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The "No BS" version of how startups are really built, taught by actual startup Founders who have lived through all of it. Hosts Wil Schroter and Ryan Rutan talk candidly about the intense struggles Founders face both personally and professionally as they try to turn their idea into something that will change the world.
Ep 268_Audio Version
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[00:00:00] Welcome back to the episode of the Startup Therapy Podcast. This is Ryan Rutan, joined as always by Will Schroeder, my friend, the founder and CEO of Startups. com. Will, we talk to founders about acquisitions all the time, right? People are getting term sheets, putting things out with broker dealers, shopping their things around, stuff's happening.
Of all the founders we talk to, approximately what percentage have realistic expectations going into the sale of a business? I'd say Give or take zero percent. Zero percent, with a plus or minus of zero percent error on that one. Zero percent. And look, it's nobody's fault. I mean, nobody's ever done this before, right?
And just like when people raise capital, they're like, Oh, well, you know, here's what I think it should be. And when people go to sell a company, they have these expectations about what the startup's worth, or how the process works, or who the buyers are, and all this stuff that are so far out of whack. And again, It's because they've never done it before.
If you were an investment banker, this is what you did for a living. You know all this stuff, but if you've never done this before and you're thinking about starting a [00:01:00] company or selling company, or even you're like, Hey, I wonder what my company would be actually worth in a sale. Not like a venture round.
It's way different than what you think. And so you, today we will dig into the actual details of. Where the value comes from, you know, where you're being way off the mark, what you're competing with, you know, in the market, things like that. Yeah. We've done this a couple of times. What are we, are we at half a dozen now?
We'll be able to say a dozen soon. We're at a dozen on this, right? Just on the buy side. Let's be clear. We're not making any of this up. Like we've been on the buy side and the sell side many, many times. To be specific, just so we're not talking in amorphous terms. At startups. com. In our history, a little over 12 years now, we've acquired six venture funded companies.
But when people hear that, that is a lot, that's a lot of companies to acquire to go through that entire process, but we've done diligence on over a hundred. So like the six that we bought were just the completed deals. It doesn't talk about how many deals we were involved in, how many founders we worked with.
To be fair, Ryan, you know, I'm sure you recall [00:02:00] this. We made exactly six offers and we got exactly six deals done. So, you know, we were six for six in the end, but. You know, getting up to the offer stage was hard, but I just paused on that for a second, man, because I think that's actually, that's an important thing for, for founders to understand because when they're on the sell side and they're approached by somebody or they approach somebody, which both happened to us, right?
We went after some deals and some deals came to us. And like you said, we've evaluated over a hundred. We've bought six, right? We closed on six deals. And so just tempering your expectations. I think that sometimes founders end up with like, you know, somebody shows up with an offer, maybe even a term sheet, something.
And they're like, well, this is going to happen, right? Some, something's going to happen, but it's not necessarily a transaction. And so I think that's, it's really important. I think some people assume it's like, it's sort of this binary thing where either nobody ever approaches me or somebody does, and then it's a foregone conclusion that will eventually strike a deal and everything will be great.
It's just not the way it works. It's so hard to get a deal done, like actually get the deal done. Let me talk about our other side [00:03:00] in our experience. Like in my 30 plus years, I've had five exits, right? The most recent one we had just recently in Q4 of last year, we sold Zirtual. And so we've been on both sides of this table and we understand it pretty well.
I mean, all things being equal, it's kind of hard not to do it this many times. Learn a lot about the process, learn something, but also we work with thousands and thousands of founders who are going through their own journey. So one of the cool things about our job at startups. com is we get to live a lot of lives, right?
Like we get to live and see through the eyes of lots and lots of founders flies in the walls of lots of deal rooms. That's what I'm saying. Right. And, and. And we get to see like firsthand how many different deals get put together, how they fall apart, what the expectations are, you know, we're, we're fairly deep in this stuff.
Oh man, you said it once and I will never forget it. I, it was probably the Zurch will deal and it was, you know, that five o'clock meeting on Monday morning where we got together in the conference room. And I think at that point we had all kind of like said, okay, yes, let's proceed with it as, as far as we can and understand at this [00:04:00] point.
Yeah. But you said it, he was like, look, we'll, we'll proceed. But it's like this thing will die a million times before it actually lives, if it lives at all. And you were absolutely not wrong. And I think that's, that's par for the course across all the deals we've done. They, they continuously die and come back to life, die, come back to life.
Some of them actually make it, but most of them did not. I always make that discovery when we were selling Zirtual, um, which we sold to a private equity firm, right? I told that, you know, the guy who owned the private equity firm on the other side, because we were negotiating directly. I said, look, this deal will die a thousand deaths before it ever gets done.
So just before we even go down this process, let's just both understand that we're going to hit a whole bunch of things where the lawyers are going to be lawyers, right? And you're going to walk away and, you know, you do all this stuff, all this grandstanding. And I remember I told him, and I think this could be valuable for folks listening.
I said, let's establish a bat phone. Right. And for those that aren't familiar with bat phone was, was what commissioner Gordon would use like in an emergency to call to summon Batman. Right. And, and I said, let's establish a bat [00:05:00] phone early on, which says. If everything just sounds off, like the attorneys are both, you know, on the, both sides are going crazy.
Let's both agree. You and I just get on the phone and we bring it back. Let's not talk through the attorneys. Right. And to the extent that we can, and he really appreciated that. And we had to use the bat phone many times, right? You always have to. And when we've done acquisitions, uh, where we were the buyer.
I established the same, you know, line of communication with the founder. I said, look, we're looking to acquire your business. There are few places this is going to go wrong. I guarantee with all the investors you have, there's at least one, if not two, if not three, that are going to be giant dicks about this whole thing.
Right. And that's kind of just what they do, right? Way it goes. And I said, when that happens, not if that happens, when that happens, just remember to call me, we'll work it out, you know, like whatever. And so I think having been through this process successfully so many times, you [00:06:00] start to really get a good feel for what's realistic and where the common pitfalls are, which again is, is what we'll open up today.
Yeah, man, I'm going back to think that the giant jerks comment and like my first, my first exit started really amicably, right? It was like a founder to founder deal, right? I was very much a junior founder at that time. He was very much a senior founder at that time. And the discussion started and you know, it was like, I'm trying to remember if it was over beers.
Was I old enough to drink? Yeah, I think it was over beers, right? It was like one of these like super amicable things. We were tossing numbers around, you know, it was all just like high level and everybody was happy. Everything was cool. And then he was like, okay, cool, well, I'll send the team over to talk to you sometime next week.
When those guys arrived, it was a completely different story. And all of a sudden I was just like, I felt like I was getting just beaten. All right. It was questions from every side. Like it went from being like pure amicable over beers to just like feeling like I was getting waterboarded over the deal.
It was insanity. What a turn of events that was. I mean, eventually the deal did get done, but. God, it went from like, this is pretty cool. Like I [00:07:00] like this, this is fun. I'm deal guy to just like, I am just the, the, uh, getting the butt end of everybody's, uh, uh, worst behavior at this point. You bet. You bet. So with that said, let's talk a little bit about, uh, specifically where do you founders, you know, where their expectations go off the rails from the get go, the most common one that I hear first is what I collectively call the white knight fallacy.
And I think that, I think that every founder falls into this, which is there is this dream acquire that has all of our best interests in mind and is somehow miraculously blind to all of the reasons that things aren't working, right? So in other words, we've raised, I'm just making this up. We've raised 10 million and, you know, we burned through all of it.
So we've got at least 10 million we got to pay back in a preference, whatever. We never got past like 3 million in annual recurring revenue, and we're losing a hundred thousand dollars a month, but I believe that there is a buyer out there that will probably buy us for anywhere [00:08:00] between 50 to a hundred million dollars.
I mean, which would be a huge discount from the valuation we raised at. So we're really doing them a favor, right? Of course, of course you are at that point. Yeah, that's not going to happen. I think we get into this idea that when we go to sell. The way our business will be perceived is similar to the way it was perceived when we were raising money.
Let's start there. Let's start by separating those two right out of the gates, right? When we're raising money, we're raising on what we can be. When we're selling a business, we're selling on what we are. Are and have been, right? Like, meaning they're going to look at your data, right? So, like, if you are today doing something that's significantly different than what you were doing a few months ago, what was happening a few months ago is still going to enter the picture, right?
They're like, oh, but, like, this month we did 50k in new MRR. And that's the only time we've ever done that and we have no idea how, but it'll probably continue to happen for the rest of the business, right? So it's a very, very much more sober conversation when talking to buyers versus investors. [00:09:00] And again, for founders, we haven't had that opportunity up until this point to kind of have that role shift or phase shift and kind of how we're thinking or how we're perceived.
But when we go to sell, yes, you know, there's, there's some hope that the business will be something bigger, you know, for a buyer, et cetera. So some of that exists, but it is nowhere near, nowhere near the kind of opportunity that investors will give us. Because investors are like, I'm putting money in so that you might become something.
Buyers are like, I'm buying on what you became. What you became. And if what you became is a 3 million business that's losing a ton of money, I don't care if you raise that a 20 billion valuation. It doesn't matter. You didn't pull it off. This is who you are now. And And that's what you had to sell. Yeah. I mean, we understand this clearly on like the, the open markets, right?
The stock exchange, right? Right. You were a 450 billion market cap. You're now a 1 billion market cap. I'm going to pay the share price of today, not what you were and not what you said you [00:10:00] could be back when you IPO, right? It's just, it is the reality of the situation. And I think that is hard. You know, we've talked about this in a couple other contexts, Will, but I think that Bounder's always being in pitch mode, even when we get into this point of sale.
And I think that In the right conversation, the right times, it does make sense. We have to be in pitch, we have to be projecting, we have to be thinking of the future. But there's some version of this, and I definitely fell into this trap myself when presenting the business, was that I was still in pitch mode.
And I was talking about what it could be, what it could be, what it could be. Yep. And then I realized as like starting to listen to the feedback from their team was that the way it came off to them was sort of like, it's not over promise under deliver necessarily, but there's a similar dynamic there, which is like, you're telling us all these things that it could be, but you're a long way from that.
And what I found that was like, I dialed it down and just became more realistic about what I was talking about. The conversations went a lot better because otherwise it'll be this and it's this now they're like, okay, explain to us how you cross that gap so that we can buy into any of what you're saying.
I was like, Well, I don't have the answers for that. That's what you guys are for. That's that, that happens after you buy it, right? Like that's, that's when it's in your [00:11:00] hands. I think, you know, where we start to weave this tale is again, like you're saying, we try to take the same story we were selling to VC or investors as a whole, and think that the, the open market, the buying market will buy the same story or even at the very least pay the same premium.
And it's not even remotely close. To put it in perspective, if I'm looking to buy a company. And I'm looking at what they've done so far. Yes, I'm looking at what they can be. I'm looking at, you know, what it might be. With the whole idea that that's, that's icing on the cake. Yep. Right? Like that's, it winds up being something extraordinary.
For example, one of the most common things I hear from founders, when they're looking to go into sell mode, is we have created some sort of asset through all this effort, etc. That we haven't monetized yet. Not, not in the way that we should. But we think the buyer. We'll see that and want to pay a premium for that untapped jet, right?
The buyer will start to value that asset the [00:12:00] same minute the market does. Correct. And so we don't get to sell that, the value of that to a buyer. Without having realized any of it. Now again, again, I'm not taking it totally off the table. It's not that a buyer won't recognize some of the value. Like they'll look at that and say, oh yeah, that's, that's definitely interesting to us.
They're just not going to pay a premium for it. It's like, you've got this meal that was like half ready and you're, and you're asking somebody to buy it for dinner. It might be good, I don't know. I had another food analogy in mind. I was thinking, when you're at the grocery store, you've got an investor, and you've got a buyer.
The investor is looking at the packaging going, Wow, this looks amazing, I love the packaging of this thing, let's buy it. It looks great. Yep. The buyer is looking at it and going, What's the cost per ounce, right? They're looking at the details, right? Like they're, they're going to do the comparison at this like base stats level, not at like what it looks like, what it could be, what it was.
The exciting part is what's the glitz, what's the glam, what's the hope. They're buying the reality of it. Right. And if the reality is that your cost per ounce doesn't line up with their expectations of the, of the [00:13:00] purchase, it's not going to happen. Stick with the investors for a second. Cause I think they become a very important part of this white night fallacy.
Because a lot of times I'll hear the entrepreneurs like, Hey, I'm kind of at the end of my rope. I've been doing this for seven years now. Like I'm broke. Like I just need to get out of this thing. Right. I'm just looking for a soft layer. I'm tired. I don't know what to do. Right. Yeah. Yeah. Yeah. Right. But the investor's like, what are you talking about?
Like, somebody's going to look at this, they're going to see the data we've collected, and they're going to want to pay a huge premium for it. Someone's going to look at the product in the market we're in, it says AI, and they're going to want to pay a huge premium. And it's like, you know, again, pardon my language here, but fuck you, right?
Like, you don't get to say that. You don't get to just make stuff up, right? And create some illusion, and then force us to like, to go find your illusion. Right? And I see it all the time. I see founders just get drug through the mud by the investors who create this bullshit idea of what the company might be.
And then force the founder through this. And our thing, like, by the time they get to us we're [00:14:00] like, dude, just, you gotta get out of this. Like, that guy's fantasy is not the reality. That's the thing, it's not the reality, but I think the founders miss out on that, right? They miss out on the fact that it's not reality.
I had somebody, I had somebody telling me Some months ago they were like, well we've got a term sheet, right, but you know, it's really not even close to what our investors said we should get. Like, did your investor give you a term sheet to buy the company? They said, well, no, they just told us what they think it would be worth and in the market, we're going to sell it.
I'm like, those are two different things. That's what, that's what they want. That's their self serving agenda. They want it to sell for that. Sure. But all of a sudden they were comparing these two things as if like the real term sheet that they had, the offer they had from a buyer in the market with cash, ready to go.
Was the same thing as the investor saying, here's what we'd like you to sell it for, because this will benefit us more. Of course. Right. And look, right, right. It's, it's not entirely off base for the investors to want that. Of course, it's what they want. That's why they got into in the first place. Yeah.
Yeah. Everybody does have to also recognize the reality to your point. If, you know, you raised on a hundred million dollar valuation, but you're now doing three and you're losing a hundred thousand a month. Any [00:15:00] offers probably not a bad offer at that point, right? If, if you really don't know where it's going from that point and it isn't arcing up, nothing's happening and you're exhausted, whatever that, that number of the investor throughout is probably pure fallacy at that point.
And look, I don't think we blame the investor for wanting to want more out of their investment. No, of course not. I can't blame anybody for that, but that's not the same as what you're saying is realistic or achievable. Right? So your wants and our needs are not aligned whatsoever. The second thing that they'll look at or the founder will look at is what this multiple will be.
Right? And I call these the multiples of madness. It starts something like this. The founder is like, Hey, I've seen other companies in the market get these multiples. Oh man, this is where it goes wrong. I mean, just like anytime you hear somebody start with, I've seen other, right? I just know we're like, here we go down the wrong path, right?
Comparison kills every single time. It's such a horrible thing to do. Yeah. And like, look, it doesn't hurt to have some general barometer. Nothing wrong with that. [00:16:00] However, you can not compare deal for deal because when it comes to sales, there are so few sales and they're all total one offs. They are all total like.
People think about the way they think of houses, right? They're like, oh, well, you know, a house sold for this markup or for this, you know, value. So I guess other comparable houses sell. Yes, because that is a commodity industry where lots and lots and lots of houses sell. And a lot of buyers, like, it's a very fluid market.
This market is a total one off every single time. So what one company got in their one off sale for whatever reason they got that has no bearing on what you're likely to get. It sounds cool. It doesn't work that way in reality. The second part of that though, this, you know, multiples of madness is no one ever says, I think we could get 10 X top line, but I just saw a company get three X top line.
So I think that's what we're going to get instead. Right. In other words, always everybody [00:17:00] always says, I heard another company got something insane. And so I guess I can get something insane as well. A couple of just, like, reality checks. Number one, are you really the company that got that crazy multiple?
Right. They're like, oh, you know, Google bought this company, you know, that's in the same space. Being in the same space doesn't mean jack shit. Doesn't mean anything. Right? Right. Yeah. It's, were you a hundred million dollar company? That's what they were, right? Like, the thing I was talking about, there's so many.
So many things that make, make these deals unique and individual from the, you know, the, the exact performance of the company that acquired them at the time and the exact performance of the company that you were when you got acquired, the market you were serving, the way you were growing, the team you had, like, they're so damn dynamic, right?
Like to your point, house purchases is a commodity, right? A car purchase is a commodity. Like all these things, you're generally going to use it for the same purpose. It's going to have roughly the same value to you. Where we get into like, the reason people buy companies, sometimes it's for cash flow, sometimes it's for, you know, a market penetration.
Sometimes it's for technology, sometimes [00:18:00] it's for, it's for a lot of things, right? And so that too is another variable where it's like, well, because they got this, well, what did that turn into on the backside? Do you have the same potential to turn into some type of strategic investment like they were?
And in most cases, like, well, n no. But we still want those multiples. Of course you want the multiples, right? I want to win the lottery once a week and just give all the money away. That'd be super fun, but it's not going to happen either. Everybody's going into this for the first time. So I give everybody a pass.
I know you do too. I get why people, you know, kind of create these fantasies. I get it. However, just because we want it, just because we see it doesn't make it real. Well, we also like, we miss like, let's say Google bought a company in the same industry space, whatever you want to call it, right. Company's doing a hundred million in sales and they bought them for a billion dollars, which make up a, it doesn't matter.
Right. 10, 10 X. They're, they're top line. Right. You got to understand. That very few companies like 1%, 2 percent of companies that are interested in selling have truly competitive marketplaces to sell. Meaning [00:19:00] when you get to a hundred million dollars, number one, there are very few companies that can buy you.
Stick on that for a second, because I think that's actually one of the key points. So it's like, oftentimes when I look at a market and I go, somebody just got acquired in that market by probably the one acquirer that exists. Everybody gets excited like, Oh, they bought them. And then we're kind of like them.
And like you saying you missed your chance because that's one way of looking at it. It's like, if that transaction already happened, they don't need to buy. You twice, right? They don't need you and that other company in all likelihood. And in, in, like, as you said, like, there are very, very few buyers. We get up to the top of these markets and especially the large transactions.
There are so few buyers. Maybe there's one buyer that's really going to value in that way. Maybe another acquirer comes along and is like, okay, we need to queue up with Jones a little bit. But they're not going to pay the same premium that that first company did. It just never works out that way. 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 a thousand times before you. [00:20:00] Which means the answer already exists, you may just not know it. But that's okay. 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. You've got a couple of considerations. Number one, to your point, that may be the only buyer. Okay. Number two. Of the few companies that get to the rarefied air that they're selling at that level, they're also not competing with other deals.
Correct. Right. I'll give you an example. A year or two ago, Figma had an acquisition from Adobe and I don't remember exactly what Figma's revenues were at times that I'd heard anywhere between 200 million to 400 million, not insignificant by the way, like still, that's a ton of Jack, but Adobe tried to buy them is since it got canceled, tried to buy them for 20 billion.
Yeah. Now, if you're every company, like Figma, right? Envision whomever else [00:21:00] at the time you're saying yourself, well, damn, if Figma is getting bought from that, for that kind of multiple, then I must be getting bought for that multiple because we do the same thing. No, you're completely wrong. Here's why.
Number one, Figma was the number one company in its class at the time. Right. Meaning they had a position that another company couldn't come in and say, if you buy us, you get that position. You're buying number one position. It's something Adobe was losing in a significant way. And they had to buy that position.
If you were a company doing the same exact product. But you're doing three million dollars in revenue. You don't matter. It doesn't matter. Even if you had literally the same product. You weren't Figma. You weren't doing hundreds of millions of dollars. I think some people then get that wrong too. They're like, well, okay.
Yeah, we're a lot smaller than Figma. So just shrink. We don't need to sell for 22 billion. Hell, we could sell for one billion to be happy. It's not the way it works, right? They're going to go out, they're going to buy the market leader. They are willing to spend 22 billion because they realized [00:22:00] that it has that kind of value to them.
It's not that you have some scalar value. If he was like, well, we're doing 2 million. So we're one, one hundredth of them. So bias for one, one hundredth of that. It's not the way it works. It doesn't matter to them. Because most of the companies where you see those headline numbers, where we pull those, you know, multiples of madness from.
We're comparing our state of the union to that, that the acquirer state of the union, a company that acquired rather, and they're not even remotely close. Not even the equivalent of me saying, I think I should get paid what Patrick Mahomes gets paid because I threw way more touchdowns in my Sunday football league with other dads.
Absolutely. Yeah. You sure? Yeah, probably not. Yeah. I always, I always, I, the analogy I always use is in a housing market. Right. And even though it is a commodity market, we look at that and we go, okay, Yeah, you're not the 22 million dollar home on the hills in California, right? You are in Iowa and you're on a flat piece of ground and it's a three bedroom, two bath with laminate countertops, right?
It's not the same thing. It is also a house, it will house people, it does the same [00:23:00] thing, but it is not the same thing. So I think this is where it's just, it's so hard. Right. And, and I think that oftentimes, because we're the founders, right. And we're inside them and we do see that we have the potential.
We want to be where those things are. And we're again, going back to that, like in pitch mode, like where we're projecting out. And we're so used to thinking about the future version of our business that we could be Figma and they could turn us into that. And then, you know, if they just bought us, then we would be their Figma and it would all be great.
And they would give us a discount. It'd be work out for everybody. It's just not, none of that acquisitions happen. It just never does. You bet. And so what we also don't understand when we think about those multiples is we create this like giant inflated value of our company. As if, if an acquirer wanted to spend money that they had no other way to spend money.
For example, anybody with any amount of cash, almost literally anybody can put their money in the S and P 500 right now. And if you look at the last 10 years in the S and P 500, it's yielded about 12%. Last year was incredible, but like, just generally. So if [00:24:00] someone's going to pay you 10 million, which would yield 1.
2 million in profit by doing nothing, by the way, by doing nothing, zero work, zero risk, and more importantly, zero effort, right. And it's still cash. It's still liquid. Right. Which is a big, which is a big factor, right? The fact that it's still liquid at any point is a big deal because startups are not. 100%.
Why in God's green earth would anybody give you 10 million for a business that makes no money? Right. Right, like how would that makes negative money in a lot of cases, right? We're still at that point where we're like, we're losing money. Yeah, like, well, if you give us a, we'll give you, we'll give you 10 times your ARR.
Well, our ARR is negative right now. Exactly. You pay us, we'll take the thing. We've got to understand, you know, as the founders that we're competing with other ways people could spend that, that acquisition cash in one of the ways is just doing nothing but investing it. I want to take a moment just to zoom out for a second and point out kind of the spectrum of places you're likely to go to [00:25:00] sell your business.
Okay. Cause again, most people have never done this before, so they don't really know. It kind of works out something like this. There's three buckets. Bucket number one is the white knight perfect candidate and in all of us have who that would be I'll give you an example for for startups. com. It's probably into it Right.
You know, we've got 1. 3 million companies in the platform, a company like into it would love to buy us because it would be a massive acquisition into exactly who they sell into. Okay. Now it doesn't mean they will. I'm just saying like, if I had to say who was an obvious buyer, we're going to, if we're going to name our white knight, that's them.
Yeah. It'd probably be into it. Right. But there's like into it and maybe a couple other companies tangentially at that, and then that's it. Right. So, so that bucket burns off. Right. And you kind of either have it or you don't. And I always generally say if they wanted to, you, they would have called by now.
Right. Like they didn't forget you existed. Right. The second bucket are kind of everyone else meeting all the other companies in our space, tangentially in our space, et cetera, they are not going to pay a premium and [00:26:00] they likely don't have the pocketbook at any given time to even do a deal. The third bucket, which is by far the biggest.
And the least understood is private equity. Now, for those that aren't familiar, just two seconds on private equity, private equity firm has one goal, buy stuff as cheaply as possible and shred all the costs inside it, translation people, and sell it to someone else. There is nothing else to their strategy, no matter how they sugarcoat it, whatever, they are the merchant cash advance of startup companies.
And just like merchant cash advance, they have a very, very Predatory nature, right? Again, and I'm not knocking him for it. I'm just like, we sold a private equity company. We felt we got a great deal out of it. But I want to point out, like we knew what we were getting into. We got a good private equity deal, right?
We didn't get a strategic acquisition. You bet. You bet. Right. When we went into it though, we knew what to expect. For example, and again, we sold Zirtual. Zirtual is a very profitable company. So we knew that a private equity company that would want to buy us. Would compare [00:27:00] using that cash into buying Zertual versus using that cash in the market.
So we weren't going to get a hundred X like a top line, right? It would make no sense whatsoever. Right. But the more important part about that bucket being private equity is there is a 90 percent chance. That's where you're going to land. Especially by the time you decide you want to sell, you've said this before, I think it's, it's a truism.
Which is that the best acquisitions are when companies are bought, not sold. Meaning that somebody comes to you, for some reason you've done something, you've gotten on somebody's radar, they called you, you didn't call them. The minute we start calling people, uh, it's, it is a bit of a race to the bottom and you generally do end up with private equity at some point.
So again, just to, just so people understand the process, private equity is awesome because like the merchant cash or payday advance folks, They're there. They've always got cash, right? And they're there. They answer the phone. They're Yep, you bet. They answer the phone, they'll look at doing deals. When we sold Zirtual, we had initially hired an investment bank to run the process.
And again, for those that aren't familiar, an investment bank is [00:28:00] just a few people in a room, typically, who are working on your deal. And all they're doing is just spamming the same list every single time, and then taking calls on your behalf, right? I'm not knocking them, and we're perfectly happy with who we worked with, but at the end of the day, they do a lot less than you think they do.
But they are in charge of your outcome. But mostly what they're going to do is they're going to talk to a few strategics that bucket one, bucket two, and then just carpet bomb every private equity firm there is, right? And that's where a lot of deals end up happening, um, at the private equity side. Now, here's where it doesn't happen on the private equity side.
Just, you know, so people understand this process. If you have a business that makes no money, you ain't selling to private equity. Correct. That is not going to happen, right? All private equity understands is the business makes this much. If we strip out costs, it'll make this much more and we'll make a premium on that Delta.
Right. That's it. That's what they do. Right. And to be fair, Ryan, we acted as a quasi private equity firm. When we bought the companies that we did, right? Because in a lot of cases, we're like, okay, this company makes X amount of dollars, but we already have the infrastructure, [00:29:00] ergo cost already paid So we're just going to take the asset, not the people or the infrastructure, which was always the founder's preference in those deals and make more money.
It's not complicated. Now that said, when folks say, say, I want to sell the founder, say I want to sell their first thought is. White knight, 10x top line, you know, you, you name it, right? No one goes into it saying, man, I can't wait to sell this thing. I want to talk to a payday advance private equity.
I want to go get nickel and dimed and have as much of my payments deferred over time as possible. That's what I would like. Which is exactly what we're talking about. It's, it's the part that isn't in the brochure, so to speak. But when we're looking at what's, what kind of multiple are we going to get?
Let's just talk about two sides of the coin here. We're either talking about top line multiple or bottom line multiple. Most startups that we talk to, Ryan, you and I talk to, by the time they're looking to sell, there is no bottom line multiple. They literally make no money. Um, they have no profit or have damn near like whatever multiple you'd apply toward their [00:30:00] profit is Insignificant.
And just so people understand like what a reasonable multiple is, a reasonable multiple on your net income number is five to seven times. Now, most people when they hear that are like, are you kidding me? Like, I was expecting 20 to 50 times net income on the top line. And again, it depends on if you have a bottom line.
It's usually around 3x top line. Delivered this news, I think this was sometime last year. And the founder was like, Well, that'll be worth nothing to me. And I said, that's because that's what it's worth to the acquirer. Right. That's the problem. This is where you're at. Right. It's not worth anything to them either.
Right. That's the reason you're trying to sell it. And, but it's, it is so hard. Again, like you've put so much time, so much effort, and you had these dreams. It was going to do this. It was going to do that. In your mind for the acquirer, it still will. Right. It's, I'm tired, but when somebody else grabs the baton, they're going to run the last 400 meters way faster than I was going to, and it's all going to work out.
Right. But that's not the way the acquirer is looking at it going, This is what it's doing now is [00:31:00] what we expect to continue doing at the point of like your, your point around P. E. They're going to look at it and go, here's some things we can do to make this more efficient, drive a little bit more IRR, but that has a limit, right?
Like we can only go to zero on costs. We can't go below that. We can't inflate this thing to 20, 30, 40 X. Maybe we can get it to four or five and that's it. A very reasonable analysis would be, look, if a team who's doing nothing but this with millions of dollars in funding couldn't get it past first base, why would we be able to get it past first base when we're going to put some employee, you know, to run this thing in our free time?
Like, it doesn't work that way. And again, we're going to describe all this and I'm like, oh, you silly founder, whatever. Remember that Ryan and I are talking about this from experience. In other words, we were those founders. I've done it wrong more times than I've done it right. I remember this is years ago.
We got a call from fiber, right? Fiber was about to go public. I mean, this is, yeah, a while ago, right? Fiber calls us as their head of BD and conversation moves to, uh, they want to acquire us, right? This was a virtual and we were like, well, you know, here, here's where we think we are in the market. And, you know, we're, we're expecting to get, [00:32:00] you know, five to seven times top line and I'll never forget the guy and the other laughed right now.
He wasn't being a jerk. Right. But he wasn't wrong by the way, just to be clear. Right. He laughed. He's like, buddy. We're about to go public and we're not even getting that multiple. Yeah. It's like, good. You're not going, but I was like, yeah, you know what, you're not wrong about that. It goes to show again, this is, I'm saying like, you know, being in the founder's shoes, you have those X of expectations, right?
And it's okay to have them. But at which point you actually expect to get a deal done. They don't work very well. Yeah. Look, I'm going to go back to that, that old phrase of my father's, which is aim for the moon, but clear the fence, right? It's fine to want to hit the moon, but like at some point you probably are just going to clear the fence.
Right. It, but on a percentage basis, at least, right? Of course there are founders out there who are going to exit. They're going to do quite well. And I think a lot of that depends on the circumstance, right? If you're actively trying to sell your business. You're probably closer to clearing the fence than hitting the moon.
The last point I want to touch on, because I think this gets easily overlooked for everyone, especially for folks who haven't done [00:33:00] this, is whether when you do get paid, even if you can find somebody that be willing to buy the asset, how you get paid. I hear about so many deals where people are like, Hey, you know, you said I wouldn't get that great of a deal.
Look how good this deal is. And you know, whatever, like, okay, cool. Let me, let me guess. They're not paying you in cash. Oh, yeah. No. No, it's it's deferred competence It's gonna be some stock and we second bite of the apple and you know all this stuff Yeah, and i'm like, yeah All we have to do is grow more than we've ever grown before for four years consistently and we'll get these bonus payouts And yeah, it's yeah.
Yeah. Yeah So so devil in the details a lot of devils and they're like, wait, what did you just say? Yeah, there's two ways to get paid cash up front and everything else, right? And everything else cash up front is how no one wants to pay you because that involves the most amount of risk. So when we say, Hey, the company is worth, let's say 10 million, right?
And that, that by EBIT multiples and top line multiples, it all falls well within reason. Okay. And you're like, Oh, cool. I'm 10 million. You know, I can make that work. And I was like, how you get paid 10 million [00:34:00] is a very different story. When we put Zirtual up for sale, we had. Countless offers from countless people.
But a lot of them were like for these huge numbers beyond what even we thought we could get for monopoly money, which meant stock, which meant like future payout, whatever, right? The price goes up geometrically. When you're not getting paid with cash. And so just to be clear, that means you're getting paid in stock, you're getting paid in incentive compensation, where like the business hits these numbers, you're getting paid in essentially earn out, which is kind of the same thing where you have to stick around and hit your numbers, which no one ever does most acquirers.
It's just in their nature as an acquirer ourselves, you know, we're in the same boat. We'll want to do something that defers the risk. That's really what we're talking about. And, you know, cuts down the cash compensation by paying you in some deferred structure over time. Sometimes you're like, I just want to get out of this thing, right?
You know, I just want to unwind this thing. Kind of don't care, you know, let it be whatever structure it needs to be. It sucks, but you know, it's better than nothing. I'm done. Acquisition sounds better than a wind down, [00:35:00] right? We've heard that before, right? Totally. Yeah. And, and, and frankly, I give this advice to founders.
In fact, I gave it to three different founders in the past month that were all going through different levels of sales. I said, look, based on where the business is at, certainly where the market's at, you don't get to call shots right now. It sucks. you talk to me two years ago, I'd give you a different answer.
But right now, you know, state of the union, uh, you don't get to call shots. The business is going down. It's got a certain lifespan to it. You're at a point now where you're not trying to land on the best piece of ground possible. You're looking for any life raft whatsoever that doesn't involve you drowning.
Yeah. You have no leverage in this whatsoever. In fact, you are the fulcrum. You are under the entire lever. Right? It's all, both sides of the lever pushing down on you. There's another hidden danger in this world that I've seen, and that's the, around this like the equity versus or the deferred comp, all of these other things that can come in.
Basically the entire bucket of not cash. And that's that founders will start to compare those two offers, right? You'll have a, you'll have a, a cash offer up front and you'll have a bunch of deferred comp and then they start to try to compare those two offers and [00:36:00] going like, well, but we got so much more over here.
Like we just need to get them to agree to that. Like, well, they're not going to, those are two absolutely different deals. And in, in one case, you know, you're, you're selling the cow for magic beans, um, hoping that the, the, the vine grows and you get to climb it and then rob the giant. The other one you're getting cash, which you can actually go and use.
Right. And so I think it's super, super dangerous where that starts to create another one of these false comparisons. It's like looking at the person that got the, the, the a hundred X multiple on their, on their business and sold to a massive company, even though you're not really anything like that company, same kind of thing here where all of a sudden we start to create this false comparison and we start to use that to evaluate the, the deal.
It is on the table. That's probably better for us because it's cash upfront. We're going to get paid, but all of a sudden we're like, but you know, we could get 20 million over here and deferred comp. Yep. Yeah. These guys are only offering us five in real cash. Well, guess which one of those is actually worth something in the next two years.
I just like, look, it just so people that are hearing this, you know, if you never get on the phone with Ryan Knight and we do an advice session one on one, I'll just tell you this, there's getting paid upfront in cash and there's just [00:37:00] everything else, right? In other words, like everything else is maybe get paid, but you always have a situation.
Where someone got paid in the Monopoly money and that Monopoly money turned out to be printed by Google, right? Yeah, that kind of some is right up there with winning the Powerball, right? It does happen. It just happens so infrequently It almost doesn't matter in most cases Whatever you think you're going to get on the back end Multiply that by 25 percent and that's your best case scenario Again, that is brutal News to process for founders, founders hear that.
And like, you've got to be kidding me. Are you saying that? Like I just sold this for 10 million, walk away with more than two. Other folks will hear that and say, that's total bullshit, right? You're going to get at least 5 million, et cetera. I don't know, man, you watch this happen enough times. You get way more realistic than by way of that cautious.
Yeah, about getting paid anything that isn't that upfront cash. I look at this in so many different ways and I always tell folks no matter what their deal is, it could be an employee exit agreement, whatever I say, what you get paid upfront is pretty much what you're gonna get [00:38:00] paid. Anything else is icing on the cake.
Don't negotiate the icing, negotiate the cake. That's exactly, it's such stage advice and like, look, if you're hearing this for the first time and you're not already post deal, this is the right time to hear it. Right. This is the right time to hear it, so you can least be. Thinking about it and knowing that this is the likelihood.
This is what is likely to happen. Um, again, other things do happen. Yes, there are other outcomes. Sometimes they're big, sometimes they're not, but we want everybody to go into this with just eyes wide open, right? The time to hear about that you might end up with 25 percent of what was agreed. is before you agree to it.
So that you're at least going into that going, okay, I really need to think about this. That is not guaranteed money. That is potential. That is future. That is a lot of things you're investing at that point. And this is a great way of thinking about it. You're investing in the person who's buying the company from you at that point, right?
You have to think of it that way. Think of whatever that money that they're not paying you today is that you're giving them that money, hoping that they turn that into something that they can give back to you. And that's it. Right. And most people wouldn't do that if they, if they were given that choice, like, okay.
If we're going to [00:39:00] pay you the full 10 million up front, but now we want you to give us seven of it back and let it use, let us use that to grow the company. Would you do that? Hell no. It's the same damn thing you're doing. If you take 7 million in deferred comp, it's the same thing, whether you want to think of it that way or not, that is exactly what you're doing.
You bet. And so you touched on something, and I think it's, it's worth kind of like ending with this notion. The enemy of every deal isn't time, and it's, time is definitely an enemy. It's expectations. It's our own expectations, which is what this whole episode was about. Which is, it's not that, you know, selling isn't great or going through the process, you know, it's challenging.
It's, you're competing with your own expectations. If your expectation was to sell for a million dollars, and someone was willing to offer you five, then the deal's gonna get done. When you expect to get five and you're only offered one, you're competing with your expectation the entire time. And this is about being very, very cautious about your expectations, realizing that your own expectations or what you thought it was worth doesn't [00:40:00] make it worth that.
And the longer you hold on to that at the, at the, at the cost of actual reality, the harder it will be To ever get a deal done and ever get the exit that you were looking for in the first place. 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 bootstrap founders and the advisors, helping them win in the startups.
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