit sharing deals. I've seen people convert portions of it over to debt payable on certain revenue milestones. Lots of things you can do to be creative here so that it doesn't feel like you're just taking your toys and, and, and going to play in your own sandbox, um, after they've helped to get it to that point right, which is not to be forgotten, but

Wil Schroter: it's always worth asking, but I think it opens up with the right look, um, if you, if you want to pursue this, that's cool. I'm okay if we don't do it, but I got nothing left right, Otherwise I'm gonna go get another job. And so, um,

Ryan Rutan: yeah,

Wil Schroter: that's what I'm saying. And, and whenever I talk to founders like this, I was talking to another founder, um, last summer And they were in a spot where the company is doing 30 million in revenue, right? So a significant amount of revenue, um, but same thing, you know, uh, expenses out, out stripped revenue and the company was losing money couldn't get to a funding round and they had to do something with it once again, I say, look, man, $30 million. A lot of cash, right? That's way too much money to not be able to restructure in some way and build a, you know, and reconstitute a business, Probably not under a broken cap table in some cases, probably not with you making $90,000 a year because that's what you've been stuck making for the last seven years or whatever your timeline, was um. and you restart it and you look at it as, you know, as a buyback. Um, and investors will always push back at first, no different than you would, but they'll also come to the realization that at some point there's no other option.

Ryan Rutan: Yeah, they're beating a dead horse at that point,

Wil Schroter: which brings us to the next point, assuming that doesn't work, assuming maybe you don't want to do it. Maybe company makes no money, right. The next is we got a fire sale an hour. Here's, here's where this, this line of thinking breaks. When I say, look, you're in a fire sale situation. No, we're not in a fire sale situation. We're in a cell situation, right? You know, we've got, we've got assets. People want to buy this thing, try selling a startup company that is out of money has weeks or months to live and see how much leverage you have in the sales process. Good luck with that. You're, you're the only person that doesn't realize you're in a fire sale situation. And we know, because we've talked to ungodly numbers of companies, uh, you know, I'll give you an example, Ryan that you and I lived through, we've done diligence. We've sat down with over 100 startup companies to acquire. We've been diligence on 40 and most of them were in a fire sale situation without realizing it in, in, in, in the situation was, was in as much as, look if this thing was taking off, like, you know, going up into the right and you were raising tons of money, we wouldn't be even be able to have a conversation with you, right, you'd be, you'd be beyond what we could afford. Um, but when a company hits a certain threshold where it's built a great product, it's it's, you know, had a lot of investment in it, but it's not necessarily a billion dollar company. Well, it's tons of value to us, right? Even if it's not a billion dollar company elsewhere, but that doesn't mean it's a leveraged situation where you can say, hey, we're just gonna run a process and and see how many people come knocking. Here's what happens the investors. And by way of that, the the the, the founders get this bizarre mindset where everybody sits around and agrees that the assets are really valuable. More importantly, there's a bunch of people can be dumb buyer, right? That's that's gonna see that. Oh, you know what? Yeah. We never made a penny in this business. But the data, there's people who are gonna want to buy that. That's the dumbest argument ever. Right? Or you know,

Ryan Rutan: by

Wil Schroter: the pier.

Ryan Rutan: Yeah, I love the one. It just, it just needs a it just needs a good operator. It just needs an operator. Right? I love that one. Right? As if the people who have been working on this thing for 56 years, just some suddenly haven't figured out how to operate. Right? That's that's all it was. It just needs somebody who's an operations person, they're gonna come in and everything will be fine as if this is a normal pe buyout, as if this thing isn't on its way to the bottom of the sea in weeks or months. Right. So yeah, lots of funny excuses at that point.

Wil Schroter: The problem isn't so much how you got there. That ship has said the problem is how people internally perceive what, what the asset actually is, right and what the, what the outcome is. And so I had a couple of situations where I built startups, we've got a little bit of funding and we got to no man's land and I'm running around trying to see if there's gonna be a buyer for it, right? And we had some people kind of kick the tires and maybe dig in a little bit, but not a ton. Um, but the investors kept saying like this thing has so much value. Again, I kept hearing the data. Um, or you know, in the, in the hands of the right person, this will be a huge by

Ryan Rutan: and

Wil Schroter: I'm like a couple of things. Number one, we have no money. So who's gonna be standing around here to sell it right by the way? Usually the founder because we're dumb. Um, we assume that we have to be chivalrous and run ourselves into the ground for 6-9 months and make ourselves bankrupt trying to fix this problem that nobody else wants to fix. Um, here's a good way to say it. If the, the investors are so sure that this thing is available. Cool. Put in $100,000 of your money as a retainer to pay me through the sale? Guess how many people are going to sign up for that? Exactly 00. It's a it's a great deal when you fund it. Mr founder. It's not a great deal. Like you asked me to fund it, but right. And so the other side of this though is, uh, once we realize we're in fire sale situation, we have to understand that we don't have leverage here, right? This is more of whoever wants to buy it on almost any terms and I love to negotiate. So I'm not the kind of person that says, hey, let's just, you know, um, drop to our knees and get it over with. What I'm trying to say is you've got to understand that at which point you have to sell the company, you're not in a position where you're getting top dollar, you're probably a position where you're getting no dollar, you take what you can get. It's a very different place.

Ryan Rutan: Yeah, for sure. Yeah. In the, I guess the core differentiator here, right? Because as we move from like phase one to phase two, how much time are we typically talking about here? Like I'm trying to go back through through the history of Yeah, it's, it's, it's measured in months and and so are there are there circumstances under which this doesn't move sequentially. I'm just thinking about, you know the buy it back if that's not possible? The like, do we ever, do we ever skip that? The fire sale phase? Like under what conditions does that happen here? Here's kind of what I'm thinking. Um, I was not sure why this popped in my mind. I'm thinking like, you don't try to land an airplane with your hand on the eject handle, right? Like there's two things that are incongruent, right? You can't like, there's a point at which is like, you know, when should we really just cut bait? Because that's where we're going next, right? The next the next, the next part of this whole thing is just run for the hills, Right? And so the timing of that is, is really important. You and I both know scores of humans who have ridden their startup further down than they should have and lost even more money that you're not just losing opportunity at that point, right? You're not just losing. Well, okay, if I keep doing, that's always the thing, right? It's like, okay, if I keep riding this out, I'll pull more money out of savings, I'll keep paying salaries, I'll do whatever. I'll hire a an I banker to write, I'll do whatever I have to, to try to get rid of this thing. I'll go all in right. I'm putting all my chips on the table, which often leaves you at the end with a table. Um, and it's not awesome. Um, and so I think that it's important to, to talk through that, like what are these triggers that would tell us like this is highly unlikely, right? Like I, and I know we have to go through, like we essentially have to be doing diligence on, on theoretical business is to do this, But are there any big signs that say, look, you're not gonna be able to buy this back? You're also not gonna be able to fire sell this thing. Let's accelerate the running for the hills

Wil Schroter: piece here. I hate to say this. Running for the hills is like, you're 80% option. It's gonna talk about this sequentially. Let's look at it like a pie chart, right? And you were to look at my opportunity here and you say, I've got a 5% chance of a buyback. That's, I mean, it's it's a long shot unless you've got a good enough sized business that it's even worth kind of going through that process. I've got a 15% chance of selling and that doesn't mean I have a good chance. It just means that 80% chances. I'm gonna have to run for the hills. So what I would do, Ryan, what you and I would do is co founders of any business of this hypothetical, you know, Titanic business is we'd sit down and if we were smart enough, we would say, look chances are planes going down, right, tune up your resume, dude. Uh we're gonna, we're gonna take, we're gonna have some of these conversations. But um, we should be actively interviewing it's time to go. Um, by way of that, we should be actively cutting everything we can, that's tied back to us. You know, I'm, I'm talking about those expenses that we mistakenly put on RMX or you know, whatever it is that, that we were tied to, I think run for the hills or plan to run for the hills and eject should be the primary plan. Now some people are gonna look at that and say you son of a bit much, right, Right? All these investors put money into you. And um, and what about all these founders that kind of got down to nothing and then turned it around and built it up bullshit.

Ryan Rutan: Right, bullshit.

Wil Schroter: Yes. Yes. There are some Rudy stories, right? Where somebody comes back and you know, and kind of wins the game, right? I wouldn't bet on the chance of those stories, I guess. Who's not betting on the chance of those stories? Your investors, who are gonna watch you run yourself off like Wiley coyote off off the side of the cliff, right? We're not in this together. At which point that the ship goes down, right? The investors have already invested a finite amount. They won't get it back, but they won't lose more, correct? We will right? You and I will because we're gonna put our time our money and all of our plans at the time when we have the least of those resources, right, The investor put in 50 grand, they're gonna lose it and it sucks, right? But that money was already gone. They were either paying their bills, you know, otherwise or they won't. And if they couldn't, they shouldn't have written the $50,000

Ryan Rutan: check,

Wil Schroter: Right? Yeah. But we're not in that spot. We're totally leveraged. Our staff gone, right. They were updating their resumes six months ago. There were no illusions of what was happening. And, and, and if if we didn't think there was

Ryan Rutan: a side hustle, it's actually now a full time job. You've become the side hustle because the writing's on the wall. Yeah, but you bring up, it's just you brought up something interesting there, which is that, you know, they shouldn't have written that check if they didn't have the money. This gets pretty dicey. If that if your first, maybe you're only round or at least there's a significant amount of friends and family capital in a deal, right? Not to not to pour gas on the fire here, but that definitely makes this a harder decision. And I think this is one of those things that incorrectly motivates founders to, to keep sticking to it. Um, and, and to continue to just dig the hole deeper and deeper and deeper because there's certainly a much higher emotional barrier there. If this is a bunch of friends and family money versus the VCS money, right? It's all money? But at the end of the day, if these are people are going to sit down to thanksgiving with, uh, then that, that can feel pretty different than, you know, a VC has made hundreds of bets this year.

Wil Schroter: I think we're talking about two different things and I know I I've been in the peril of this. We got two options. Again, you and I are uh, co founders in this theoretical company. And I say to you, Ryan, two options here, Option one is we can keep running ourselves into the ground. Yeah, right. We feel compelled because of the relationships we have in the in the statements that we've made to do that. It's also

Ryan Rutan: used to it at this point, like it's what we've been doing. So there's, there's to some degree, this is just inertia taking hold, right? We're just like, this is what I've been doing. I'll just keep doing it

Wil Schroter: right. Or option B is we can ask ourselves, we can look at the current state of things and say to ourselves, is this still a good bet for us, right? For the next 369, 12 months, all our cash, is this a bet we should be making if we are decoupled from the situation and someone said, hey, will you invest time and money in this situation, would we say yes? Of course we wouldn't be like this is a terrible idea, right? So why are we so compelled knowing it's a terrible idea for us to go do it anyway? Because the people around us, if they care about us, they don't want us to see us ruin ourselves. And if they don't care about them, care about the two of us. Yeah. Right.

Ryan Rutan: I got an answer for them.

Wil Schroter: Yeah,

Ryan Rutan: for sure. Yeah. No, it's, it's a good point. Again, I think it's just, it's one of those things, it's one of those causal factors that we see, um, that ends up keeping people from just pulling that eject lever when they should have right? And, and so there's, there's lots of us, right? And, and you know, there's the false hope that we can turn this around. There's the, I've got to do this, you know, for, for the team, there's, um, you know, sometimes we're so compelled by that, the problem we were trying to solve if it's deeply personal. Uh, those things all all can get in the way too. But like you said, the likelihood is right, that the writing was already on the wall. There's a reason you're, you're having these discussions with yourself, the business was failing. It's likely to go under. Um, and therefore the sooner you let go of that, uh, the better for everybody's sake, right? Not, not just for your own sake. Um, but it's rarely executed that way. Right. I mean, just we, we often see founders putting on that, that ship, captain's hat and, and you know, putting on the brave face and going down with the ship. Um, you know, who remembers that later? Almost nobody except

Wil Schroter: the founder, there's no, remember

Ryan Rutan: that time when I was really cool and I was a superhero and I, you know, I did that, I did the honorable thing. Like when you bought us lunch last week, are you talking about man? Like

Wil Schroter: nobody remembers any of that. And at that point within our lives within our business, we wake up when we realized we're not playing to win, we're playing to not lose. And that is a very different place. And that goes back to the bad bet syndrome. Like we're putting, you know, um, bad money on a bad bet and no one's going to tell us otherwise. And I think at which point we get into this sort of no man's land of funding. We've got to realize, we've got to realize that there's no money to be made here, right? There are no riches in this land. And the only thing we can do to save ourselves to save the company and everyone around us is just to get out. Alright, 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, the 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 were 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.