How to Sell a Failing VC-Backed Startup with Wil Schroter, Founder of Startups.com

All right, so for this webinar, I just want to give a little intro. So this is with Will Schroeder, one of my good friends. He's actually acquired seven venture backed startups and he has been through it all. He's built companies, he's sold companies, he's had companies fail. He currently runs startups.com and in this podcast, what we go over is what to do if you feel like you're stuck, what to do if you feel like you're burnt out. You can't go any further. Maybe the business is stalled in growth, but you've raised a little bit of money from investors. Maybe you've raised a lot. And so we go over a few buckets where maybe you're sitting on a good amount of Runway, maybe it's 812 months. So you have a lot of options in terms of making it a potentially a life changing acquisition for you. But there's decisions you have to make now. And then we also talk about a different bucket where maybe you raised a ton of money and there's no product market fit. You raised in 2021, 2022, and you're just thinking, what do. And so that's another bucket. And then another one is I'm running out of money and I have to sell this business, but I want to take care of my team. I want to show some sort of return to investors. I just want out. So I've been having a lot of these conversations, so I thought it'd be great to bring Will in the podcast and get his perspective. And more than anything, if you're in any of these buckets, I just want to say you've built a great company, built a great product, you have customers, you have optionality when at times it may feel like you don't. So I hope you enjoy the listen and I hope you get through whatever you're going through, if it's a hard time or a good time, and really start thinking about the importance of preparation when getting acquired. And ideally not getting down to one month of Runway to go to market. But we talk about every single one of those scenarios. So listen up and I call Will Startup Yoda. So hope you enjoy. Cheers. All right, I'm here with Will Schroeder, the founder of startups.com who is a good friend of mine, the man, the myth, the legend. How you doing, Will?

What's going on, buddy?

It's good to be here. It's good to chat. The last podcast we did was candidly one of my favorites. So I'm glad to have you back on here, but, um, we got a different topic today. We're going to be talking about how to acquire venture backed startups. And I guess to kick things off, do you want to give people just a quick introduction of yourself that may not know you?

Yeah, sure, sure. So I've been doing the startup thing for a very long time. Yeah, yeah, I said like 30 years. Yeah, it's, it's been a long, long, long time. And I've done nine startups. You know, this is all I've ever done for three decades, nonstop. A few startups at the same time in parallel. Wouldn't recommend. And so in that time I've basically gotten to live all of these lives, right? Not just through all my own startups, but I've helped thousands and thousands of other founders. You know, Gaz and all those guys do now. We were like a decade before those guys. Sometimes too late, sometimes too early. We were too early, doesn't matter. This was one of the first times that I had been in a position where I'd raised money and run out of it, didn't know what to do, right? And so I did like what most founders do. When I ran myself into the ground, I was just like, no, this thing cannot fail. Let my ego get in front of it and just did everything wrong. At some point though, we actually ran.

Out of money, right?

Like there was nothing else we could do. And so I'm sitting there thinking, okay, I get it, we're out of money. But like, like literally what happens to this thing now that it's out of cash, right? Well, it turns out, and again, a lot of folks don't know this and this is like the premise of everything we're going to talk about, but when a startup runs out of cash, everybody kind of runs for the hills. The founders are like in a broken cap table where they have no upside. So like, hey, I'm out of here. The investor like, well, hey, there's no one to run it and there's no money. So we' out of here. And all of a sudden this great asset often is just sitting there and no one can do anything with it. And that kind, I just kind of put that like, huh, this seems to happen a lot. And then most of my friends are founders, so I would listen to them go through these incredible stories of building these great businesses and then they ran out of money or it wasn't venture fundable, you know, anymore. And then these assets would just sit there. So after a while I'M like, who's, who's buying all of these? Like what happens to all these assets? Especially when they're worth a lot and it turns out nobody. So, so at the early stages of startups.com, this is like 10, 12 years ago. I knew that I wanted to build this platform to help startups. I knew there's lots of things that I wanted to do within that, like, like building a customer acquisition app, building a funding app, all these things. And I'm like, I can't build all these at once, but what if I could buy it? So I moved to San Francisco and I was in like 12 meetings a day talking to every single startup founder that would listen to me saying, look, if you have something that's in our space, like in the startup space, we'd love to talk to you. We end up talking to, in doing diligence on over a hundred different venture funded startups to buy and we end up pulling the trigger on six of which all six completed. So that was the genesis of me getting into the buy side, which was trying to buy companies that fit the thesis for what startups.com did.

So in terms of the companies that you acquired, what made them stand out out of the hundred? Was it, yeah, the motivation of the founder? Was it the deal structure that you were able to obtain? Was it like what, what really? Because I think a situation that a lot of founders are in today is they get a lot of cash on hand, you know, from 2021, 2022. They're not really growing too fat, but they're not like in a dire need to sell, but they know they have an outsized valuation that they're probably never going to grow into.

Yep.

And so they're not that motivated to really grow the business. But there's, you know, it's probably better than a job, you know, so, so in these situations, you know, how do you, how do you think through that, I guess in terms of, you know, if you're a buyer, how do you create a win win deal for these venture back businesses that have, you know, they built a great product, they have product market fit, they have tons of happy customers, they have an amazing team. How does that, like what do you do?

Here's what I did and I don't think this approach is for everyone, but it was kind of syncs with, with how I operate. I sat down with the founder and I said, look, I may or may not buy your business. Who the hell knows how these things go? And there's a million you know, variables. I said, but let me explain to you how this process works. So whether you sell to me or someone else that you are taken care of because as you know, all I care about our founders. So like, you know, I was basically saying, here's how to talk to your investors, here's how to talk to your staff, here's how to talk to everyone else, and here's what to expect for yourself.

Right?

Again, most people aren't going to have that kind of advice because they're just trying to buy a business. They're not trying to advise a founder. But I use that to say, look, again, I don't care if you buy from me or not, or sell to me or not rather, but I care that if you're going to exit this thing that you do it right. So most of those conversations, guys were just me having a conversation with a founder to help them out right now. In some of those conversations, the founder was in a tough spot here where the cat finder typically was, right? One was they just ran out of money.

Right?

There is no money in the bank and the thing is going to wind down. That's always a category, obviously right now when that happens, I think something that a lot of people just don't understand is that there's no one at the wheel anymore.

Right?

Like there's, there's no one. It's, it's not like, oh, hey, we've run out of money and yet we have a full time staff running this thing. It's like at some point everyone just drops the keys and walks away, particularly investors. The reason I say that is because in those cases the value goes to zero. And I think even the founder doesn't realize that usually the founders are like, well, I just raised that a $20 million valuation. And I'm like, yeah. And if you stop working there, the value is now zero. It works there. There's no value. And most founders don't get that. Does that make sense?

It does. And there's, I think there, if you've been following kind of like the data that's been coming out, like there's probably, I think I read, I can't remember who put the report out. It was either Carta or Pilot. And they, there's a stat saying like 60% or 70% of venture backed startups have like 12 months of Runway left.

I'd be shocked if it's. Yeah, yeah. Even that much anymore.

Yeah.

So given the last 12 to 18 months.

So we kind of have these two interesting buckets that I think people are looking at, and we've been seeing a lot of interest on acquire.com in terms of both on, on, you know, founders just saying, hey, you know, this isn't going to work out for me. And then the other side I'm referring to, I got cash in the bank. You know, we could go for a decade. But, you know, it probably makes sense to just kind of, you know, wind this one down or just sell the assets and go build something new.

And then the other second category, that's, I was going to say.

Yeah, yeah. And the second bucket is the one that you're referring to, which is we're running out of money, we have to sell and, or sometimes it doesn't even come into their head. It's just, you know, we're running out of money, the startup is failing. And they don't ever think like, hey, you've actually built again a great product, you know, happy customers, you've created value. And, you know, getting those startups to have, quote, unquote, a soft landing into a buyer like yourself or another, like, that's, that's a topic that's been a rising trend. So let me, let me play like a theoretical situation. So let's say there's, there's a founder out there that's in that situation.

Sure.

They're losing money. Maybe they have eight months of Runway. What should they start doing in terms of they, they want to sell the business, they want to have a soft landing, maybe return some capital back to investors. There's probably not going to be a lot of upside for the found. Or maybe there is. Like, what advice would you give to that founder?

Well, the first bit of advice and sadly, guys, this, you know, you and I were talking over the weekend, this is, this is more of the advice I'm giving right now because a lot of people are at the end of that Runway, right? And my first bit of advice is, you understand you'll probably get zero, right? And the reason I say that isn't, isn't to be negative. It's just to prepare people. Because what happens is five seconds ago, you raised a bunch of money and you were at $20 million valuation, $100 million, whatever you were at, right? And psychologically, it's just hard to understand that that could go from that to zero or some number close to it right now for most of the founders, they're like, I can't comprehend that because my whole life is in this. I told me all this money that it was worth something. And I'm like, oh, that's awesome. It's great that you did that. And it's probably worth zero now when I say that zero sounds like such a finite number, right? It sounds like, well, how does it be exactly zero? I start with zero because I said, dude, the probability that you will find a buyer at the end of this is extraordinarily low. Which is why I always then point them back to you guys because you guys have, you know, begun to change that equation. But think of statistically probability, how many things have to fall in place for an exit to occur.

Right.

First off, you have to have something people want, which isn't necessarily always the case, but let's assume you do. Second off, the people that you would take it to have to be in a position to buy, which everyone thinks, oh, you know, I've got this great asset that there must be a bunch of buyers. Not really.

Right.

Which is where you guys come in because you guys open up so many more doors of people that wouldn't normally be a case. I told three different founders this last week giving the same advice. We're all in kind of a wind down, venture funded situation. I said, here's three buckets that you're going to wind up in either private equity, which is only an option if you have revenue.

Right.

The second is a strategic buyer, which is always your best case. But there aren't that many in the likelihood that they're willing to buy in. The contact you have has the authority or the wherewithal to champion the deal fairly low. And then the third is essentially someone like me or you guys, like a one off entrepreneur buyer that's buying it as, as their own acquisition, not part of something bigger.

Right.

Those are typically your three options and you have to exhaust all.

I agree. What's your thoughts on this? So this is kind of like the advice because I've been having a lot of these calls too, I imagine.

Yeah.

And you know, they're, they're painful because some are in dire situations, some in both buckets like, hey, I have a lot of like cash on hand but you know, we're not growing and all my investors are yelling at. And then also the, we're running out of money. And again all my, I just want to move on. Everyone just in these two situations, they understand. And just for, for listeners, when I say optionality, what I mean is that big exit that you dreamed of when you raised the money, you know, it's, it's gone. It's, it's very unlikely to happen. And I just, I also want to just mention Will and we both know this, but, and that's okay because statistically, when you like acquired a commercial venture backed statistically to reach venture scale, you have a 0.01% chance of success. So you have to be a statistical outlier to succeed. So you're not a failure. You haven't done anything wrong. It just, that's just how startups go. You win some, you lose some. And sometimes the advice I give is the number one thing you don't want to waste more than capital is your, your years of your life.

Yeah, absolutely.

If you see the writing on the wall and as a founder, you usually can, you know, I know there's a lot of startup virtues like, you know, just keep going, keep going. But if you're just drained mentally, you know, I think looking at a sale is, is a great option because again, you're able to get some sort of capital back to investors possibly. But more importantly, I think restructuring the business to where it's a profitable business, where it's a more sustainable business, you get off the ven of high growth and you turn it into a business that's going to be round for a while. And you've. And you've done that, Will.

You have. Yeah.

And I. Here's the challenge though. From an investor standpoint. A lot of folks don't under. Don't understand kind of what some of the investor motivations are. And let's segment them as two groups and I think this is important for the buyers to understand as well. There's two groups of investors, there's angel investors, which are essentially people where if cash got returned to them, they would buy a cyber truck or something.

Right.

You know, they would have a use for it.

Right.

And then there are venture investors who, it doesn't matter if you return money to them. Not like, not, you know, an insignificant amount of money.

Right.

In other words, if, if you say, hey, who's your lead investor is Bessemer.

Bessemer.

If you were to say, hey, Bessemer, here's $85,000, you know, thanks for your investment, here's your return. I don't even know.

Right.

And again, a lot of people don't understand that. And when I say that Bessemer or folks like them would prefer to be able to have their stock just moved over to another entity that would likely do something with it and hopefully have an outcome down the road so they don't have to write it all down.

Right.

And again, there's some nuances there that people don't understand but have a tremendous amount of influence when it comes to selling.

So let's talk about, let's talk about deal structures in terms of. I'd love to hear maybe one that you structured and you know, ones that you know, I'm, I'm currently recommending and I think a big part of this, and tell me if you agree with this, a big part is preparation. I think a big mistake that a lot of venture backed startups do when they go to market to sell to buyers is it's a complete mess. And I always say the first thing a buyer is going to do is they're going to look at that and say, oh, I got to fix a bunch of stuff.

Yeah.

And that could be. Expenses are too high. You know, you haven't, you know, gotten to that, you know, sustainable path if you can get there.

Right. Yeah.

And that makes good. Go ahead, go ahead.

Here's what I would say. You've got a few components when you're looking at buying a company, particularly a venture funded one. But, but either way we'll use a venture funded one because just slightly more complex we'll cover. You got a few components that you've got to consider. Number one, what happens to the founder or founding team?

Okay.

Like not insignificant. I can't go buy a company and totally overlook what may or may not happen to the founder.

Right.

Because that's kind of the person driving the deal. But let's put that aside. Okay, that's one bucket. The second is who are the investors? Are they angels, are they vcs and what are their motivations? I, I can't state this enough. When I talked to founders, founders, I talked to you last weekend back, I said, who's on your board? Who makes the decisions? Why? Because that's where challenges are going to come in from trying to sell this thing. Because remember, you got to sell it internally before you sell it external. You know, you got to convince people that it can be sold or it should be sold in, in the personalities there absolutely matter. The third part is, is this business even survival?

Right.

In other words, like if you were to say, hey, we've spent $7 million, we've built a product, but you know, it's not really in. We don't have any revenue yet, et cetera. We just have a ton of expense. Who wants that?

Right?

And please don't tell me it's because of the data.

Right?

He wants your shit data.

Right.

Like that's not really the way it works. Like do you have something of value?

Cool.

What is it? And how do you prove that it has value? You can't just sell the venture story to the world like, nobody gives a shit. Do you have some revenue? People understand that. So, so those are three components that tend to like, like, determine how I'm going to structure the deal to try to make sure each of those things is considered gotcha.

And so as a, as a founder, what can I expect when one of these transactions happen?

Yep.

Like, what am I getting? What is my benefit? Why should I even consider this? And assuming I'm a founder, I've, I'm, I'm out of gas. My team is no longer believes it's it. The writing again is on the wall. Yeah, but you still have time. And I think the, the worst scenarios that I, and I got an investor update the other day from a company invested in five weeks of Runway Left.

I mean, and you don't just wind up there. You did a million things to try to avoid that, but you do eventually wind up.

So in terms of, let's say a typical scenario I'm seeing lately is we have a year of Runway Left.

Right.

And we're not hitting, you know, like, we're not going to raise any more capital. And just shout out to every venture back founder right now too, because of the whiplash that's happened over the last four years. I think it's very understandable. Just your valuation was here. And then I was like, psych. No, it's down 90%. And then it was like, but you got to grow at all costs. And then it's like, psych. No, you got to be probably. And now we're back to Psych. You got to grow at all costs, but it's got to be also like, really capital Fisher. So it's just been sort of like up and down. And a lot of founders are, you know, frankly, you know, burn. And so let's just say pretend I'm, you know, that founder in that situation and I'm just ready to move on.

Yep.

I got 12 months of Runway. I want to take care of my team. You know, how should I start, you know, preparing for sale? How could I, like, what, what, what is the main benefit or outcome I should expect when I'm in that situation?

Well, in most cases, whatever money you raised likely has a preference on. For those that aren't familiar, often when you raise capital so you raise $10 million just making up a number, there's a preference which indicates that if you sell that money has to get paid back first, and then whatever left over goes pro rata, meaning by percentage of what else is there. So in a lot of cases, by the time you get to this point, even if you've only raised a few million dollars, the likelihood that you're going to sell something and get over your. Your preference hurdle is usually pretty low. But that's okay. There's a part that people don't. Founders don't understand either. Why would you? Because you've never done.

I love it when you say that.

Well, sure. I mean, I always caveat because people get all angry. It's like, oh, I don't know how to raise capital or I don't know how to sell a business.

That's why I call you Startup Yoda.

Yeah.

Because you did it.

Yeah.

Yeah.

And so one of the things that I coach founders on when they go through this is I say, hey, you know that you can go back and create a new deal for yourself within the company, right? Yes.

I'm glad you brought that up.

And most founders don't know that. And don't get me wrong, on the one hand, it's the last thing investors want to hear, but kind of a fun fact by the time you get there. Investors knew this a long time ago. I mentioned that company that I did back in the mid 2000s called Afford It. By the time I was like, guys, you're not going to believe this. We're going to have to shut this down. They were like, dude, we wrote this off like a year ago. They were so far ahead of me, they got it. And don't get me wrong, that's not every case.

There's a saying in venture. Your lemons right fast. Yeah, you get it. But I want to touch on that a little bit more because that is an option for founders is you can go back to your investors and yes, they know. And they'll be like, oh, well, I'm glad it doesn't always work out. But I've seen it work out recently. I won't. I won't name companies, but you can go back to investors. And this is bucket. I'm using hand motions. I don't know if you're listening or watching the video, but let's say you have a lot of cash on hand. You can actually go back to investors and just say, hey, you know, we raised a lot of cash. We want it to, you know, adjust this business to a profitable, sustainable business, and we want to renegotiate and give the money back and restructure the Business to where it's a sustainable business. It's not, you know, bloated with employees, you know, huge marketing budgets. That's also an option. Would you agree with that?

Yeah, in, in the, the playbook that I usually hand a founder, that works pretty effectively. First things first, you do not want to go back to your whole board, so to speak, and have this conversation as it had a board meeting, right? You talked, you talked.

You needed a friendly.

Yeah, yeah, exactly. And so let's say you've got a five person board. It's you, your co founder, you got a board observer and two investors. In almost every case there's one person on the board, hopefully not two, but one person. That's kind of an a hole, right? It's kind of an a hole. And so you want to go to that person last, right? You basically want to make sure your co founder's on board. Again, let's assume this is the, the order of events. You then want to go probably to your board observer because it was probably a friend of yours anyway and that's how they got the job. You basically want to start to build up some understanding and this is the message that you want to send to them. When you do, you don't go with, hey, it'd be kind of interesting if maybe we sold, I don't know, we'll see what happens. That leaves all the room in the world for them to like push back and say, ah, it's not really what you want to do. And you're making it sound like conversation. By the time you're going to have that conversation, it needs to be definitive. Dude, I'm out. I'm out of money. I'm out of like hell. Like my, my spouse is trying to, you know, is tired of dealing with my shit. I need to get out now. Hear me out now. Need to get out could mean two things. It could mean I need to sell the business or I need to negotiate a new deal. But if you leave it, as in, hey, let's just talk about it, it won't go your way because at which point the investors think maybe you'll just keep abusing yourself. They'll let you keep abusing yourself, sadly. So you need to be definitive even with your co founder and say, look, dude, I'm out. This is it. These are the decisions I have to make and be, and be strong about that. People will understand. That's the thing. We build this, this idea up in our head, guys, right? Where it's like, oh my God, no one will Understand? And they'll come at me with pitchforks. No, they won't just be like, I'm fried.

Right.

Can't do this anymore. People get it.

And I think the reason for that is if you're honest and you just say I'm fried, I need to restructure this. So there's some upside for me in the business because that motivates me to keep going and potentially get you a return. The other opt is zero. We're basically. Because I think another thing that a lot of founders don't understand is, and I don't, I don't recommend it, but you can quit. You're not legally bound to a company. You can just say, nobody gets that. I love your advice in terms of just like. Because the person who wins in negotiation is a person who cares the least.

Yeah.

Maybe not the right quote for this, this conversation, but you, if you're in that situation where you're feeling stuck and you see no upside in the business and you don't even know, like, you could, you could start something new and be super excited, but if the business was structured to where you had more upside and you know, you were able to renegotiate that again, doing it firmly and just telling investors like, this is what I need to keep this business going. And that also benefits investors too, because you both get aligned on just the reality of the business. And really what you're doing, in my opinion, and I'd love your thoughts on this too. Well, is you're really just, just having a candid conversation about what's really happening.

Yeah.

And they're thinking about it too.

They're also, guys, when you and I are laying in bed at three in the morning thinking about this stuff like.

Staring at the ceiling, that's when I wake up.

Yeah.

Actually, you know that. Yeah, yeah, yeah.

But, but when, when, you know, when we're terrified about this and this in, you know, everything's going to hell in a hand basket and we're staring at the ceiling, this is our only deal.

Right.

Knows this is the only thing we're working on. If I'm an investor, ideally a good one, this is one of like 30 things I'm working on.

Right.

And while, let's say I'm the investor and guys, you come to me and you're like, hey, you know, things are working out, I'm going to have this conversation like six more times this month with other founders.

Right.

So to me, it's not that mind blowing of a conversation for you as the founder. It's life or death.

Right.

So understand your audience too. Your audience in many cases too understands that these things happen or ideally they should if investor and not everybody agreed.

So that's door number one is if you're in a situation where you feel like your venture backed startup is failing, but again, you built a great product. You got like you, you've, you've done what 99% of, you know, others will never do and you should be proud of that. That's an option is you can renegotiate your valuation, your ownership.

Yep.

There's a lot of options there.

And what you do is you tie, sorry guys. You tie it to milestone. You say, look, here's a new deal, here's where it benefits me, here's where it incentivizes me, but here's where it will incentivize you long term. And you have to start with right now, your option is zero. You can't be like, oh, I know we raised at 50 million, but like, you know, this one will only get you five. You'll be like, dude, you invested. However much you invested, sadly, it's gone. We're starting from zero. This is how you recapture from zero. Not here's how you make the best of a $50 million investment. That's just a, it doesn't exist anymore. It's like, you know, you invested in, in FTX back in the day and you're like, but I put 50 million in. Yeah, it's gone.

Right.

It doesn't matter how you felt about it, it's gone. And so you have to start, even for yourself as the founder, with that mentality so that you can build up a new version because if you keep trying to base it off on what was, you can't win. There's actually no way to kind of rebuild that, that history because that moment in time doesn't exist anymore.

Yeah, I'm really glad we touched on, on this one. I want to move on to the bu. I'm, I'm just done. I want to get out.

Yep.

But there's a lot of great businesses where the founders, they love, they're passionate about what they're building, but you know, the whiplash, the expectations, they're not meeting them, the upside, it's gone. And you can renegotiate something that aligns everybody where it could be a win win for you and your investors.

I'll give you some examples. So I can't go into the, into specific details because some of these are under NDA and I never want to Tell another founder's story. So I don't think it's fair to them, but one of the businesses we bought, I can talk high level. One of the businesses we bought early on was a company called Clarity fm.

Right.

And you're familiar with Clarity. Clarity is a marketplace where it allowed experts to be able to connect with people who needed to talk to them and essentially charge for their time.

Right?

Awesome. The founder of that is a guy named Dan Martell, friend of mine, awesome, awesome entrepreneur. And Dan got to a point.

Let's give Dan a shout out. I love Dan.

Yeah, he's awesome. He's awesome. And you know what? The reason I'm using this example was because of how smart. So in other words, like be like Dan. In this case, Dan raises a few million dollars. This is like eight years ago, so I'm trying to remember my numbers, but dan raised like $8 million and he raises from some well known investors. Dan had like, you know, good cloud even back then. I remember Mark Cuban was in the deal. There's a bunch of people in the deal that were like pretty well known folks. And Dan gets to the business where he didn't spend crazy. You know, he was very, you know, mindful with his cash. He had a little bit of cash slow up to the bank and he calls me, up, up and he says, hey, you know, we love what you're doing with startups.com would love to see if Clarity could be a part of that.

Right?

And I hadn't thought about, about that but, but Dan brought it up, which I thought was a really cool move. We sat down, we talked about where he was at and here's what Dan said and I'll never forget this. I thought this was just such a pro move. He said, will I can keep running this business? I like the business. I, I, I'm proud of what we've built. We've got some cash in the bank, we've got revenue, right? But I can't go raise more money on this business because it's not going to be a venture outcome. And I'm not going to take people's money on a story that maybe even if I could sell that, I don't want to stand behind. And I just thought that was such a. And so he had that conversation with his investors. He said, look, I like the business, it's got opportunity, but I don't think it's going to be like the $100 million plus exit. It's not. And so we have to, we have to look at the business for what it is now, not what we thought it could be three years ago. And so we ended up doing a deal with Dan where he got some stock, he got some cash, and we took over the business. Worked out great for Dan. His investors are now our investors, you know, in our cap table, if you will, @startups.com and if and when we go sell for a billion dollars, those guys will all get paid.

You know what I mean? So did you do, did you do a stock sale or an asset sale for that business?

We, we always do asset purchases. We. We never buy the actual operating company. There's never any upside in it, in as far as I'm concerned. For those that aren't familiar, there's kind of two ways to buy a company, many ways, but two ways that, that people tend to fall on. One is an asset sale where you just buy the asset, think customer list, website, etc. But you do not own the actual company itself. The C Corp. Llc, whatever it is, that remains as its own entity. So Dan's original company that was Clarity, still exists. It still exists as an entity that holds its stock in startups.com Interesting.

So that's how you didn't form a new corporation and then just move investors into that new corp. You kept the existing core.

We didn't need to because he already had an existing holding structure.

Right.

Or, you know, company structure, and so they could just maintain it. Now some of the downsides to that is that Dan's got to maintain this damn entity. All that really means he's got to do a tax filing, you know, on an annual basis. But he does have to maintain the fundamentals of the entity, which isn't much, but it exists.

Right.

And it exists for one reason, to hold its stock in startups.com at which point we sell, they get their percentage of our sale, and then that gets distributed to everybody in their C Corp or whatever they had at the time.

Love it. That's a good.

The other option, just to complete the thought, is you buy the C Corp or whatever the corporate entity is. The reason you don't want to do that, the reason I never want to do that, is because you're also buying whatever liabilities are tied to that legal end.

Right.

And who knows, right? Who knows what suit you have pending somewhere? Who knows, you know, who's upset in the cap table, at which point you just buy the assets and you're not buying the entity itself. There's a much bigger firewall between those kinds of issues.

Yeah. So I was hoping to explain that, but you did it better than me. Well, so really the main, the main benefit to doing a stock sale versus an asset sale for the founder is tax purposes.

Sure.

You'll generally benefit from qsp. Ask Google it if you haven't. If you don't know what that is. It, it basically means you pay a very low long term federal gains tax. So it has some tax implications that are very low and very favorable to the owner of the business. But like you said, as a, a buyer of the business, you're, you're acquiring potential lawsuits. A third co founder who pops out of nowhere. Su. So typically, as if, if you're, if you're looking to sell your business, it probably will be an asset sale. Trust me.

Right.

Because like you said, there's very little upside for a buyer unless your business is ripping and you can command your terms and stuff like that.

Yeah.

So maybe accept that in your mind if you're listening this podcast and this is resonating with you. Okay, let's move on to the next bucket. You know, I got it sounds like we covered the. I got a little bit of cash. Things are going okay.

But yeah, usually not the situation by the time you're here, like you're starting to think about it when you have a little bit of cash. But by the time it comes toward the end, in my experience, there's not really much cash left.

You.

You said something earlier. I just want to reiterate what you said because it's so important you can quit your startup. Just, you are not an indentured servant.

Right.

Like I say that because a lot of people don't hear that. They actually don't know that that's possible.

There's so much startup truisms and I think, you know, I, you know, I'm a big believer in like never giving up and, but that's just like how wired.

Yep.

But if I, if I'm wired like that. But again, I'm stressed out, I'm burnt out, family problems are coming in, bills are starting to add up. It's okay to quit. It's okay. You're not a failure. You, you've still done what most people like I always say, you want to say I tried rather than what if and you know, people will still fund you if that's what you want to do, you know, second time around. But realize, yeah, quitting is an option. But the only thing I would say about quitting is before, like don't do. Because with investors, they believed in you, you know, they wrote you a check and they, they, they put their money where their mouth was and they said, I think you could build something amazing. Now the degree of that belief is another discussion. But I, in my opinion, you have a fiduciary duty to at least go back to your investors and tell them, hey, like this is where I'm at right now. Like, I want to go down one of these doors, but you can just walk away. But before you do that, I highly recommend having a candid conversation with your investors. That position, maybe it's a raise, maybe it's something small like that that kind of keeps the company alive, keeps you going. But I guess more or less what I'm trying to say is if you're in that situation, have candid conversations with your investors and let them know where you're at, because there's no point in just wasting years of your life till then.

And since then, the wire got pulled and they never got the wire. And they had 450 people on staff right now. They were coming down to the wire. You know, they needed that, that money to take, to get in the bank so they could start payroll on Monday and it didn't show up. My point is that happens a lot, you know, where people kind of like take it to the wire because usually you're not working a lot of cash.

Tell me about. Okay, so, so door number one, if you're in a situation where you just feel trapped and there's no upside for you, go back to your investors. Start with the ones that may have more empathy in terms of your sit. Just hear you out and be definitive about. Because I think a good exercise to doing this is, you know, write down, you know, basically just like, this is what I'm going to do.

Yep.

And give yourself permission to ask investors to renegotiate some sort of deal structure that is a win win for everybody. So that's door number one. And then we have door number two, which is lots of cash on hand, lots of just want to sell the business. I believe we touched on that one with clarity.

Yep.

So that's where you can find buyers for these businesses. But just again, I think a theme that I'm getting here is just being honest with yourself.

Yep.

Just with you personally, how are you doing? And then also the future upside of the business. Yep. And then I think door number three is probably, you know, the most pressing and probably the one we're, we're seeing the most where really there's just not a lot of money left in, you know, the bank account investors have already probably, you know, this is going to zero again. You built a great product. You have, you know, paying customers, you have revenue. But I want to sell the business. What can I do in those, like last two months to make it a better opportunity for potential buyers or to increase buyer interest, in your opinion?

Yeah. So I think when you get to that point, and I think we should, we should kind of explode this topic a little bit, there are a lot of businesses that raise a few million dollars. They get to like let's say 30 to 50k of MRR, right? And that's as far as they get now, I guess. Think about that. Let's say you And I started acquire.com, right? We raised a few million dollars and the business got to say $50,000 a month of revenue. And we have like 20 people on staff. And you know, it's, it's definitely not the kind of business that's going to support, say 20 people, but we don't have to have 20 people. If we were to reimagine this business and it was just me, you and a couple of contractors, this would be an incredible business for us.

Right?

The reason I say that, guys, because this actually happens a fair amount where the founders are like, hey, it wasn't a venture. This is Dan Martell story, right? It wasn't a venture funded business, lo and behold, but it's still a great business. And, and I think, you know, that's, that's what I was responding to on Friday, saying, hey man, I think there's a ton of really good businesses and I hate it when people say, and you were saying this, hey, it failed. Yeah, that version failed.

Right.

But like you keep saying statistically it was going to fail. There's a 99.9 chance as soon as.

As soon as it's funded. It's, it's a lottery ticket.

Correct. But, but this is, this is, I think, a big difference. And this is part of how you start to think about how you structure it or present. Doesn't make it a bad business. If you and I build acquire.com it's doing $50,000 a month in revenue. And, and again, we've got, we've got a staff that we could consolidate, but we can continue to run this and make it a great business for the two of us. It's a win and we can structure a deal that gets us there. Now it's also a win for someone else. That's why I'm bringing it up. So let's say you And I had this business, but we're burnout guys, right? We just want to go do something else.

Right?

Remember that $50,000 of MRR might be jack shit to some big company, but to a smaller buyer, it's a huge windfall.

Right?

That was me. I was that smaller buyer.

Right.

I was the buyer going in and telling Dan Martell at Clarity, hey, Dan, you know, it's not a huge business, but it's a big business for us.

Right.

If a business were doing $50,000, we might be able to acquire that business and run it for $10,000 and make it a $40,000 a month net business. That's an awesome deal for us. And I don't think a lot of founders realize that. They think that their cost structure, their opex, everything else is baked into what it's always been. They forget that that asset in the hands of people that don't have that expense base could be a money machine.

I completely agree. So this is, this is the advice I've also been giving to a lot of founders is before you go to market, try and get your startup to profitability. And that's going to come with a lot of hard decisions. You're gonna have to let some staff go, you're gonna have to be really honest with your investors. And when you send that investor update saying, hey, you know, like, we're letting people go, we're basically gonna cut costs until we're profitable. I think once you hit the mark of break even and profitable, that's when your buyer interest just skyrockets. Because what you've essentially done. Do you agree with me? Started?

Oh, yeah, 100%.

Yeah, yeah.

All right. And the reason I say that is because I've been on so many acquisition calls where, where I talked to the buyer, like, what'd you think of the business? And they just name all these different things that they would do if they bought it. And to me, that I'm like, okay, I go back to the founder, I'm like, hey, you should fix all this stuff. Because I'm hearing from every single buyer, customer acquisition strategy, just, you know, the unit economics aren't good. You're spending too much here. If you fix these problems and then come back to market, you're going to have way more buyer interest and probably a better outcome overall for the business. And then that buys you time. More importantly, because acquisitions can take, I don't know, years sometimes.

Absolutely. And one of the exercises that I always go through with founders, and certainly an exercise that we went through when we did diligence on 100 companies is I say forget where the business came from. If you and I were starting it today, what would it look like? How would we run it? I guarantee we wouldn't have like a VP of this and a VP of that and a VP of this.

Right.

That made sense when we thought we were going to have a venture funded outcome. But if we were starting the business today, what customers wouldn't we go after? What parts of the product would we not care about? What things would be charged for that we used to give away?

Right.

Like what does a hard reset look like? And I got to tell you, that's often what as the founder you're going to be selling to the, to the buyer is the new version of what this business could be, not the tired version that you sold, you know, investors on two or three years ago.

Yeah. One thing I think that a lot of founders are struggling with is the strategic buyer. The, the, I call them, you know, the one in a. Maybe. Like I, I always say, hey, you know, before making any changes, just shoot out a few emails. Head of corp, dev, head of product, CEO, depending on company size and see if they'll at least take a meeting. And you'll get to, you'll figure out if there's strategic interest pretty quickly. If there's not, then that's where I think you should open up the playbook of reaching profitability and turning it into a sustainable business. Because that's how you're going to actually sell the business in two. And it benefits you in two ways. Number one, it buys you the time. So those strategic conversations, maybe you're going to hold out for them. Well, you're profitable so you're not going anywhere. And then you're probably refreshed because you're not burning a bunch of money every month and watching this like, hey, we could go out of business in like three months.

Right.

Get that monkey off your back, position the business into a sustainable form to where, trust me, when you're profitable, it's like a breath of oxygen. If you're, if growth is flat and right, you've kind of lost, you know, you, like it's clear that you're not on, you know, the venture track.

Right.

And there's again, there's nothing wrong with that. And I think by doing that instead of just driving it into the ground is such a smart move that founders, you know, should realize is actually sometimes one of the best outcomes they could possibly have because they could save their company and then have have maybe a meaningful acquisition, depending on the liquidation preference and all the terms like that, which can be renegotiated.

Again, a lot of people don't understand that. They don't understand that you can renegotiate your deal. It's shitty, but it can be done. And when I say it's shitty, I mean it's a hard conversation to have. Nothing shitty thing to do, guys, if you were a founder looking to sell and I was trying to say to you, here's how to realistically think about your options and I kind of touched on this at the beginning of this. I put it in buckets of percentage probability, right? There's a 40% chance that you'll sell to a PE private equity because if you're profitable, because those guys are buying all the time, there's very active, right. There's a 10% chance that you'll sell to a strategic for all of the really dumb reasons you think you're going to sell to a strategic. By the way, it's your best option. But here, here's what's going to happen. That absolutely isn't going to happen. Not trying to rain on people's parade, but I hear this all the time and I just want to like help founders not kind of go off the edge of the cliff, Wiley Coyote style, right? Number one, hey, someone's going to really appreciate how much money we put into this product. No one cares. Money's gone. No one cares.

Right.

Second thing, people are going to really want our customer base. It's worth a ton. Is it? Just because you have customers doesn't mean someone else is going to be able to acquire them and execute on them in the same way. It sounds awesome. Way harder to do. I've acquired over a million startup in all the acquisitions that we did, right? So a million customers on paper, that should have yielded me orders of magnitude of value. Cross selling products, et cetera. Never happened, right? I mean, parts of it happened a little bit, not nearly what people think it is. So again, it's cool to be able to say I have all these assets that theoretically might have value, but the buyer has to be willing and able to extract that value from those assets. Assets, which is way harder than you think it is. And by the way, you've spent the last five years doing nothing but exactly trying to extract that value. So the last part about that 10% bucket is you're assuming that all the stars align. So you email the corp dev person at name your company, you're assuming that they're Looking to buy exactly your type of asset at exactly this time given all the other deals that they may be doing or their opportunities they have have. And oh by the way, you don't make any money, right? Come ON man, like 30 other calls today for companies that are further along. Why would you think that your company is the one that's gonna, you know, change all that? Not saying it's impossible, I'm just saying like be a little realistic. That last bucket that makes up the 50%. I don't know this, I'm totally guessing, but I feel like it's, it's the heart and Soul, the acquire.com customer as far as the buyers, which are people who are buying it for their own purposes.

Right.

I know when I've used the site in the past, I've seen a ton of those folks on there guys, you would actually know the answer. But this isn't specific to acquire. What I'm saying is there are a ton of people out there. And by the way, part of this buying population are the actual founders themselves.

Right.

Of people that are just owner operators that would come in and take over the business. And yeah, it's not making a lot, but they don't need to make a lot. When you go to pe, it has to be a lot because it has to be worth their while. When you go to strategics, it has to be a lot. But if you've got 50k in MRR, there are a lot of people that could just take over that business. Former entrepreneurs, et cetera, angel investors, what have you, which tend to be former entrepreneurs. And part of that, that, that buying population are the founders themselves taking over the business and running it. Like we talked about before.

I agreed, completely agree. And another thing I would add, and one thing I want to touch on, I know we're running long on this. Let's go, let's give this 15 more minutes. But I want to talk about the opportunities for buyers because when I hear people buying venture backed startups, there's such a tone of. It's almost like vulturesque. It's like, you know, we're comment but like there's a group of buyers that I work with on a daily basis that understand these situations and will work with you on structures and how to position the business so you can get approvals from your investors. Someone like yourself.

Yep.

But as a buyer, let's say individual, you know, private equity has it down, strategics have it down. But let's say I'm a second time entrepreneur and I'm Looking to buy a, a, a really good venture backed business. Walk me through how you would approach it. I know you've touched on this and it might be a little bit repetitive. Yep. But maybe, maybe pick your favorite bucket of what situation a startup is in and walk me through, you know, how you would approach that and really work to get the deal done.

Here's the part I don't think people understand both on the buy and sell side. Guess is most of these companies don't get bought with just a big chance check cash on the barrel head. You know, I've heard this from, from friends of mine who are, who are buyers or you know, founders that may have cashed out and they're like, hey, I want to look, look for, you know, some deals. But you know, I saw that company raised a bunch, a few million dollars. I don't have like $10 million to buy it. I'm like, dude, that's not how people buy businesses at all. I mean, some, yes, but rarely. Here's how most of the deals I see get structured. We pay you over time. It is a combination, one cash that we pay over time.

Okay.

Okay. So that it syncs with any kind of revenue the business itself has. And then some sort of flyer meaning some sort of equity or sale upside in case the thing goes back on to become wildly successful. Okay, so back up. One is how do we pay for it in cash? The two is how do we pay for it in stock? The answer is typically both. Typically I go to the seller and I say, here's how much I can pay you. I'm just using this as an example on a monthly basis over a period of time, say two to five years, so that you can get your cash back. If you're, if this business isn't making any money money, I'm not just gonna magically give you a million dollars of cash and just hope that it works out. Why would I do that? It doesn't make any sense.

Right.

But if I say I, I will give you a million dollars over the next three years so I can sink and give myself time to recoup that cash. Awesome. That's a totally different deal. And others get that. I think sellers are like, well, don't. Like we raised $3 million. Don't we have to get $3 million back? Cash in the barrel head? Absolutely not. That money's gone. Any way you can retrieve that money?

Money.

And now again, there's two components. One is any kind of cash in the deal and, or cash over time. And the Second is some sort of equity deal. Here's what I found, guys. When we buy something, if I just come in with a cash offer, then that's all people see. If I come and I say I want to buy the company, I'm just using small numbers for a million dollars.

Right.

People like, oh, I guess that's it. Like, you know, we raised 10, we're selling for a million dollars. But if I say, and you also get this percentage of the upside upon sale, that number can be whatever you'd imagine budget. That could be $100 million in the future if you don't keep that variable component, what I call kind of the lottery ticket in the deal. It is very hard to negotiate a cash, cash purchase. Not for everyone, but it's an important part of the chemistry.

You know, that, that's, that's, that's what we're seeing. So my, I'll give you my verbiage on it. So let's say, you know, you look at the business and you value it at 5 million bucks, 10 million bucks. So what you would typically a structure that could be something that actually works for everybody involved would be percent cash on close. So that would be. We're buying it for 10 million. They have closed, you get $2 million. And that's probably going to go back to your investors. So I think again, going back to our previous, what we were talking about was accept that you're probably not going to get a lot. And again, that's okay because it's much better than just watching your startup crash and burn and then you're stuck with a dissolution bill and all this. Like, that's, this could be a great outcome for you. So if, if you're in that situation, this comes along, hear it out, out. And then, okay, so we got 20%, you know, cash on clothes. And then maybe, you know, 70% is, or let's do 60% is seller finance. So I'm doing, you know, 8 million. That's going to be seller finance, which essentially means I'm going to be making monthly or quarterly or sometimes yearly payments to you.

Yep.

So every month you'll get some form of cash back, and that's probably going back to your investors as well, depending on your liquidation preference.

Yep.

And then the last kicker is the equity component, which is you coming in saying, hey, you know, I'm going to take this business off your hands. You've done a great job building it, but you're burnt out. And, you know, I'm going to breathe new energy into this and this is actually one of my favorite parts about acquire.com is when you know someone is truly at the end of the road and they're able to take what they've built and see it continue to live on, but under the ownership of someone who can breathe in, in that energy and also restructure the business so it's a sustainable, profitable business. Which takes a lot of work. It takes a lot of work to do this. So you're not going to get the sky high 10x revenue multiples or my least favorite is, oh, my competitor sold for this amount, so I should get that too.

And you're not selling a house. Doesn't work that way.

No. Yes. And, but the equity kicker is where things can get really interesting. Where if you sell to the right buyer. And my advice for founders here is, um, you know, you, you can never do a good deal with a bad person. It's Warren Buffett quote, um, so when you sell to something, sell your business to someone, make sure it's someone that you really get along with. You really trust them. And you can see yourself, you know, down the line. You know, they call it getting a second bite of the apple.

Right.

Those can be amazing deals because you're solving every problem that I think so many founders are going through, which is burnout out, no upside. They just want to move on. They feel stuck and shameless. Plug for acquire.com but we have buyers that can help with that. And then. Yeah, go ahead.

I was going to say the other part that I tell people all the time founders, no one will remember whether or not you made money on the sale, but everyone will remember that you sold.

That's very true.

Okay, so, so if you talk about a resume builder, a lot of founders don't think about this at the time, but when you say:4 years ago I exited my business. This, people just assume you made money. And this isn't a, a, a reason to be disingenuous. What I'm saying is people generally look at the, the, the, the sale of a company as a positive. So even if you didn't personally make money, but you're able to, to get the business acquired, that's still an important notch on, on your, on your belt.

I call, I call land. I mean, you took a plane up in the air. Bird strike hit.

Yep.

You know, LaGuardia and the other Air Force. I'm using a reference from when they land the plane in the Hudson River.

Yep, I remember that.

Yeah.

You know, it wasn't pretty.

Yep.

You know, but they landed the plane, no one got hurt.

Yep.

That's a much better outcome than, again, just letting the startup completely fail, you know, leaving all your employees, investors hanging. So you have optionality. Whether you, when you, when you feel like you don't, you really do. And I hope this conversation will. This has been awesome. Just kind of give some perspective. If you're in these situations, you do have optionality. It's just not talked about very much because all we hear about is the winners and, you know, the ones that are getting acquired for hundreds of millions or billions of dollars. But if you're in a situation where you feel stuck, burnt out, you don't see the upside, you're not motivated, hard to get out of bed, it's, you know, hurting your personal relationship. That stuff's serious.

Yeah.

You have options. So do you want to end on that note, or do you have anything else you'd like to add?

One thing I, I do want to add because I think, think it's. It's a. It's a more positive note, but I also think I, I don't want to overlook this part because I think you even tweeted about it. And we actually just did a. A podcast on this that I think drops today Startup Therapy episode. And it, and it says something to the effect of title was something to the effect of there's treasure in failed startups.

Right.

And I want to remind people that just because operationally the startup didn't work out doesn't necessarily mean it's a bad asset. To put that in perspective, we've made a 50x return on our investment by buying what other people would call failed startup.

Right.

And it's not even our business model. It's like, I'm building a company or something.

Right.

It's just that every single time we bought one, it was actually an awesome asset. That was everything you just described. Founders were burnt out or it wasn't on venture track or just it wasn't trending the way they initially thought. But I looked at that and I was like, okay, this is an awesome product that just has the wrong timing right now, and we're able to take those products and build great companies out of them. So again, it's not for everybody. It doesn't always work that way. But we've been at this a long time, and I can tell you there's a ton of value in these startups. So, you know, if you're a buyer out there and you're looking at, oh, you know, this startup raised some money and it's, it's not working anymore. Yeah, it didn't work for that moment. That'd be like dating someone and say, oh, they broke up with the last person. So I guess that person's undateable. Bullshit. That's why people get married and divorced again.

Right.

Like, we found so many good deals out there. And I think on the flip side for the founders that are looking to exit, remember that. Yeah, maybe it didn't work for this moment, but there's definitely a second life to be had.

I completely agree. Well, you're, you're awesome. And I, I, I, I hope as many founders in the, and you know, whatever situation you're in just understand there's always a positive outcome. And I think just, you know, understanding them and really the sooner the better. Yeah, you don't want to get to the, the two week line because it makes everything just that much harder. But this, this has been awesome. Well, I appreciate you coming on the podcast. People want to learn more about you. Where can they find you? I know where to find you, but.

Yeah, yeah, yeah, so, so I live over@startups.com you know, as you know, I was thinking about just, just now as you're saying this guys, startups.com is where everybody goes to start and acquire.com is where everybody goes to, to finish their journey to sell their company. And you know, kind of you and I are kind of bookending this process but, but I've got a podcast called Startup Therapy where we talk about all of this stuff at infin that the personal side of building startups. And, and you can find me all over social at, @ Will Schroeder. W I L S C H R.

O T E R Right on. I'll put all that in the show notes. Well, Startup Yoda, always a pleasure chat with you. I appreciate you will.

Thank you, brother.

Cheers.