Ryan Rutan: Welcome back to another episode of the Startup Therapy podcast. This is Ryan Routan joined as always by Will Schroeder, my friend, the founder and CEO of Startups.com. Will, we talked to lots of founders, that is no secret around here, and one of the things we talked to them about a lot is seeking investment. And within that conversation, one of the things that often comes up is what is going on with the investors? What are their motivations? What are they trying to do to me as opposed to for me? Are they trying to shove me off a cliff? What's Actually going on here.
Wil Schroter: You know, the funny thing is, kind of, yeah, they kind of are. I mean, it's like the the funny thing is I and what we're gonna talk about in this episode with good reason, right? Like their motivations are to push us off of a cliff. Now that sounds dire, right? That sounds dire when we say, oh my God, you know, they're pushing us off a cliff. But if you really understand why they're doing it, I'm not saying I agree with it, by the way, but I understand why they do it. And if we're gonna talk about that. We're gonna talk about why they're doing it, why they can do it, you know, works for them, doesn't work for us, right? You know, and those two things don't sync up. So people understand the motivation. So I think let's start there. Let's talk about what the investors' motivations are to push us off a cliff as a startup.
Ryan Rutan: Let's start with the fact that like investors aren't just betting on us as founders, they're racing against their own clock, right? I mean, I think this is, this is one that we forget about, but We look at Andriessen Horowitz, for example, they, they raised what, billion dollar funds. Oh, it's it's 10 year, 10 year time frame they gotta return that money on. They spent a couple of years making the investments, and then they've got a few short years to kick everybody across the line and try to drive a return for the partners, right?
Wil Schroter: It's crazy, yeah. And so essentially though, if you're one of the limited partners, and for folks that don't understand this stuff, limited partners are the folks that fund VCs, they are the money behind the VCs. The deal goes, when you're out raising, if you're a VC and you're out raising a fund, the deal goes like this, you're gonna give me a bunch of money, millions in some cases billions of dollars, like totally, in order for me to invest that in a very relatively short period of time in in less well less than 10 years. But the big deal is, if this works on a 10 year horizon, I'm gonna give you way more money than you could have ever made in the traditional markets or anywhere else. That's the bet. But that comes with a really specific timeline, which is, I have to make this bet, all these bets, yeah, as the VC in a very short period of time, and All of those bets have to turn into returns in an even shorter period of time. Right? If we were to play it out, how long would you figure, like, if you and I just raised a fund and we said we're gonna return all this money and more in 10 years, how much time do you think we have to make those bets? Just making the bets before they do anything? Well.
Ryan Rutan: I mean, there, there's always going to be some rate limiting factor there in terms of the number of qualified deals that we find and and getting the terms and all that stuff. I, I'd say like 3 to 4 years probably on average, just to get the capital deployed.
Wil Schroter: Let's talk about that. Let's pause there. Now it's Ryan and Will VC. We've never talked about us being the VCs, but let's, let's put our yeah.
Ryan Rutan: Hang on, I've got a monocle around here somewhere.
Wil Schroter: Yeah, yeah,
Ryan Rutan: I can do is some fighter glasses.
Wil Schroter: Yeah, you know, if you need, you need a Patagonia vest and yeah, you need in khakis. And so we've raised a bunch of money. At first, we're in a mad rush to deploy that money so that we can get those companies scaled up as fast as possible so that we can exit all of those returns. Couple of examples. One of our investment portfolio companies comes to us and says, hey, good news, I don't need any more money. I think we can grow this thing about 20% a year, and it'll be profitable every year, and we're like, that's terrible. But, but why? Like like like uh Ryan, when people talk to you about this, like, hey, I think I'm gonna make a company profitable, it isn't that great. Profit's not bad, right? Right, but how do you see it from the VC side? Like, how do they view that same answer? Easy,
Ryan Rutan: easy. I look at profit as a missed opportunity for growth.
Wil Schroter: Yep, yeah, that's it,
Ryan Rutan: right? That is, you are, you are sitting on money, you are hoarding cash that should have been deployed to make this thing grow fast at the cost of profitability, at the cost of stability, and all those things, because that's what I need, right? as Ryan the VC. I need you to not be sitting on money that you can send out in disbursements to to other shareholders, to to anybody. This has to be redeployed as growth, so we can hit the next funding round, so we can hit the next funding round and the next funding round, and then either get acquired or go public, which is how I get paid, and that's all I care about.
Wil Schroter: So you and I as the VCs in this case, we have a very specific time commitment. Like we can't, we can't take our time, we can't hope this. Becomes profitable someday, we have to grow as fast as possible to get to one of two specific outcomes, either a sale or an IPO.
Ryan Rutan: Stick on that because we're fighting a very narrow time window, and we're fighting a very narrow outcome window. We can't just become a profitable company that pukes cash because that doesn't benefit the investors. So not only are we fighting the clock, we're fighting against the fact that now we've narrowed down our victory lane significantly.
Wil Schroter: You bet. And so, I think it's important to to initially understand why the investors are pushing us off a cliff. Again, we're gonna get into more parts of this, but initially you've got to understand where their motivations are coming from. Their motivations are very specific. I've got a limited window. I've got to get this thing to a big exit fast, and you know what I can't afford? Time. Yeah, I can't afford time, so I need you to spend every bit of that money right now, hire as many people, do as much marketing as you can to get to an outcome, good or bad, really quickly. And so, the other thing I wanna ask you this, do you think that they want us to run out of money? Right now? No, in other words, when when investors say to us, hey, we want you to spend this as fast as possible, any rational founder is gonna be like, OK, but then we're gonna run out of money. What does that make you think?
Ryan Rutan: It's, it's kind of the other side of that same coin that we just talked about, which is that profit looks like lost growth opportunity, right? So it's not that we, not that I want you to run out of money. But I certainly don't want to see you accumulating it, and I want to see you spending it all the ways that will make you move as fast as possible. Again, like the, the time horizon here is so short. If we've got 10 years, and we said we're going to spend the 1st 3 to 4 and maybe more deploying that capital, and we know that it takes 7 to 10 years for most startup companies to hit the type of outcomes that we're talking about. Absolutely. You're literally like it is photo finish time. And so any any cash that's retained in the company is not being used in a way that's gonna help accelerate that growth. Now, you can make all kinds of arguments around like, oh well, but then if you, you know, you hit a trough, you hit a plateau, you hit something, and if you got that cash, then you can break through it. Sure, maybe, but that's not the way this works. You've just gotta keep pedal to the metal. It's got to be afterburners all the way, all the time.
Wil Schroter: So maybe we'll look at it like this. Investors don't want us to run out of money that doesn't behoove them either, but they also don't want us to hold on to it either. Nope, nope, right? They want us deploying it as fast as possible so that we can grow as fast as possible. Now, now, here's what I've heard from a fair number of founders, especially recently. They said, hey, if I raise $5 million at like current pace, I could like not need money for like 6 years.
Ryan Rutan: Then you gotta change your pace, man. You gotta, that's the only answer. It's like, cool, I hope you've enjoyed first gear. That's the last time you'll see it for a long time. We're now in 5th gear and you're gonna see there even through the curves.
Wil Schroter: And so from the outside, when people look at how venture funded companies or funded companies are spending money, they don't get it. They're like, wait, this company just hired 100 people, 200 people, whatever, and then they look retroactively, they look at what happened to those companies when they flame out, and they're like, didn't the investors see them spending all that money? And it's like, yeah, because the intention was. That if we raise a bunch of money and we grow very quickly, that we're gonna get to that big outcome faster. Now, here's what's funny, and this is we're gonna spend a lot of time talking about how our worlds are not aligned between us and investors. But one of them that I think is very clear is the investor needs an outcome as fast as possible. We would like one, but we just want to have an outcome and whatever timeline that takes, and once again, we are not aligned. The investors like, I need you to burn through this money and grow as fast as possible. It's either make this work or not, so we're done. And we get sold on that argument so easily, cause here's how it's pitched to us. The pitch is this. Don't you wanna grow as fast as possible? Don't you want to make this successful as as fast as possible? So we're on the same side here. And it's like, at first we are when there's actually money in the bank.
Ryan Rutan: That's it. There it is right there.
Wil Schroter: And so I think for the most part, it's not that they want us to run out of money, it's that, yes, they don't want us to hold on to it, but more specifically, when they start saying spend that money, there's a narrative that they're trying to construct, and that narrative is growth. They want us to look like we're growing, even if we have no revenue to show for it, which is like 90% of startups.
Ryan Rutan: Yeah, and it's tough because it is one of those cases where I don't really think that there is a middle ground, right? We can say like, OK, well, the, the startup founder, if this takes 7 years or 15 years, I don't necessarily care. If I'm enjoying running the business and and we're making some money along the way and it's going well, and we hit profitability, and now I'm taking a little. Any exit of, you know, $500,000 to $750,000 a year every year in distributions, feels great to me, right? And don't really care how long it takes. That doesn't work for VC at all, right? They're like, no, we gotta push this thing as fast as we can to get where we need to go, to get to an exit, to get to IPO to get to whatever, you know, big liquid exit in that probably 5 to 7 year time frame, and you go, OK, well, how do we meet in the middle? You don't. Right? What is it, what is it you're so fond of saying, well, she with the gold rules, right, the gold are taking other people's money, you also fully adopt their rule set, and that's just the way this goes. There is not a middle ground here,
Wil Schroter: there's not. 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. And, and so for the most part, when we think about this in terms of why are they pushing us to to rip through cash, etc. you gotta remember, again, you gotta remember, they're they're doing it. For a reason, it's not coming out of nowhere. It's not just quote bad advice. It winds up being bad advice when the thing fails. What they're thinking is, I'm gonna make 20 bets. Yep, for each of those bets, I'm gonna push them as hard and as fast as possible, and some number of those will flame out, and then we we'll talk about that later.
Ryan Rutan: Before we get there, let's talk, there's another really, really important factor to all of this in terms of the time frame and how long this takes, or how fast it takes, or how profitable you are, or what the founder benefits along the way. And that's the fact that investors are going to get paid either way. We, the founders are not. So before we jump into how many bets they're making or how many bets we're making, let's talk about like how those bets actually pay back. So let's stick to the VC because it's very different for angels, but they're also investing under a very different thesis. So we're mostly talking venture capital. So walk us through it,
Wil Schroter: Will. There's a few things we've got to remember. And again, this is one of those things where like, oh, we're on the same side of the table, not even remotely close, right? Like only in the best possible outcome, right? Are you on the same side of every other party
Ryan Rutan: we agreed to the terms, we might end up at the same side of the table the day it exits. Maybe, maybe not, depending on how far we've gotten squashed on the table, but n those two places. On me, we will be on opposite side of the table for that 7 to 10 years.
Wil Schroter: There's a couple things that I didn't know early in my career about how VC worked or how venture funds work and so they kind of rely on that. Yeah, yeah, yeah. So for those that aren't familiar, venture capitalists, they raise a fund, and within that fund, the way they get paid is twofold. It's called a 2 and 20 model usually. The 2% means for whatever we raise on this fund, let's say it's a billion dollars, we're gonna take 2% of that. Every single year for a decade, that's in salaries. In other words, even if the 20%, which is we're going to take off the profits if we ever get them, even before the 20%, we could be taking anywhere up to $200 million in fees over a 10 year period, right, you know, for a big enough fund.
Ryan Rutan: Yeah.
Wil Schroter: Again, it's 2% every year,
Ryan Rutan: every single year. It's a lot of money whether we deploy the capital or not, whether we get any returns on the capital or not, just keeps coming. And
Wil Schroter: we can operate this with a dozen people. So again, we don't have massive overheads, etc. those private jets aren't cheap though. So, so with that said, when when we're talking about the difference in outcomes. As an investor, what's really sweet about my life is I'm gonna get paid either way. Now I know an awful lot of venture investors, and they don't all see it that way, that they know it's true, they know it's true, but they don't all see it that way. And I, I remember a good friend of mine, I I never named names on the show, but a good friend of mine who, who was a managing director of a great firm, uh, out on the west coast. I remember having breakfast with him one day, and he said, you know, I know this is, I'm not complaining because I, you know, I'm in a. Privileged position, he said, but I've been at this for 10 years. I make a good salary, but I would have made a lot more money had I gone into investment banking or kind of anything else within the realm of what I do. And it's kind of the same the same discussion that we have with founders that are venture funded. Right, they're like, you know,
Ryan Rutan: that's it's kind of like saying like, yeah, my 120 ft yacht's nice, but had I done something else, I could have had a 150 ft yacht, like it kind of goes screw.
Wil Schroter: I'll give it numbers. uh, so he was making around $400,000 a year, right, which you get is a lot of money, right? So I'm I'm not, but not $4 million a year. I want to be clear, he wasn't complaining about that, right? It was a smaller fund relative to funds, but still a pretty healthy fund. What he was saying is he's in the prime income earning years of his life. He's like in his mid-40s, right? And he said, hey, in finance, in the, in your mid-40s, you're making millions of dollars per year, right?
Ryan Rutan: He's not sitting at breakfast with me at that point. You're, you're, you're in the office, you know, you're not wearing a Patagonia vest. You're wearing a tie. So yeah, there's some tradeoffs.
Wil Schroter: So, but what was interesting about it was VCs generally don't get into it for the salary, but they're gonna get really well paid. So why does that really matter to us? Here's why it matters. Because we're gonna get a salary, and it's gonna be nominal. It's, you know, even if we raise $10 million we're probably looking at a $150,000 salary, maybe $75 depending. While we're basically still trying to figure out how to like, you know, maintain bills in, in a, a buck 50 isn't what it used to be, right? I'm not gonna get into this whole argument, but I'm saying it's not the kind of money it used to be, uh, that is for sure. And so at the same time, the person sitting across from us, the VC sitting across from us saying we're on the same side of the table. I was like, you make 10x what I make. I'm a rounding error in your personal budget, right? If this thing takes off, sure I'll make more money than you will relative to me hopefully having a bigger equity stake, but that's where it ends in. Until then, if this thing doesn't work out, this salary is all I got. And if it does work out, and, and we keep on moving, this salary is still all I've got. And I wasn't getting paid for like the 1st 4 years. So if you average it out, we're not doing the same, not even remotely
Ryan Rutan: for them, it's, it's a portfolio strategy, right? Yep, for us, it's our livelihood, right? This is, this is what we're going to survive on or not. Yep, depending on how things are going. Yeah, it's very different sides of a very different size and very differently set table.
Wil Schroter: Here's the big difference, for investors, they make multiple bets. Yeah, we have one. Yep. Now that does not put us once again on the same side of the table, right? From an investor standpoint, they can afford to lose this bet. It sucks, it's not what they're hoping for, but it's what they're planning for. They go into this thing I'm gonna make 20 bets. Hopefully 2 of them will work. We go into this thing, I'm gonna make one bet. And if my bet doesn't work, I'm screwed, right? We don't have 19 other opportunities to fall back on.
Ryan Rutan: For them, we're, we're a 1 in 20 shot, right? For us, it's a once in a lifetime shot. This is it. This is what we got. This is what we're going for.
Wil Schroter: It's our everything. We have one bet, we have one hand. Now, investors will tell you a different story, rightfully so. They'll be like, I treat every one of my investments like it's the winning hand, OK? Sure. But you know by default it's not. You know that that the difference between this company failing for you and for me as the founder, is you're not gonna lose your house. I am. Like, and when we talk about not just VCs but angel investors, angel investors 99% of the time are using their discretionary funding to put into this. So for them it was, I didn't take another vacation, buy another jet, buy another house. I mean. It's kind of the same budget they would have used for that kind of stuff,
Ryan Rutan: right?
Wil Schroter: For us, it's, I have no house. I
Ryan Rutan: have it's, it's involvement and commitment, and I remember this being explained to me once by a farmer. He said, look, if we want to think about involvement versus commitment, think about breakfast. The chicken is involved. The pig is committed, right? One of the two has everything on the line. The other one is like, OK, I'm here.
Wil Schroter: And it, it's funny how passionately the investors refute this, right? And again, they're all good people and I'm glad they're in the environment. This isn't like knocking investment. I'm just, it's a perspective thing. And they're like, you don't understand, this is my business. Companies failing or not is my business. So when a company fails, that does hurt me. It's not incidental because I've got other investments. And I'm like, I, I don't think you understand what I'm saying. I'm not saying it doesn't hurt you. I'm saying you'll get, you'll get by. Right? I won't. That is such a fundamental difference. It's like when the startup goes to sell for for like a small amount, right? And the investors like, I don't think it's worth selling. There you go. For you, it's not worth it cause you already have money or it's it's only gonna make a small impact on your fund, but for me as the founder, it's everything. It's, it's my entire life.
Ryan Rutan: So look, as founders, our journey with investors is a balancing act, a constant push and pull between the drive for exponential growth and the need for sustainable survival, right? Understanding their motivations and recognizing the differences in our relative stakes can help us work together, right? But it's up to us to set boundaries that protect our own path forward. In the end, finding success isn't about choosing one perspective over another, it's more about aligning where we can. Advocating for what we need as founders, and then navigating the challenges with as much resilience and clarity as possible. Remember, this is our one shot, so let's make sure that we're building in a way that's worth all the risk that we as the founders are taking. Overthinking your startup because you're going it alone, you don't have to, and 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.