Ryan Rutan: Welcome back to their episode of the Startup Therapy podcast. This is Ryan Ran joined as always by Will Schroeder, my friend, the founder and CEO of Startups.com. Will, startups are a bet it all and or go home type business, right? We just have to risk everything, risk it all, put all the chips in, you know, bet the farm. It's the only way we can do this, right? And it's the it's the right thing to do.
Wil Schroter: Yeah, the only people you hear that from are the people whose bets won. You don't hear that advice from all the people where, where the bets failed. You know, I've been watching this show, uh, with my kids, you know, History Channel does these awesome kind of mockumentaries, if you will, about like the toys that built America and like the men that built America and all these things and I and I I love them, except they're just fairly untrue, right? You know, it's more mythology than it is. Actuality. So they do all these little vignettes where they'll show some entrepreneur at a critical moment, making like a better all decision. And we were watching the one of the toys that built America and they were talking about like Hot Wheels and like the big decisions they had to make, and they were talking about um Barbie doll and Trivial Pursuit and all these things. And again, every time they show this fictionalized vignette. Of the entrepreneur being like, fuck it, let's just do it, right? Right. And I'm sitting there going, #1, no one does that. And number 2, what a moron,
Ryan Rutan: right? Well, well, also, you know what you didn't see, the other 300 room cams where people also said fuck it, let's do it, and then became absolutely nothing but abject failures, right? They just went out of business and faded into obscurity. They didn't make the highlight reel. thing, yeah, sometimes big risks pay off, but if we only look at the times the big risks pay off, we start to assume that the only way to do this is to take big risks without any downside protection, which, yeah, you can do that if you want to join the 99% of startups fail.
Wil Schroter: I think it's become yet another chapter in startup lore where everyone believes that I heard this is the way it was. Done by big companies or you know, that there are big companies now or successful entrepreneurs. So I guess that's the way to do it. And I love when I hear that because I'm like, that is such broken logic, and we're in such a unique spot, you and I, in that we talked to thousands and thousands of founders, so we get to live everyone else's lives, and I can tell you we have way more discussions where that conversation went wrong than when it went right. Yeah, because like it's just not the way to do it.
Ryan Rutan: It's, it's broken on both sides of the logic because it's assuming that then the only people who made it there also took those kind of big risks, right? The big risk is the only way to get to that outcome and that that's the only outcome that happens like so clearly there's a lot of downside of taking big risks and your your vast likelihood is that it will hurt you more than it will help you. In the event that it does help you. There's also this implication that was the only way I could have gotten to where I got to, right, that that moment where, where, you know, the, the Hot Wheels gang said fuck it, we're all in. That was the only way they could have gotten to where they were. No, it's just empirically untrue. Well, probability tells us there were plenty of other pathways that could have gotten in there, maybe not in exactly the same way. But I think we gotta be really careful that we're being super super selective in the narrative. We're taking the the Instagramable moment and and applying that to all situations such as.
Wil Schroter: Yeah, so when I share people all the stuff that I've done, all the bets that I've taken, etc. I always get, oh my God, you know, you must have been so bold or brave to make that decision. I was like, I'm decent at making big bets. But I am sun sue when it comes to downside planning, right? I am, I am
Ryan Rutan: all backup plans have backup plans for their backup plan.
Wil Schroter: That's the point though, because and the reason I can make cowboy moves is because I spend a lot of time planning for downside, right? And, and that's the part that no one really talks. talks about, right? You know, in that mockumentary, no one's like, and then Cornelius Vanderbilt built this downside protection in case the whole railroad thing didn't work out. And and and that's what I I wanna talk about today. I wanna talk about how to take big bets by focusing on downside risk, not just the upside risk, it's like, oh well, if we land this contract, we're gonna have to hire so many people and it's gonna be such a challenge. It's like, nope, we missed the contract.
Ryan Rutan: Let's go, let's go hire the people that we were going to have to hire anyways, and then we get this big contract, and then, uh, we missed a big contract and then we don't, we don't have the cash from the contract, but the overheads will
Wil Schroter: exactly, exactly. The first thing when I hear people taking big bets like making, you know, uh, I'm gonna quit my job, that's usually the first one, right? quit my job. I'm gonna risk it all risk my 401k. I'm like, OK, so what's the downside plan? If that doesn't work, what's your plan? You know, you and I were talking earlier and you're saying, hey, when people go to raise capital, they're like, I have to raise capital, and we're like, cool. And if you don't, what's your plan? Well, I have no pets.
Ryan Rutan: That's lazy, right? Like, not a good plan.
Wil Schroter: It's just lazy,
Ryan Rutan: right?
Wil Schroter: It's like, how could you make that bet and think about this, like, as we get further into building a startup, we're responsible for a lot of people. So if we make a cowboy bet and it doesn't pan out, those are real jobs. Jobs and lives, you know, that are at stake, because we're too lazy to come up with a plan B. There is nothing glamorous about jumping off the cliff with no idea what's at the bottom, right? There's nothing glamorous, that is lazy at best, irre responsible
Ryan Rutan: at worst. I, I keep having this conversation in in regards to founders funding. Nothing wrong with funding, nothing wrong with seeking funding, but there is absolutely something wrong with seeking funding without a plan B, right? They're like. Look, I, I, there's no way I can bootstrap this thing, right, flawed logic. The, the, the only option is to go raise funds cause we need all that money to do all these things. Sure, to build that version of the business that you decided on that you still don't know can exist or not, right? You're, you're telling me your future imagination has figured out exactly how this only one way this can end, and it starts with funding. Come on, right? So I think that when we we pick these like old and hyperbole paths. Um, and not only do we convince everybody else around us that this is the only way we can do this, but this is the, uh, that we convince ourselves the only way to do this ourselves in a really, really dangerous territory. Right, like, cool, go go go attempt to raise funding, but tell me, what's the bootstrap path in parallel? They will also, by the way, support the traction that you need to actually qualify to to receive that funding in the first place, right? the two have to go.
Wil Schroter: Let's walk through a massive cowboy move that we made and how we actually managed downside risk. I don't even have to tell you what I'm gonna suggest cause clearly it's when we bought Zerrtual. So to give some folks some idea of the the context, so companies called Virtual.com. It's a virtual assistant business. You can, you know, hop online and for a monthly fee, uh, hires a virtual, a virtual assistant. We bought that business, right, if you can believe it, almost 10 years ago. That was 2015. What's interesting about how we bought that business is that business had one of the most bizarre paths of all time. I'm not gonna go into a ton of detail, but the short version is they were on fire, eight-figure revenue, 450 full-time employees were just about to close another round of funding. The, the, the, the round fell through, which this rarely happens like. This and they shut down. They had to shut down within like 24 hours, right? I've never seen anything like it. We got the call at like 10 o'clock at night on a Sunday and, uh, short story long, we ended up buying the company at 5 a.m. Monday, completely sight unseen. 8-fire revenue company, 450 full-time employees, 2000 plus clients, and a business we had never worked on, we had barely heard of, and we bought it totally sight unseen. OK. Now. It doesn't get more cowboy than that. OK, so the first instincts would be, oh, that's one of those quintessential bed it all, whatever. That is not how we went into it. We went into it, we sat down 9 a.m. on Monday, you remember when we're all huddled in the conference room.
Ryan Rutan: 9 a.m. sure we were in there by like 5:30, but yeah, by 90 a.m. we had settled into the fact that we were doing this.
Wil Schroter: From that point on, we just isolated every variable, right? So so give Folks an example of what that looks like, OK. Number one, we now have 450 people on our payroll that we've never met,
Ryan Rutan: never met, never talked to. Oh my God, right? Yeah, we were smiling and dialing that day,
Wil Schroter: right, they're all gonna quit? Who knows, right? Also, they have no idea what just happened. Like, even the CEO, the original founder, kind of just found out like 24 hours ago. On top of that, 2,000+ clients that could just as soon say screw this. In bail tomorrow, right? And many did, by the way, just to be.
Ryan Rutan: And he did, yeah, that the question wasn't if it was how many, right? It was what, how, how many businesses are we gonna lose, how many, how many assistants are we gonna lose?
Wil Schroter: You bet. And this is gonna hit the press cycle, which it did. You can Google it, it's on TechCrunch, it's whatever. Or like it didn't go unnoticed, right? So all of this, right, not to mention all the people they owed money to, right? A lot of debt to a lot of people. All of those were just line item after line item of risks. Some people may look at that and say, yeah, but you've got, you know, eight figure revenue coming in. Maybe, so our whole game plan was, what happens if everything goes wrong, OK? So, so you compartmentalize and you say, OK, we have 450 full-time VAs. What if it goes down to 50, 100? What does the business look like? What can we sustain? We look at the clients, we have 2000. What if that goes down to 200? Like, how do we manage for all of that? The reason that business, Ryan, the reason I think that works so well, and that became a phenomenal business for us, the reason that works so Well for us, I think is because we were so good and so diligent at making a downside decision. I bet, you know, something that's really funny about everything we talk about here is that none of it is new. Everything you're dealing with right now has been done 1000 times before you, which means the answer already exists, you may just not know it, but that's OK. That's kind of what we're here to do. We talk about this stuff on the show, but we actually Solve these problems all day long at groups.startups.com. So if any of this sounds familiar, stop guessing about what to do. Let us just give you the answers to the test and be done with it.
Ryan Rutan: We looked at worst case scenarios across the board. Yeah, and so it was like, but that's, it's such a great point, right? Yes, maybe the the upside eventually comes and we'll deal with that, right? Like did we have to worry about, well, let's, in case we lose half of our assistants, let's go and hire a bunch more right now. No. Well, let's do create a hiring pipeline so that we're ready for that. Let's let's do some things, but we were, we were very, very cautiously optimistic about the upside, and we were very conservatively pessimistic on, on the downside. And we had plans for what happens in these cases, right? And it's, and of course it's it's calculus, it's not simple arithmetic. It wasn't like, OK, well pick a problem, right? What if we lose some of the clients, right? OK, solve that problem in a vacuum. What if we lose some of the assistance in a vacuum, right? We didn't, it it had to be done across the board and and understanding. What are the impacts of these sliders, if this much of the business goes away and we lose this many assistants, if that works in in parallel, then maybe that's actually a benefit. If one goes one way and one goes the other like we lose all the assistance and none of the business. That's a big problem too. How do we plan for these? How do we, what are the contingencies for these things? But we had a plan is the point on this. Yes, exactly, we had a plan for it. Well, first we, we had visibility and awareness, right? So go back to our example of the founder who's saying, I'm gonna go raise funds, and if I don't raise funds, I'll go, I'll go, it just goes bust, right? We could have said the same thing. All right, the only thing we can possibly do here is hang on to all the assistance and all the business, otherwise it's just gonna go bust. We won't think about what those scenarios look like. It either works really well or it doesn't. We can very clearly say at this point, hindsight being what it is, had we not had those plans in place, it would have followed that second path, right? The business would not have worked out as well as it did for us. And that needs due to those downside protections in place and by focusing on this thing. Yeah, taking defeat this mentality, I hear that a lot too. It's like, well why just focus on the downside? Why focus on the negative? Do we have to grow to be, yeah, but you gotta be around to grow. You miss the downside, right? You're like, yeah, I have to run fast to win the race. Yeah, but if you trip over the first hurdle, guess what, right? So you gotta watch the downside.
Wil Schroter: And and I think the continuity is a point we should really kind of harp on for a second. We want to be able to risk enough. But still have a little bit left over, and so the analogy I always use is like the blackjack table, right? So you're at the blackjack table and it feels great, like from an adrenaline standpoint to say I'm all in on this hand. That's the dumbest idea in the world, especially as a startup. Number one, if you go all in that hand and you win, That's great. You, you, you maximize the upside, OK? But if you lose and statistically you're likely going to lose, you're out of the game. You can't come back. Bet 70% of your chips, at least you have 30% left to play with, but when you push them all in metaphorically, you're making the dumbest possible bet. You like, don't make a bet you can't come back from. It's kind of that simple, even if you come back in skeleton form. At least you come back,
Ryan Rutan: right? I'm gonna apply something that you said in in the past around giving equity away in return for things that that aren't really worth giving equity away for and you say like, you feel like you're betting with monopoly, right? You're, it doesn't have any value, and, and you said something that I love and all the time, which is that you have to remember that while that value may seem low value or valueless at this point. It represents 100% of the future value of your company. Apply that here, and I cause I think it's it's it's very similar mechanism, which is that at the early stage we feel like I can bet it all, right? I've spent a year on this, I've spent 2 years on this, we've got whatever we've got, I'm gonna bet it all and we're either gonna, we're gonna make the big hit or we're gonna, or we're done, right? Because it doesn't feel like there's that much at risk at that point. We haven't come that far. We haven't done, you're betting 100% of the future outcomes. Of the that the company could have achieved based on that one moment without a downside protection. It's, it's just dumb as it sounds, but we see it all the time, and I think it's partially because of those blinders that say, well, not really risking that much, not today, but you're risking 100% of the potential outcomes on this one bet, which just isn't as bad as it sounds.
Wil Schroter: When we talk about it, like we said when people quit their job, well, you know, there's, I have so much work to do on this business. If I quit my job, I will, you know, spend all the time in the business. OK, at the expense of not paying your Bills, which one of those is likely gonna run out first, right? Like you might make more money in this new thing, but you will run out of money for like the risk enough is cut back your hours, get a part-time gig, do consulting, don't cut off income. Cut off your exposure to hours, but don't cut off your income. Right? That's just lazy. Again, that's no backup plan. Another version is, is when we hire. We're like, oh we need this person full time, maybe, and maybe you need them full time, and maybe they're gonna work out, and maybe you paid them what they're, what you should have, etc. like, Is a contractor, right? See if they work out. If over time, if over time it turns out that that They work out great.
Ryan Rutan: Awesome. I think there's there's something about that one too, which is like the the most of these bets that we make. There are very, very few times where it's like, we have to, we gotta decide now guys, that the future of the factories in the line. Are we going VHS or beta, right? Which way are we going? What are we gonna make here? right? There are very few of those in in almost every case, like a higher is a perfect example. Right, and it doesn't seem that risky as a one-off. It's like, well, if they work out, they work out, if they don't, well, we'll do it again. But you also don't have to treat it that way, and right, if you treat 100 decisions that way, you, it adds up to big big bets, right? So instead, about these things in terms of incremental bets, and to your point, hire that person as a contractor, do a single project with them, do something that allows you to um kind of get a preview of what the outcome that bet's gonna look like, and then build from there. There are so few things. That require immediate and full binary decision of invest or don't in the startup space, that it's almost laughable that we make any decision that way.
Wil Schroter: In my personal life, I'm used to just making bets on things, right? I'll be like, oh, like, you know, I do a lot of woodwork and like, I'll just start. Building this and I'll just figure it out as I go, right, because I'm like, look, at the end of the day, it's $800 worth of wood, right? Like if I, if I don't like fix, you know, figure this out, I can't build this cabin or whatever the hell I'm doing. It's an $800 problem. My downside, right, just isn't enough to worry about the bed I'm making. And I think like I process every single decision I make. In a very, what's the worst that could happen, you know, what's my downside risk? And it's interesting because a lot of people don't do this, like, like in their every day. They're like something bad could happen and therefore I can't make the decision. Right? And it's like, no, that that that's lazy. What exactly is going to happen? We talked about this in in previous episodes, like, you know, this this paper demons as I, as I call them, like, you know, where they don't actually exist, but because we believe that there could be
Ryan Rutan: a problem rarely as bad as we as we imagine it to be right,
Wil Schroter: you've got to quantify downside. I made a bad hire. OK, that will cost. Real money, right? There there may be severance involved there, you know, etc. but you can unwind it. Like, it's not like these things are unfixable. Also,
Ryan Rutan: it doesn't mean you never hire anyone again because you made a bad hire, right? I think that's the other thing is start to compound past decisions. We we don't take, we, we assume we didn't take many learnings from it. And and part of that is because, and I think this is, this is a great point, because we didn't do the downside analysis in the first place, we didn't really look at and quantify that and say we didn't take any, any notice of it, even after it's happened. We don't even really fully account for it and go, OK, I'm just not gonna do any more of that, right? Uh, paid spend on Google didn't work for us. I'm never gonna try that again. I'm not gonna, I didn't look at the downside, we looked at the upside, we didn't get the upside we wanted, and, and now we just won't do that again without going back and saying, OK, let's reevaluate the downside and and see if that actually makes sense in terms of the calculus decision we're trying to make. Just doesn't seem to happen with the frequency. People's personal lives are great reflection that even in the business world, they like sort of expect things to be run off of a spreadsheet, they're not.
Wil Schroter: In my mind, like we are in the business of bets, right? We are in the like the startup as a startup, you were in the business of of. Risk, right? It's important to be good at the business of risk, right? And being good at the business of risk is how to manage downside, like we keep saying, the upside is never a problem. I, I, I've had those penultimate moments where like a huge contract came in that was life changing, and we had to hire hundreds and hundreds of people to solve it. Yes, it's work, but it's not a problem. A problem is when you don't get the contract, and you have to fire hundreds of people, like that's a problem. When I think about like any startup, right, I think about this entire journey, right, it's just a series of bets, but I think what we've learned, and you and I have been doing this together for a long time, what we've learned is, yeah, we'll make bad bets, who cares? But we won't make like game over bets,
Ryan Rutan: and we won't make Calculated bets. We won't make bets where we go, damn, that worked out a lot worse than we ever thought it might have. I don't remember having ever said that, right? We've said bet didn't work out as we'd hoped, or, well, that's, you know what, it's funny. I, I would say that like in 90% of our bets that they go wrong, which is probably just 90% of our bets, we, we typically will end up saying some version of, well, that kind of went as expected. I love not being surprised by our bad bets. Like it, it gives you a lot of comfort to wake up in the morning knowing that we take this approach. It speaks to longevity, right? It speaks to extending the runway, it speaks to being around to make that next bet and never being caught off guard by them, I think is so important, prepares you for the big things that you didn't see coming too, right? Like then when the pandemic pops up, if you've also got a bunch of other floating bets out there that you didn't know what the potential downsides. was, and they're now magnified by some weird black swan event. Yeah, that's really problematic and we saw a lot of really good otherwise startup companies die as a result of its sad, right, because there wasn't downside management place.
Wil Schroter: I think like that's the the pushback for folks when they say, hey, I'm making whatever the bet is, no matter how small, even, you know, as entrepreneurs within our company and the teams, you know, each person making their own bets. I think what's important for us is to be able to say, hey, yes, we're making whatever bet. What's your backup plan? Well, my backup plan is this. If this doesn't work, here's what we'll do. Cool, then make the bet. I think it's empowering that way, right? Because like you said, we know how to come back from it. I think that the part of it, it's not an admission of a bad. Right, because I think people are saying, planning for failure, well, you know, that's just negative. It's like, no, that's the foundation for being able to make a good bet
Ryan Rutan: for everybody who's out there right now going, look, you hit what you aim at, so you guys are asking us to aim for failure. We're asking you to aim for failure, we're asking you to understand it. We're asking you to calculate it into your bets. And to make sure that we know that this is a game of bets. This is a game of being able to make as many bets as we can, and to be able to defray the risk across those bets to benefit from the upside, but to understand the downside, so that making one bad bet doesn't mean the end of our startup. Overthinking your startup because you're going it alone, you don't have to. Honestly, you shouldn't because instead, you can learn directly from peers who've been in your shoes. Connect with bootstrapped founders and the advisors helping them win in the startups.com community. Check out the Startups.com community at www.startups.com to see if it's for you. Could be just the thing you need. I hope to see you inside.