Episode 276: Build Repeatability Into Your Business with Troy Henikoff

Welcome to another episode of the Club Capital Leadership Podcast. My name is Bradley Hamner, your host. On today's episode, we have Troy Hennecoff. He's a general partner of Math Venture Partners. He's a co-founder of Accelerate Labs, which became Techstars Chicago in 2013. He also helps manage the Firestarter Fund, teaches entrepreneurship at Northwestern University's Kellogg School of Business, and is on the board of the Chicagoland Entrepreneurial Center. This guy knows all things business, entrepreneur, tech startups, etc. This is really a master class on whether it's raising money, but also we're really going to get into financial modeling and the importance of that in your business. We're about halfway through. You're absolutely going to want to stay and listen to the— this episode in entirety. He drops so many nuggets and so many one-liners that I know is going to be able to help you. Without further ado, here's my conversation with Troy Hennigkoff.

So the big question is this: how do small business owners like us grow our leadership, develop our teams, and scale our business in a way that allows us to get our products and services out to the world yet still remain profitable?

That is the question, and this podcast will give you the answers.

I'm Bradley Hamner, and this is the Club Capital Leadership Podcast. Welcome to The Bottom Line, a new weekly podcast series that we drop every Thursday to complement our weekly Monday podcast interviews with the industry leaders.

These podcasts are gonna be designed to give you short, impactful, and value-driven information that you can start using right away in your business.

I value your time and attention and will do my very best not to waste it.

Just get what you need and go.

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Troy Hennecoff, welcome to the Club Capital Leadership Podcast.

Thank you very much. Great to see you.

Great to see you. Excited to have you. Well, we always start with background and origin story. And so for people that don't know you, uh, tell us a little bit about your background and how you got to where you are today.

Oh boy, it's been a long time. It depends how far back you want to go. Um, I'll try to make it quick. So I'm a serial entrepreneur, an accidental entrepreneur. When I came out of college and I didn't know anybody who had started a business, the word entrepreneurship wasn't even in my vocabulary at the time. Literally, there was no Shark Tank, right? There was no TechCrunch, none of this stuff. But I couldn't find a job that I really thought fit me. And on a whim, someone said, well, why don't you go start a company doing software development? And I laughed out loud and And then he said, no, no, no, I'm serious. I've seen the work you've done the last couple of years while you were summer, during the summer in between college, you know, I'll be your first customer. And I figured, well, if I have a customer, maybe I should start a business. And I had no idea what I was doing. And I mean, no idea what I was doing. But I did it anyway. And, you know, I made a lot of mistakes along the way. And in the course of 6 years, that little company doing custom software development went from you know, having one client and me operating in my parents' basement as a 21-year-old to having done work for companies like Abbott Labs and McDonald's and Computer Discount Warehouse. And we wrote the worldwide purchasing system for Hyatt Hotels. So we had software in every Hyatt Hotel in the world. And remember, this is before the internet existed. So they were FedExing diskettes with data between Chicago and Paris, putting it in the computer, letting it read the data, write some data, FedExing back to Chicago to read the data back in Chicago. And they thought it was the most amazing system ever. So anyway, it goes way back and we were building custom network database applications. We ended up, that company got acquired by a company called Medline Industries, which is a medical supplier. We wrote the software that Medline Industries sold to their hospitals and nursing homes. I had a 5-year earnout. I ran that software division for 5 years, way too long an earnout, lots of lessons there. But at the end of those 5 years, we had software in 10% of the hospitals around the United States. And our little 55-person software company, through a rebate arrangement where the hospitals, instead of paying us cash for the software, would pay us by buying more bedpans, linen, syringes for Medline's core business, our little 55-person software company tied up about $125 million a year worth of incremental revenue for Medline. Another lesson there, if I had understood how valuable we would have been to Medline, we could have held out and sold for 10 times what we sold and it still have been a great deal for Medline. But anyway, And after I left Medline, I built out the technology for Jellyvision. Those of you who today know Jackbox Games maybe previously remember the game You Don't Know Jack. Built that out, started a company called SurePayroll. SurePayroll was the first internet payroll company in the country. Actually, I know you have a lot of insurance agents in your audience, and we did a lot of work with insurance agencies early on with SurePayroll. We had Northwest Mutual, Allstate, State Farm. We were one of the first approved vendors for all of them for payroll. And then I got really involved in helping other entrepreneurs through teaching entrepreneurship at Northwestern starting in 2003, investing as an angel investor in early stage companies starting in about 2008. 2010, 3 other people and I started an accelerator for digital technology companies in Chicago called Accelerate Labs that ultimately became Techstars Chicago. And I ran that for 7 years. And then more formally investing through a venture capital firm, MATH Venture Partners, which we started in 2014. And so today I spend most of my time helping entrepreneurs, whether it's investing in them, mentoring them, helping at Techstars. I no longer run a Techstars program, but I do a lot of work with Techstars and I just love seeing early stage entrepreneurs figure it out and succeed. And hopefully they don't have to make all the same mistakes I made.

I have so many questions around just your experience. I'm going to kind of like pull some threads there that I'm really interested in.

Go crazy.

You've had 2 companies get acquired personally, is that correct? One by Medline and then SurePayroll.

Yeah, I would say 2 that were real acquisitions, meaningful acquisitions. So SurePayroll today is a division of Paychex. Many of your listeners may be SurePayroll customers. They service somewhere around 150,000 small businesses around the country.

Yeah, yeah. No, a lot of our listeners are going to be very familiar with that. What do you think are— I don't think I could ask one. And I realize that this is a really broad question, but I'm going to try to give it— tailor it to something. Is when you think about a business that is being acquired, there's this idea that the same thing that, that allows a business to be able to grow and scale is the same thing that allows a business to be attractive to an acquirer. Now, outside of the valuation aspect of it, you mentioned obviously you could have sold the company possibly 10, uh, for 10 times what you sold, uh, to Medline. Outside of valuations, what are a few of the core foundational principles that you think are absolutely necessary that acquirers look for in a company Tobah?

Yeah, so this is a very complicated topic. And as a matter of fact, my business partner Mark Ackler and, and a good friend of ours, Mert Izri, wrote a book called Exit Right, which is all about how do you set up your company for exiting the right way. And there are a few high-level things that I would say And we could certainly dig in, or you might want to bring Mert and Mark on your podcast at some point. But the first thing is that when you're exiting, you have to understand why you're selling and you have to understand why the acquirer is buying. And there are lots of different reasons that acquirers can buy. And some acquirers will buy for cash flow. They see a business and they see that it spits off cash and they do some math in their head. How much can I invest? If I put that money in a bank account, what would it earn? If I use that money to buy this business, what will it earn? There's obviously more risk with buying a business, so they're expecting a higher return, IRR, on their, on their money. But that's generally the worst reason to sell a business or the worst person to sell a business to, because there isn't, there isn't a lot of upside in it, you may as well run the business and get that return if that were real. The best thing is when you have a strategic buyer, that is someone— Medline was a great example. And as a matter of fact, it's used in the book Exit Right as an example where Medline, they didn't care about the revenue from our software company. Our revenue was single-digit million, low single-digit millions when they bought it. What they cared about was if we had this amazing software capability that we could write material management software that would manage all of the stuff coming in and out of the hospital, the gloves and bedpans, syringes, all the stuff that we sell, and we could befriend the material manager, the person who makes all the buying decisions, by giving that person software. And rather than making the person pay for it in cash, we'll just have an agreement that we'll give them, and in their case it was a 2% rebate on everything they bought. So our software would generally sell for $2,000 a month, but instead of giving us $2,000 a month, take $100,000 worth of purchases from Baxter that you're making today, move them to Medline, and the software becomes free to the material manager. And the material manager looks like a hero because he or she has now made their department more efficient, has not cost the hospital a penny and doesn't have to go to the VP of Finance or the CFO to get approval for capital purchasing, which is a scary thing to do as a material manager. And so they literally look like a hero. And in the meantime, that one little hospital, we just locked up $1.2 million a year worth of sales for Medline instead of collecting $24,000 for our software. Which do you think Medline would rather, $1.2 million worth of incremental sales of their core business or $24,000 of software revenue? So the strategic value was so great. Now here's what happened, and there actually is a long funny story with it, but the short version is that I was pitching Medline to do some more business with them. And then part of pitching, I said, oh, I was earning credibility, We just completed the worldwide purchasing system for Hyatt Hotels. And literally the CEO was in the room and he looked at me and said with this funny voice that I can't quite imitate, but he said, wait, if you did purchasing for hotels, you could do purchasing for hospitals because hospitals are just like hotels, only the people don't feel so good. And I said, sure. And then he looked at me and he said, okay, I want you to come work for me. I want you to build that system for me for hospitals. And I said, all right, well, who do I talk to, to write a proposal? He said, no, no, no, I want you to come work for me. And I said, well, I can't work for you. I've got customers, I've got partners, I have employees. He said, then I want to buy your company. I said, Jim, our company's not for sale. Everything has a price, he says. He asks a couple of questions and he literally gave me, made an offer right there. And I said, "Jim, thank you. It's very flattering, but we're not interested in selling." He was mad. He hustled out of the room. Everybody left. I didn't know who to talk to. I wanted to get the business, right? I wanted to write a proposal. So his brother, who is the president, calls me a couple of days later and says, "My brother was serious. Here's a new offer." And he made the offer a little bit higher. And I said, "Thank you, John. That's really nice, but we're truly not interested in selling." And we weren't. And 3 days later, John called with another price and we weren't interested in selling. Another, I don't know if it was the 4th or 5th call, but he gave us a price that was more than we thought the company was worth to us. And that's when we said, okay, and we sold the company. But what we failed to do was to understand what this was worth to them.

Yeah. Yeah.

And I didn't ask those questions. And if I had understood what they intended to do with it and how much this was worth to them, I am not kidding. Had they paid 10 times what they paid for the business, it still would've been wildly profitable.

Yeah.

Now they may not have done that. They may have chosen other options, bought someone else, built it themselves. There are lots of other options. But when you're selling a company, you have to understand the value to the buyer.

Mm-hmm.

And deals get done when something is more valuable to the buyer than it is to the seller, because now there's a range of price in the middle where everybody's happy. The seller got more than they thought they were worth, and the buyer got it for less than they thought it was worth. And this is why selling to someone who's just buying it for the cash flow is the worst deal, because the cash flow is the same to the buyer and the seller. There isn't much room in there. Nobody feels like they got a great deal, right? The bigger the gap between the value to the buyer and the value to the seller, the more room there is for both parties to be really happy. If there's a big gap and you split the difference, the seller is super happy, got way more than he or she thought. The buyer is super happy, got it for way less than it's worth. So look for opportunities where this product, your company, is worth more to the buyer than it is to you. And the bigger that delta, the more the opportunity is.

There's a couple things with that, I think, um, and for some of you that, uh, I'm gonna take what he just mentioned here, that don't have a company that you're able to sell or, um, don't have plans to be able to do that. I'll come back around to that in just a second. But I've heard that there's financial buyers, there's strategic buyers, and then there's just individual investors. And it's obvious that what you're sharing is that if you can sell or find a strategic buyer, someone who says this company is worth more in our hands than it is worth in your hands. And find some— tell me clearly, they're looking for a return, right? They're looking for a return on that asset. And they see something in that company that says, well, if you can do the same thing that you did for hotels, you can do it for hospitals. We want that thing. And obviously, that was incredibly profitable and very wise on that CEO's part to be able to, to be able to say, oh yeah, Uh, you know, for sure. I'm curious, uh, I've got to ask, um, since obviously financials— did it end up— I'm not going to ask you the numbers, but, um, unless you want to share— it was—

it—

did it end up being some multiple of EBITDA? Was it a multiple of revenue? What, what did they— what was the formula that they ended up kind of coming back with and what you ended up settling on?

Well, he started with a multiple of EBITDA. And I said, no, thank you. You know, we're very flattered. And he realized that I wasn't interested in selling. And one of the other lessons here is the strongest point to negotiate from is when you actually don't want the deal, when you're comfortable walking away from the deal.

Sure.

I didn't want to sell. My partners didn't want to sell. So we said no. And it was a credible no, right? You have, yep. You can't say no and then when they walk away, come crawling back and say, "Oh, I was just kidding. Please come back." You have no bargaining power. So it's a credible no.

He started with— I'm sorry, I don't mean to interrupt, but I just want to double tap on that for just a second. I think it's really important what you're saying is that obviously means that the business had a trajectory that you saw of future growth and I'm assuming had to be had to be profitable and spitting out some nice cash to you at that moment, because otherwise some people would be like, man, this thing— if the business was struggling and somebody goes, throws— I'm just going to throw out a number for somebody— $1 million, they may say, oh man, yeah, for sure, take this off my hands. I mean, so I'm assuming the business had to be doing well at that point.

Yeah, we had about a dozen professionals. We were running it at cash flow breakeven. So whenever we had a little extra cash, we added another person. We were in growth mode. So I wasn't personally taking much. My partners and I were taking the smallest salary that we were comfortable with because we wanted to invest in our future. But we had never raised any outside capital. It had grown all on revenue. We had the ability to be cash flow positive at any time. We just stopped growing. It would have started spitting off cash. No, we had a bright future and we were having fun. We were in a loft building in Lincoln Park in Chicago. I think the oldest person in the company was 28 years old. We were having a ball. So we weren't that interested in selling. And so it was a very credible threat. But understanding this dynamic is so important in selling. And the other thing that I'll say, I know some of your listeners are sole proprietors or sole owners, and then so this won't apply so much. But if you're in a business where you have a partner or where you have investors, and this also is in the Exit Right book, it's so important that at least once a year you have what we call the exit talk. And the exit talk is making sure that you are aligned with your partners and your investors as to what success looks like, because you may have very different views as to what success looks like. Maybe one partner says, sell for $1 million, I'm out of here, this is amazing. Maybe the other partner says, well, I won't give up until it's an IPO. If those are your two positions, you need to work that out because you are going to have friction and problems. And so making sure that everybody is aligned is so important. And so I'm on 9 boards right now of the companies that we've invested in through MATH, and we try to once a year have the exit talk. And it gets complicated when you have venture capital investors because everybody, has a different perspective based on where they are in the stage of their fund. Are they in the beginning stage of their fund and they've got 9, 10 years left? Or are they in year 8 of their 10-year fund and they want to exit in 2 years to be able to return money to their limited partners? What kind of expectations on returns have they set? And so everybody has a different seat at the table, but having that conversation once a year really aligns interests. And helps us when we're making strategic decisions. Like, should we invest in a new product? Should we acquire a, you know, should we do a little tuck-in and acquire a small business and bring it in? Well, if you're about to exit, that might be a bad thing to do because it may burn a bunch of cash and put you in a weak position. If you think you can leverage that up, then it might be a great thing to do. So it is so important to have everybody's interests aligned.

You know, before we hit record and before we were streaming it into our group, you actually asked me that question. And I think it just shows how, how the power of questions— you said, what does success look like from this, from this interview? So obviously, I'm assuming that that's something that even in the, the businesses that you're looking at or the deals that you all are looking at, I'm assuming that's probably a part of the questions that you're asking is like, what, what does success look like for this entrepreneur or these, or these partners? Is that fair?

Absolutely. And what success looks like changes over time for some people. But it is important that you, when you get into business with someone and you partner with someone, that you have a shared vision of what success is. And that's why I asked that question at the beginning of this podcast before we started, because I wanted to make sure that I knew where you wanted to take this and how we could make this valuable to your audience. And now that we know we're aligned and we're trying to do that and it works super well. I have a quick story for you and I know some of your entrepreneurs may not have this kind of an opportunity. I'll keep it anonymous, but it's a good friend of mine. And he started a tech business. And when he started the tech business, it was just him. And then he added a co-founder about 6 months in. And when he added the co-founder, he said to him, he said, listen, here's the deal. Here's what you're signing up for. I've got student loans. My wife has student loans. She has law school student loans. And we want to put a deposit down on a house. We want to have a down payment for a house. The minute I can get $800,000 out of this business, I can pay off all my loans, my wife's loans, my wife's law school loans, and put a deposit on a house that we want. I am selling. And so if you want to come join me, that's what you're signing up for. And he did sign up and they got together and they started building this business and it grew very nicely. It did very well. And at some point they raised a little bit of venture capital. And then in their next round of venture capital, it was a big round. There was a lot of interest in the business. And he had— the founder had the opportunity to take some money off the table in that transaction. It's called a secondary sale of stock. So he sold some of his stock to the new investors. Most of the new investors were buying new stock, but some of it. And he was able to get a little more than his $800,000 off the table. But he still retained 80% of his ownership. And what happened was a switch flipped and he went from playing defense, "I got to get to $800, I got to protect my $800, I got to protect my $800," to taking his $800 and a little more off the table. He paid off his student loans, he paid off his wife's loans, they put a down payment on a house, and he's like, "Now I'm playing with house money." And they took that company all the way to IPO, where it IPO'd for over $3 billion. His risk profile changed when his situation changed. So they went in with one set of expectations, they satisfied that set of expectations, and then reset expectations. Let's shoot for the moon. And they did, and they had a successful IPO.

Thank you so much for the specificity of that scenario, because I think I had a— I say this a lot, generalizations kill clarity. And I think that that is such a good one because that $800,000 was so important to him in that moment that he was like, I want to be able to pay this debt off. That is something to where somebody can say, I want to pay my house off, I want to pay my student loans off, I want to pay this car off. I want $100,000 in the bank. I want to be able to do this and this. And now I would go on to say, and this is not a goal setting podcast, but to say, write those things down and look at them on a daily basis to say, this is what I actually want. He could not have gotten to the place of saying, I'm going to have a $3 billion IPO. Like, he just mentally wasn't there. But like you said, the risk profile and then the mindset shifted because then he was like, okay, I'm good, I'm good. And whether it had been, I mean, $3 billion is unbelievable, right?

I mean, you could have said, well, he did $100 million of the $3 billion. So just to be clear, but the company, he did well for $3 billion. Yeah. Yes.

I love that. I love that because I think it's something to where regardless of how many commas and how many numbers are in that example, I think at the end of the day, like, I can think for myself, there's a lot of things where it's like, no, this is important to me to get to this point. What happens after that? I'm not really sure. And that's where I kind of like to be able to set 3-year, like a 3-year vision out to say, here's where I want to be in 3 years. I'm not sure where I'm going to be in '25. Okay, where the business is going to be. But I can kind of project out 3 years. This is what I want to be able to accomplish. And then when I get there, then I'll just reset another 3 years. But anyway, okay. So let me ask you, um, tell me about the partnership. Tell me how the book Levers came about. Now I'll tell you, I mean, I'm reading all the time on Amazon. I think actually it was several months ago that this book— I guess obviously the algorithm on Amazon shared it with me on my Kindle, and I was like, oh my goodness, that's perfect. And the reason I like it is two reasons. One, I use the word levers a lot, like what levers are we pulling in the business? That's just vernacular that I use. And so that immediately caught my attention. And then secondly, excuse me, the subtitle, The Framework for Building Repeatability into Your Business. So tell us about how that partnership with your co-authors came about. Obviously, we're going to kind of go deeper onto the chapter specifically that you wrote, and we'll kind of break that apart for people. But give us kind of high level how that, how that came about.

Yeah. So all 4 of us, Amos, Trevor, Cody, and I had been managing directors at Techstars. And what that means is that we had run Techstars programs all over the country, various places. And for those of you who don't know Techstars or know what Techstars does, is it is an accelerator for early-stage technology companies. And generally, we would take 10 companies at a time and run them through a 90-day boot camp where we gave them a bunch of stuff. They got a little bit of seed capital, they got free office space, they got more mentorship than they could possibly handle, they got a bunch of perks from Techstars. And in exchange, As Techstars, we became their co-founder. And so we end up with a tiny slice in— when I was running it, it was 6% of common stock in the business. So we give them a bunch of capital and space and mentorship. And we say Techstars for life, in that you're part of the Techstars network for life. And when we're helping— and I ran 7 years of this program, so I saw 70 companies go through my program. And there are a lot of patterns that you see of people making some of the same mistakes and we're trying to help them avoid it. And you test and you iterate and you come up with ways to communicate how, what the best practices are. And so what we did was Amos and Trevor started this and they were really focused on the top end of the process, which is, you know, who is your customer? And it is so funny. Like to ask that question, who is your customer? Seems ridiculous, yet so many people don't understand. So I have, picture if you were Mark Zuckerberg and you were, you know, it's 2000 and whatever it was, 4 or 5 when he's starting Facebook. And I asked him, who is your customer? He probably would have said college students, but the college students I would argue are not his customer. They are his user, but they were not ultimately his customer. His customer is the advertiser. That's who pays him, right? He has lots of users. I'm a user of Facebook, but I don't pay Mark Zuckerberg anything. I'm not a customer. I'm a user. And there's a difference. And so then, you know, who is your customer? What are they buying from you? What are those advertisers buying from you? They're buying access. They're buying specificity. They're buying the ability to highly target various people based on their demographics. So, you know, what are they buying from you? And it's so important to understand that. So we started with that as the first, you know, the first chapter And then what are they buying? And in this case, it's access. And we go all the way through the chapters, all the way down to the end, which is the chapter I wrote on financial modeling, which kind of brings this all together. And I try to describe a financial model as a mathematical representation of the inner workings of your business. It should have— it's generally a spreadsheet, and it should have inputs or levers, which are the assumptions, the inputs you have, the things you can pull in your business. And I want to give you some examples anyway, and it has outputs, and the outputs are a set of financial projections. Forward-looking projections. But you could have one— you should have one model for your business, the inner workings of the business. You can have multiple sets of projections. Here's my optimistic projections. Here's what happens if I raise a little extra money, or here's what happens if I get a great salesperson. You could have pessimistic projections. Here's what happens if the economy goes sour. It's still one model. You've just tweaked some of the inputs. Which will tweak the output. And so you could have 3 sets of projections, optimistic, pessimistic, realistic. They came out of one model though. You just tweak the inputs. And I view the model as a cheat code for your business. And let me be specific. Let's say that you had a business, I'm drinking my coffee, so here I'll talk about a business of making coffee mugs. Your business is making coffee mugs. If you knew, and this is a, let's say that you're cash flow positive, it's an ongoing concern. If you knew that your business was going to grow 20% year over year, you could do really well. You would plan production, you would plan capital purchases, inventory, and you could handle 20% year over year growth. If you knew that your business was going to grow 200% year over year, You could do even better. You'd have to plan. You might have to take on some debt to facilitate manufacturing, but you would have 200% year-over-year growth and you would sell a lot of coffee mugs and be really happy. Where you get into trouble is if you plan on 200% and you only get 20%. Oh boy. And you actually are in trouble if you plan for 20% and you get 200%, because now you have customers who can't get their product, your customer service isn't doing well, you have people unhappy. That's almost as bad. And so if you knew exactly what tomorrow looks like, it's like having a cheat code for your business because you could run a business that would be very successful at whatever that growth rate is. And a properly designed financial model gives you that visibility going forward. And it's not a stagnant thing. It is a dynamic spread— it's a spreadsheet again. It's a dynamic tool that every month when you get the update of what happened that month out of QuickBooks or Xero or whatever you're using, you have to go to your model and say, oh, my predictions were wrong. Your model is always wrong. Every model I've ever built is wrong. It's the only thing I know for sure about it. Hopefully, it gets less and less and less wrong as I get better and better, but it's wrong. And so every month I look at it and I say, "Ah, you know what? My customer acquisition cost wasn't $47. It was $48.15." And so I update that assumption or input in my model. And now guess what? My model just went, "Trrr." It changed a little bit looking forward. And then I say, ooh, the number of customers I lost each month, it's not 3.5, it's 2.75. It just changed a little bit. And if you are disciplined and you have a good model with appropriate inputs and you update those inputs every single month, your model becomes sort of like a heat-seeking missile. You know, with a regular missile, you fire it and it just goes in one direction. And if the target is there, it hits it, and if the target moved, it doesn't. But a heat-seeking missile makes corrections along the way trying to find its target, and that's what a good financial model will do. And so it's like this cheat code that today it may tell you you're predicted to have 200% growth, but if you have a bad month, it may say 180, and then it may say 160, and then it comes back to 170, and it's constantly adjusting so that you can be in control of your business. And I'm heavily biased, but I think the financial model is one of the most important things that you can build for your business to help you be successful. And notice I said you build. I really believe even for those of you who are intimidated by Excel, who are intimidated by finance, that investing the time to figure this out, and you don't have to have a sophisticated model, you can have a very basic spreadsheet that again has inputs and has outputs of results, but building the model yourself so that you understand it viscerally. And when I was running SurePayroll, every month when we got our numbers out of QuickBooks, that first Saturday, I would get up early before the kids were awake. I'd have a big cup of coffee. I'd sit down and it took me about an hour, hour and a half, and I would update my model with all the things that were wrong. I'd look at what we had projected was going to happen in the month, what actually happened in the month, and I'd have to figure out where I was wrong. And I'd update those assumptions every month. I'd get new projections. I learned more about my business in that 90 minutes on a Saturday morning than I did almost the rest of the month.

That's awesome.

So critical. And the only way you learn that is if you're the one who built it. And you're the one who modifies it. If you give it to some MBA student who's an intern or an associate, whatever, an accountant, and by the way, accountants are horrible at building financial models. Accountants are really good at recording what happened. They're trained to record what happened. That's a rearview mirror that looks in the past. They don't ever think about what's in front of the vehicle. They look at what's in the back. Financial model is looking forward. And so they really aren't— most accountants are not trained in how to think about modeling. And so what they'll do is they'll just take the history and project it forward. That's very different from having levers and inputs and understanding the mechanics of how your business actually works. I spend a dollar on Google, that gets me a view, that gets me what percentage of conversion to customer, blah, blah. You're an insurance agent. How much do you spend in that ad? What is your expectation of return? If you spend twice as many ads, do you get twice as many customers? Those are the inputs. Those are the levers we're looking for. We're not looking at just taking history and just repeating it. Anybody can do that.

Mm-hmm. All right. So I've got a lot around that. I think that is— that's so good. I'm going to share something with you that I shared with someone the other day. You, you give me your feedback. What do you like? What are your thoughts around this? And so this person, we were talking around their financials, and I said, uh, I said, what did you do last month? I think this would have been, uh, well, this was about a week ago. So I said, what was your revenue for June? So they shared, and I said, what was your revenue last year? And they said, I don't know. And I said, well, take a guess. And they took a guess, and it was less than what they did, um, same month this year. And I said, okay, what was your projection for what you wanted to do this month? And he said, I have no idea. And so my thought is, is both knowing, okay, well, what was the revenue? So if you— so if one of your businesses just says, well, our revenue was $100,000, some people would hear that and say, you did $100,000 this month. That's amazing. Well, I don't know.

Is it?

It's just a number because it's not in perspective of, well, what did you do the same year last year? What did you do the past month? What did you also project that you were going to do? Because if you projected $200,000 revenue, we did $100,000. That changes everything. And so having that forecast, like you said, over time, it's going to be completely wrong because your assumptions are probably going to be terrible. To begin with, but over time the projections get better because you just have more data, more data, more data, more data. Thoughts on that?

Yeah. So I agree with everything you said, but I think you missed the most important piece. Okay. And to me, the most important piece is why was your revenue $100,000? Again, whether that's above what you thought or below what you thought doesn't matter. I want to know the why. Because if you were to say to me, well, I thought we were going to come in at $75,000, but it turns out we ran this amazing ad and we got an extra $25,000. That's gold.

Yeah.

Because then we're going to try to do more of that, right? We're going to run that amazing ad next month. We're going to test it, et cetera. But if you say, I don't know, it was supposed to be $75,000, it came out to $100,000, then you're just playing It's like playing the lottery. You don't know. It's just luck. And so the key is that you have a hypothesis of what you think is going to happen. And that hypothesis is your forward-looking model. I believe if I spend $10,000 in advertising on this kind of ad, blah, blah, blah, I'm going to get— I'm going to be at $75,000. And then you have a result of the test. Which is your financials. I came in at $100,000.

Why?

Did you spend more on that advertising? Was the advertising more efficient than you thought? Was it less efficient than you thought? And when you understand the why, that enables you to grow even faster, to make the right decisions. And so it's really important that every single thing you do in business, I like to have— talk about should be a twofer. And by a twofer, I mean I want to move the business forward, but I also want to learn. And so as an example, I talked about digital advertising. If I'm going to spend $10,000 in digital advertising, that's great, but I want to learn. So I'm probably going to split it into two different ads. I'm going to spend $5,000 on one that's blue and $5,000 in one that's green. And I'm gonna see, do blue ads work better or green ads work better? And at the end, both of them are gonna bring me customers, but one of them may bring me slightly more customers. So now I'm smarter. Let's say the blue ad worked well. Now I'm gonna take the blue ad and maybe next month I'm gonna try blue against yellow, right? And I'm keeping on iterating in every single thing I do that's new in the business. I try to do two things. One is I would wanna learn from it. And two is before I start, I have objective numeric goals, right? I have entrepreneurs come in to talk to me all the time and I hate when they don't have objective numericals. Things like they'll say, oh, we just launched a new website. It's our minimum viable product. And I'll say, great, what are you testing for? Like, I want to see how people like it. What do you do with that? What do you do with that? Now, if they said, I want to see— our goal is to get our conversion rate from visitors to paying customers from 1% to 1.2%. Now I love it. Yes, they have an objective numeric goal and they could come back and maybe they hit their 1.2%. Now they— now we have to figure out why. And now we're going to iterate and we're going to try to get to 1.3%, 1.4%. And this is no different than when I was running marathons and I set a goal for myself of what time I wanted to get.

Sure.

And I did a bunch of research and I found out that there's a book that has a table and it would show you that marathon time is equivalent to this half marathon time, to this 10K time, to this 5K time. And I set a little grid and I had to do my 5K time and I checked that off and I had to get my 10K time and check that. And it was a process that got me to the end goal, which was I beat my time in the marathon. The other thing for me that helped was I told everybody who cared that I had this goal in the marathon, which kept me honest.

Yeah. Accountability.

And then when I didn't feel like working, doing a workout, I'd be like, ah, I don't feel like running today. Oh boy. But if I don't hit that goal, I'm gonna be embarrassed. I better get out there and do it so I'm not embarrassed. And so I worked really hard and I hit my goal. And it is not easy, but if you're in business, and you set objective numeric goals, you share them with the right people. You don't have to share them with the world, but you share them with your business partners, you share them with your leaders in your company. And we work together to hit these objective numeric goals, not ones you can slide around. I want to see how people like it. Right. Objective numeric goals. It just helps you move the business forward. Yeah, it's awesome.

I, I, it's one of the reasons why I, I personally really like the OKRs framework on an annual basis, because you can say, here's our objectives, and then let's drop it down and give specific key results. Like, it's not a key result unless it's a number, and then let's track that number on a scoreboard or some sort of a dashboard.

100%.

Yeah, really, I really love that, love that framework. All right, I got a question. How— I'm gonna get— and we'll wrap up on time here in just a second.

What are—

how far out do we do the forecast? What is— where— I mean, look, if we're forecasting the next month or the next quarter, we clearly know that that should be more accurate than if we're going to forecast, like in my example earlier, 3 years out. But yeah, how far out are you sharing with your one of your businesses that you're investing in, etc., whenever you're giving your advice and mentorship, how far out are you encouraging them to go?

So it depends on why you're building the financial model. So if you're building the financial model and you're using it as a tool for fundraising, going to venture capitalists, angel investors, etc., it's got to go pretty far because you have to go far enough out to show that this company is going to be profitable. And in my world of tech investing, most of these companies are not profitable for a long time. I mean, Amazon went public and wasn't profitable until well after it was public, right?

Yeah, sure.

And nobody's going to invest in a company that just loses money, loses money, loses money. So you have to tell the story that I'm losing money because I'm building a future that's going to ultimately take off. Generally, for fundraising purposes, It's a 5-year projection. Now, that's long and that's hard. And I will tell you, when I was running SurePayroll, after we had raised our Series A round and we had a board of directors, at the first board meeting, one of the board members said, we need 5-year projections from you. Next meeting, I want 5-year projections. I didn't know what I was going to get in 5 months. This was early stage. We had a brand new product. Nobody had ever created internet payroll before. We had no idea what it was going to be. I was so frustrated. So what I did, kind of funny and a little embarrassing, was I took my model out 5 years and in Excel, I made year 1 be 100% darkness. I made year 2 be 80%, 60%, 40%, 20%. So that the grayscale of the print, so when I printed it out, it looked like it was Dark, lighter, lighter, lighter, and you could barely read the 5th year. And I printed it out like that. And at the board meeting, I handed everybody the paper and they were like, "Your printer needs more toner. It's all faded." And I said, "No, no, no." I said, "It's really hard to project out 5 years. It should be hard to read." And they were a little annoyed. And then I handed them paper that was 100% dark where they could read all of it. But I was trying to send the message that I didn't have confidence in the 5th year. And it is hard for operating though. I think it is important. I always keep a 5-year model at this point and I'm always updating it. And every year when I get to the end of the year, I add another year on the end of it. You want to know where you're going. And again, it's important if you have goals that you have goals for what you're trying to achieve. This was the the story of the $800,000 we talked about earlier. Um, and your goals are— it's fine that they change, but, um, it's so hard. Now, if you're running a business that is cash flow positive, the business isn't changing much, you're going to have the same business in 5 years, you just may have 20% more revenue, it's probably less important that you are as as disciplined as I'm talking about because I'm generally dealing with early-stage businesses where there are huge levers that can totally change the trajectory of the business. Once the business gets to the point where it's stable and cash flow positive, you're looking for 10% growth year over year, 20% growth, whatever it is, but you're not going to be making huge swings. And by that time, you probably know what the drivers are, what the levers are. But in the early stage, it's so important to track, track all of this, to understand what your levers are and understand the input and the result that you get. The input, the result that you get, because you want to figure out which ones work, get you the most results and do more of those.

Yeah. I mean, I think that this is where there's a tie, where we want people to be able to see the tie is to be able to see the decisions that you're making on a day-to-day basis in the business. Ultimately has an impact to the financials one way or the other. And then you use that to be able to say, okay, well, that projection didn't work out. I thought our sales was going to be this, which would have led to additional incremental revenue of this. Well, that didn't work out. I thought we were going to spend X amount in marketing. We spent less or we spent more. And then it just keeps iterating over time. The second part of it is is it's almost like it's a rolling, whether it's a year, etc. Everything is kind of being pushed out. And whether that's 5 years, for some people listening to this, they need to build a financial model that goes out 12 months just to begin with if they don't even have anything, uh, that starts, obviously. So that's good. I got one question for you personally. Why VC money? Uh, I mean, obviously VC is, is, is a, a form of private equity. What do you love about the tech startup world versus being investing in a business that has already got a little bit of a, you know, revenue behind it, etc.?

So a couple— I'll take this question from two directions. One is when we were building companies. So I've built companies that have been bootstrapped. My first company was totally bootstrapped, as I told you. I've had angel investors, I've had private, traditional private equity, and I've had venture capital. You know, SurePayroll, we needed significant amounts of money to build because it cost us over $1 million to build the infrastructure to process our first payroll. This is before things like Amazon Web Services. We had to buy physical servers and all that stuff. And then when we processed our first payroll, our customer paid us $19.95 every time they ran payroll. So you needed capital. Now today, SurePayroll with roughly 150,000 customers paying, and they pay more than $19.95 now, but not that much more. Even if it's double, call it $40 every time they run a payroll, you can start doing the math. That's a real lucrative business. But you needed capital in order to get there because of the initial startup costs. As an investor, What I love is creating— well, as an operator, what I loved was creating something out of nothing. And as an investor, what I love is being able to help other entrepreneurs create something out of nothing. So there are lots of great businesses out there that if you want to, you know, not work for the man, you want to go work for yourself, and you want to do— and you don't want a lot of risk, you can buy into a franchise, you can run your own organization, you could I know people who own 20, 30, 40 McDonald's restaurants. They are very lucrative. That's not a business I have any interest in being involved in because it's not challenging to me. I like the intellectual challenge of creating something new, doing something that's never been done before. We created the very first internet payroll product. People told us it couldn't be done. We did it. It's fun. I love— that's the part I love. And I love helping entrepreneurs create new things and make the world a better place. And so as an investor, I like to invest in those early-stage entrepreneurs who are trying to make the world a better place and trying to invent new things.

All right. So then my last question is going to be, what is your— what is one piece of advice? I was going to say best, but what is a piece of advice to that entrepreneur when it comes to being able to trade money for equity? Meaning somebody has got an idea and they're like, oh, I'll sell 80% of the company from the get-go. Well, that, that you could be really hamstringing yourself. What typically— give me some ranges that you see that come, uh, that the original founder or founders will be able to give away early on Again, I think for some people Shark Tank would be kind of an idea of that, although that's kind of— I think, yeah, parallel enough. What do you typically see?

Well, first off is I tell people, so if someone comes into my office and says, I'm selling 20% of the business for $200,000, I say, you've been watching too much Shark Tank. That's not the language we use. Right. And I tell people Shark Tank is to our business what the World Wrestling Federation is to the Olympic sport of wrestling. Yeah, it's vaguely related. It's for entertainment. Some of it is scripted and it's made for TV right now. It's more interesting to watch than Olympic wrestling. If you've ever watched Olympic wrestling, and I was a wrestler in high school and college, Olympic wrestling is kind of boring to watch. It's nowhere near as exciting as the WWF stuff, but it's the real thing. It's people really grinding it out and trying to win in a fair athletic competition. So in our world, first of all, the more progress you can make before you take outside capital, the better. So a lot of people will have their day job and they'll have an idea. And they'll start to do a side hustle and they'll come up with an MVP, this minimal viable product. How can I— if you're thinking about this and you haven't read the book, The Lean Startup, this is for your audience. Everybody who's an entrepreneur trying to create something new should read the book, The Lean Startup by Eric Ries. They should put it under their pillow at night so they absorb more of it through osmosis. It is the process by which you try to learn as quickly as you can and inexpensively as you can. So you do a bunch of mockups and you do a bunch of tests and you iterate, iterate, iterate, iterate. And so you can do some of this while you have your day job. So you're not risking your life savings and you're not risking a bunch. And the more progress you make towards having a product, having a product that users, customers are actually using and deeply engaging with, I look at engagement metrics. I don't care how many people downloaded your product, that doesn't show anything. What I care is if they downloaded your product, they used it and they came back. That shows that they actually liked what they did and they came back, right? And the more often they come back and the more time they spend on it, even before you ask them to pay, and then the closer you get to getting them to pay and getting revenue, the further along you can get on that trajectory before you raise money. The more money you'll be able to raise at a higher valuation. So you will have to give away, sell a smaller percentage of the company. The terms that we use in the industry, we talk about pre-money valuation, the money that was raised, and that gets you to a post-money valuation. So if I have a business that actually has some traction, I might have a pre-money valuation of $3 million, and I might raise $1 million. That means my post-money is $4 million. After the money has been added, it's worth $4 million. Since it's worth $4 million and the investors put in a million, they bought 25% of the company. And the language we use is, what is the valuation, pre-money valuation and post-money valuation, and how much was raised? There are a lot of different ways you can raise money. There is equity, which we just described. There are SAFE notes, there's convertible debt. There's lots of nuance in there. And the one piece I would say, if you're actually raising money like that, that you find a lawyer who does just this in your industry. And the analogy I make to people is if your best friend is the smartest physician in the world and he's a cardiovascular surgeon and you need a brain surgery, would you have your cardiovascular surgeon do the brain surgery on you? No way. Well, you don't want your best friend who's a real estate lawyer— let's say she is the best real estate lawyer in the world— you don't want her doing your equity deal for an early stage technology company. It would be like having a cardiovascular surgeon do your brain surgery. You want someone who does this thing all day long, knows what goes wrong, knows how to fix it, knows what standard is, right? So, um, but to answer your question, the further you can get in terms of traction, which can be getting a product getting engagement, getting revenue, right, in that order, the better it is because your company will be worth more so that when you do raise money, you will have to sell a smaller percentage of the company to get the money you need.

Oh, that's awesome.

Very few people can have an idea, wave their idea around and say, I want to raise $1 million on an idea. Now, if you were Mark Zuckerberg, or, you know, Bill Gates or whatever, if you've had a successful history, yeah, sure, you might be able to raise a bunch of money on an idea. But most first and second time entrepreneurs, you need to show that there's actual customers who want the thing that you're selling. There's some engagement. You don't necessarily need revenue yet, but if you show that there's engagement and they're actually using this thing and Certainly if you had some revenue, that would be even better. So the further along you get, the easier it is to raise money at a better valuation.

So it's been great. I really enjoyed the conversation. People want to pick up the book. Where would you point them to? And also if they want to connect with you on social, LinkedIn, where's the best place to be able to do that?

Yeah, of course. The book is on Amazon. It's Levers. If you just in Amazon, you say Levers book, you get there. We'll put a— I assume you'll have show notes or something. We can put a link. Yep. I am TroyHennecoff, all one word, on Twitter and LinkedIn is TroyHennecoff, although I only connect on LinkedIn with people I've actually had meetings with because what I found was on LinkedIn people would say, oh, do you know Bradley Hamner? And I'd say, I never met, I don't know. But now that we've had a meeting, I'd be happy to connect with you on LinkedIn because then they can say, of course I was on his podcast.

Yeah, that's awesome.

But Twitter is the best place to follow me. And I do open office hours on Fridays. I can give you a link to that as well. If people have questions about entrepreneurship and really, you know, want help thinking through some of these things, I do open office hours. It's amazing to see the various entrepreneurs that come and show up. The only thing I ask is Don't come and try to sell me something.

Troy, this has been great. Hope to have you back on in the future.

Well, thank you. I can't wait to, uh, see more of your podcast.

Thanks so much. Boy, I really enjoyed that conversation with Troy. We covered a lot of different things, and I know that some of you may not necessarily be in a position to sell your business, you're not interested in selling your business, but I do know a lot of you have had either side hustles or some other businesses that you're considering starting. So hopefully that gives you some insight into that world and what that looks like, not just on Shark Tank but in the real world. I thought some of the biggest things that he talked about, which is certainly something I'm going to use whenever I'm talking about Club Capital, is— look, I mean, he wrote the chapter in that book Levers and we're actually interviewing one of his co-founders in a few weeks. But Troy wrote the book on, uh, you know, financial modeling, and we wanted to bring him on to be able to share with you guys. This is from somebody else's totally different perspective. Um, and some of the things he mentioned is like your financial modeling, your projections, ultimately it becomes a heat-seeking missile. And I love that analogy because those heat-seeking missiles are obviously you know, changing course, etc., every single time to be able to hit the target, which is exactly kind of what you're doing in your own small business with your financials. And then the second thing was, okay, here were the numbers. Why were the numbers that way? And you heard me actually ask him or share with him what I had just shared with the business owner. And he said, sure, but the most important thing is why were the numbers what they were, whether they were high, whether they were low. What were the decisions, what are the things that we did or didn't do in the business that made those numbers kind of came out. I also thought he said that the financial modeling is kind of like a cheat code, and who, who in business doesn't want some sort of cheat code for their company? Really enjoyed that conversation with Troy. Make sure that you go and check out their venture capital website. Certainly pick up the book Levers and go to leversbook.com. But you can also certainly pick it up on Amazon, but their website is mathventurepartners.com. Well, what a good segue into Club Capital. Look, if you want to be able to do this type thing that what Troy was talking about, Club Capital can help you do that. They've already got the tech and the behind the scenes, but the thing is they've also got the perspective. Of the— what everybody else is doing. What are the top ones doing? What is the average doing? You're able to get that data that you just can't get from anyone else. That gives you perspective not only of your own numbers, which is obviously incredibly important, but you're also going to get perspective what everybody else is doing. Of course, it doesn't have names on there because it doesn't really matter who the people are. What matters is, is what are the best practices that other people are doing But they're also going to be able to walk you through— you've heard me say mindset, skillset, toolsets. Like, okay, what's the mindset I need to have in terms of marketing and making the investments and team members, etc.? But also, do I have the skills to be able to kind of build this out? Well, you may not, but Club Capital is going to be able to help walk you through this. It's what they do on a day-to-day basis. So these projections, financial modeling, etc., look, sounds like big words, but they're going to be able to help you actually see Well, what should my revenue be over the course of the next 12 months? What about expenses? What about profitability, et cetera? If I make this investment in this person, when is, uh, the, the, when am I going to see the impact financially in a positive way for that new team member? Maybe a sales acquisition team member. Do I have the bandwidth to be able to increase marketing spend? I'm at 3% and I thought I was better than that. I was investing more in that. Maybe I need to be more at 6, 7%. Whatever that may be for you specifically, they're going to be able to help you. Go to club.capital and book a no-obligation demo with somebody on the team today. You know, one of the biggest investments that you're going to make is in your team. So attracting A-players, finding A-players, and then being able to onboard them effectively is critical. And so having a bench, having something that's being done on a regular basis is one step in that direction. And really, it's the part that most people don't like to do. We as business owners, we're wearing so many different hats. And so being Chief Recruiting Officer, as an example, you realize like, well, ultimately it's my decision. Yes. But that entire process, the motion of the recruiting process, there's aspects to it that you're absolutely able to get back some of your time so you can invest and higher leverage activities. And that's where Autopilot comes in. Go to autopilotrecruiting.com, let them know that you heard about them on the Club Capital Leadership Podcast, and they'll be able to share with you exactly how they work with thousands of insurance agency owners today. Go to autopilotrecruiting.com. Last but certainly not least, the investment in your team, whether it's recruiting, but also the investment in your team, is going to give you some of the biggest payoff possible. Investing in my own coaching and development as well has been the best return of anything I've invested in. Yes, even beyond the team, finding A players valuable, but being around other people, other insurance agency owners. Look, I talk about David Peterson's coaching and being able to bring your team on. Yes, but here I want to focus on the aspect that you're going to be around like-minded business owners who are trying to grow. On a once-a-month agency or agent-only call with David. So if you want to be in that community with other insurance agency owners that are getting it done at a high level or working to get done at a high level and be able to work with David and ask him questions one-on-one, go to coachpconsulting.com. All right everyone, great episode. Till next time, lead well.