Quit Chasing The Money!

Many entrepreneurs want to be the next Elon Musk.

Many business owners believe an infusion of cash will solve all their issues.

It won't.

On this episode of Books & the Biz, we will talk about why the constant chase for money could be the worst thing for your business future, and what you should focus on instead.

[00:00:03.14] - Alice

Books and the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltri Group and a financial strategist, working with companies to manage their money more effectively. Now onto the podcast.

[00:00:34.16] - Dan Paulson

Here we are.

[00:00:36.02] - Rich Veltre

Here we are. Welcome to Books and the Biz. Yet another week of talking about the crossover between operations and finance. So, hey, Dan, my friend. Dan Paulson. How are you?

[00:00:49.11] - Dan Paulson

I'm good, and you?

[00:00:51.08] - Rich Veltre

I am doing excellent. Doing excellent.

[00:00:53.11] - Dan Paulson

How's the weather out there in Jerseyland?

[00:00:56.25] - Rich Veltre

Still pretty hot, pretty muggy. I think we were spared from what I gather. We were spared from the leftovers of barrel. I think I'm saying that name right.

[00:01:10.14] - Dan Paulson

I believe you are, yes.

[00:01:11.20] - Rich Veltre

Okay. Barrel's up in New England, so it kind of passed us.

[00:01:17.26] - Dan Paulson

Just dumped all the humidity out there, huh?

[00:01:20.11] - Rich Veltre

Oh, still out there. Still out there. So a couple of power outages, but not like Houston, so I will take what we got.

[00:01:28.18] - Dan Paulson

There you go.

[00:01:29.20] - Rich Veltre

How about you? Did you get any of that?

[00:01:31.14] - Dan Paulson

No, it went south of us, so it kind of split the difference between us. We are going to get a lot of hot, muggy weather over the next several days, but we actually didn't see any rain from it, which is kind of ironic because it's been raining pretty much every day since. You think that storm pushing through would have given us something, but it didn't. So we're good.

[00:01:51.06] - Rich Veltre

Yeah. Yeah. I hear we're supposed to get some rain this weekend, so heavy rain. I hate when they say heavy rain because I have no idea what that means.

[00:01:58.22] - Dan Paulson

That means you don't need to water the lawn, that's for sure.

[00:02:01.05] - Rich Veltre

Well, this is true. This is true. So, Dan, I think our topic for today is really to kind of take a look at whether or not companies should be looking at financing, especially early stage companies. I've come across a lot of conversations lately where people are talking about, oh, you know, we're going to raise funds, we're going to raise funds. We're going to raise funds. And while it's a great conversation, if you've got something that's growing or you have something that really has a potential, I worry a little bit about so many people talking about raising funds.

[00:02:38.03] - Dan Paulson

I just.

[00:02:38.24] - Rich Veltre

I think that there's a. There's a sense of this, you know, diamond in the rough, like, oh, I've got a company that's a diamond in the rough, and it's better than any other company out there. But when everybody's saying they have a diamond in the rough, that's an awful lot of diamonds. So, you know, if you put them all together, you have a pretty big, you know, bag of diamonds. But, um, without that, I think it's all subjective, right?

[00:03:07.13] - Dan Paulson

Mm hmm.

[00:03:08.23] - Rich Veltre

I mean, I think. I think that the big problem that I have with it is I think some people have to take a step back, sit down for a second, breathe, you know, take a, take a deep breath and say, is my company worth something, something today? Because if you're running out and doing a finance raise, okay, whether you're going to borrow money from someone or you're going to raise equity, you're giving something up. So you see all these people that jump onto shows like Shark Tank, right?

[00:03:41.28] - Dan Paulson

Exactly. Yep.

[00:03:42.29] - Rich Veltre

Somebody jumps into shark Tank and they're pitching to people who already have billions of dollars. Okay, and you're saying, I'm willing to give you x in order for you to give me y. And y is usually some dollar amount. X is the number of shares that you're going to get, percentage ownership. So the offers that come in from these people are taking away something that you may have of value. So do you actually know what you have, or does it just become that? Companies are saying, look, this is just the normal way to go. We raise money and then eventually it becomes the size of Google and we sell it. 1% of companies at best, become the size of Google.

[00:04:27.09] - Dan Paulson

Right, right. Well, I think, you know, if I were playing the part of Mister wonderful, you know, my first goal is get things into in perpetuity, as he would always say, you know, I won't give you all this money, but I want a dollar of every sale that you have in perpetuity. Smart way to go, because it's residual income. But I, you know, what's the cost of that to business? Now, to your point, startups are, I think I do agree with you. I think it's just kind of in the nature, in the culture that you start a business, you start ramping it up, the next step is to go for seed round funding, then round a, round b and so on. And most of these guys are looking at this as an end game. I'm going to make millions or billions of dollars off of selling my idea. I just need the cash flow to kind of ramp up first and make myself look big. Here's another way to look at it. I'm talking with a number of prospects and clients that are at the end game of their business career, and they're starting to look at their business and saying, well, I want cash to get out.

[00:05:36.25] - Dan Paulson

I want to, you know, this is my retirement. I want to cash in my retirement and I want to get the money, and then I will maybe work for a couple years, and then I, I'm done. You, you do with it what you will. The problem I'm seeing there is sometimes these businesses don't have the value that the business owner thinks they have. You know, I've talked with numerous clients or numerous prospects, I should say, that have said, well, you know, this is a $5 million company. This is $10 million company, the $20 million company. Well, what are you basing that off? Well, that's what I think it's worth. Well, that's nice that you think it's worth that, and pity the fool that actually buys it for that price. But most people who are legitimate and going to do their due diligence are going to probably find out that the number you have is not equating to the number that it's actually worth. And then are you going to be disappointed when that $5 million business is worth a million, maybe 2 million, maybe less, especially if your EBITDA. So we're using your terms that you like to toss around is much lower than that.

[00:06:41.11] - Dan Paulson

So you might have high sales. And that's why I think most people look at, well, I have $10 million in sales. It must be at least a $10 million company. Well, sales minus materials, minus labor, minus, minus, minus. And now you get down to where, okay, now you're making $100,000 a year after you check off all the boxes. It's not worth what you think it is, especially with some companies that don't have any assets. There's no building, there's limited equipment. There's really nothing. It's all blue sky. It's basically your client list and what your previous sales were. So I'm seeing it on that end, too. I think there's this trend, and maybe it's just the way politics and the way business is going right now that people just. You want to cash out?

[00:07:26.02] - Rich Veltre

Yeah. I think the other thing I'm seeing with some of the startups, too, is, you know, if there, if it's early stage, you know, you get your first round of financing, it's like this big win. But what's your focus the day after you get the financing? Is your focus to build the business, or is your focus to get the next round of financing, the next round of financing comes from building the business, not from running around and meeting more people and figuring out who's going to be your second round. You know, the second round doesn't come if you don't build the base business. You need to put the foundation in place. And it's funny, too, because I'll go back. Way back in my career, I was working on a company that had developed a logistics software, and it was used by companies like FedEx. It was a decent size product. So they went through seed a, B, c, and I think D rounds. Like they had gone all the way up, like, and what you realize is in order to do that, there has to be, as you said, there has to be sales, there has to be growth, there has to be a potential.

[00:08:35.03] - Rich Veltre

Well, the D round they gave to FedEx. FedEx actually became the shareholder in the D round for this logistics software because they were using it. And they said, this is good stuff and we'll invest in you. But what they put in the round d agreement was that they had right of refusal for whoever was going to be in the e round. So what wound up happening was the business wasn't as good as they thought. Maybe the software was. And that's why FedEx said, you know, we want the software. But the business wasn't as good as where they were standing. So when they went and said, well, now we need an e round, FedEx said no. So now you've got $100 million company or plus, and it wasn't going to get the next round of funding it needed for cash flow. So guess what? It wasn't really worth 100 million anymore. It basically, it shuttered its doors at some point. My guess is somehow FedEx wound up with the software.

[00:09:37.08] - Dan Paulson

I'm guessing that, yeah, they bought the software for what they got. And what happened to seed through c rounds? They probably got nothing.

[00:09:46.13] - Rich Veltre

Nothing.

[00:09:48.02] - Dan Paulson

And I can speak personally to that because I made an investment early in my naivety of investing. And, you know, I knew the owner, he was going to ramp this thing up. It was going to make all this money. He went and I was in the seed round. So I invested early on. A round came along and of course they wanted the premium shares. And then they turned our shares into common stock and started diluting them. And then by b round and whatnot, it was completely diluted out. By the time they finally sold the company, all the people in front of or actually behind me got the money. And then by the time it got to us, it was like, well, there's no money left, so you get nothing. Ooh, thanks. Ooh. It's right.

[00:10:36.11] - Rich Veltre

If you're lucky, if you're lucky, if you're lucky, you get one of these guys that comes in and wants to be your ABC round and says, we want all the smaller guys to get taken out. Right. So I've seen that happen before where you're kind of getting lucky. Like, I have one share of, you know, 20 million, what am I going to get? And somebody comes up with an offer that seems reasonable, you might want to take it because there's still significant risk. You know, if you put a dollar in and you're getting, you know, $50 back, you know, it might be worth it. And, you know, multiply that by a number of shares. But I'm saying if you put a dollar in per share and you wind up at getting 50 out of it because the big guy comes in and says, you know, we want to clear the deck, let him clear the deck. You know, it's usually, I would say that's my advice, but, you know, but.

[00:11:30.17] - Dan Paulson

Most cases don't go that way. I think most cases, wherever I, you're stuck holding the bag if things don't work out. And let's face it, investing is risky. Whether you invest in the stock market, whether you invest in a private company, it all comes with a certain degree of risk. Now, stock market tends to be, quote, unquote, a little less risky because usually you're investing through mutual funds, which then diversifies who's doing well and who's not. But kind of circling back to where we started with all this. When do you think this started? I'm looking at the shift in business. And really you think of probably around the early two thousands, late nineties when the.com era really kicked into place. That's really when you started hearing about private investing and private equity and all these startup companies. I mean, pets.com is the textbook case that a lot of people use because that was like the pinnacle of the, the.com bubble that popped. And a lot of people use that as an example of, you know, we had all these websites that did absolutely nothing, but people were just pumping millions upon millions of dollars into them thinking they were going to be the next big thing.

[00:12:43.02] - Dan Paulson

Fast forward that to now. You've got shark tank, you've got, you know, you've got all these other incubators and everything pops up. And a lot of the talk is about going for rounds of funding. Now, rounds of funding are great. When you have a viable product and when people want that product, you know, it can really escalate your sales and your ability to sell and your ability to get materials and stuff. But how many companies actually have that at their, you know, at the ready early in their startup career?

[00:13:17.12] - Rich Veltre

Very few. Right. I mean, you, you have, I don't know, it's, I think you're right about the timing. Okay. I think somewhere around 2020 people saw Google. Okay. And I keep using Google, so I apologize to Google for using their name all the time. But, you know, their first name.

[00:13:35.29] - Dan Paulson

You do.

[00:13:36.27] - Rich Veltre

I mean, hey, you know, they raised millions and millions and millions of dollars in their, in their ability to get Google started. And their sales were like zero. You know, their financial statements looked like who in the world would invest in this? But they were able to get people based on a concept. And so they raised millions and millions and millions of dollars and then eventually became the Google that we know today, which vision worked out. But again, you go to, that's one company, and how many of these people.

[00:14:09.08] - Dan Paulson

That are talking about, well, you could compare Amazon to that too. I mean, Amazon's really only turned profit in what, probably the last decade. And for a good 1520 years before that, they were losing billions of dollars hand over fisthen.

[00:14:24.02] - Rich Veltre

Yeah, same thing.

[00:14:24.26] - Dan Paulson

They were busy, you know, creating their online empire now that most of us take for granted.

[00:14:30.08] - Rich Veltre

Yeah, I think yahoo. Was another one that was kind of going down the same route and everybody kind of had to eventually figure out, what do I want to be when I grow up? And, you know, I think you're right. I think it basically came down to just continuing to, you know, raise funds. But I think that set the stage that all these other companies started doing the same thing. And private equity, I think, is a little bit bigger in the point of theyre investing in companies that have somewhat already established themselves. So there already is a company that has a growth potential where venture capital is still out there. And I think that would be the one thats probably taking the most risk in jumping in on these companies who are just looking for, for that round of funding to get to the next round of funding to get to the next round of funding. Right. So I think, I think my biggest fear right now is just that we have to get back to the point where people start to balance a little bit. And I'm sure there's companies out there will be mad at me for saying it, right, because they'll say, oh, we have balance, we've done it.

[00:15:40.28] - Rich Veltre

And I'm sure they're right. I'm sure some of them have. I think there's just too many of them that just think, well, we raise money and then we move to the next one.

[00:15:47.26] - Dan Paulson

Well, every good entrepreneur is going to think they have the next billion dollar idea. That's the only way you get even the seed round funding is if you don't believe in your product or service and don't believe it's going to revolutionize something. Why would anyone want to put money into it, right?

[00:16:02.13] - Rich Veltre

So, but I think that somewhere along the line, someone needs to say, if I'm going to found this company and I have the next big thing, okay, let me go prove it and get back to the point where you start to prove it. Yes, maybe you take on some friends and family, maybe then you move into a seed round, you know, but by that point, you really should have something that is viable. You know, do you actually have a good product? Can you get marketing without having to spend the billions of dollars that you think you have to, you know, the brand will come, you know, and you'll build it around what you started with. Right. But I think that, you know, the product itself, the financing itself, the actual, you know, putting it together, you know, getting it manufactured, if it's something to be manufactured, you know, get it out there where you're actually, you know, not going to somebody like the shark tank or, you know, just replace that with any venture capital firm and go to them with, well, here's my concept. And by the way, I'm willing to give away 99% of my company in order to get to, you know, do some marketing.

[00:17:09.06] - Rich Veltre

You know, if you remember, right, I used to watch Shark Tank a lot. Don't watch it as much, but I used to watch it a lot because it was interesting to listen.

[00:17:18.07] - Dan Paulson

It is interesting. Yes.

[00:17:20.02] - Rich Veltre

And these guys would put up, you know, what are you going to do with the money? Oh, we're going to do all our marketing. And you see all five sharks kind of go, oh, because they just look at, okay, you're just going to burn the money to go get, you know, marketing. Why haven't you kind of pounded the pavement?

[00:17:34.13] - Dan Paulson

That happens so much. I mean, you, you usually, when you look at these investments, if you've ever sat, I know you've sat in on a bunch, but usually it's how much cash they're going to burn each month, which is why they need the millions upon millions of dollars. And the assumption is by burning that cash, it'll turn into sales and turn into growth. And that to me is just craziness.

[00:17:55.16] - Rich Veltre

Yeah, I don't see how that translates. It's more interesting to see the entrepreneurs that go up there and say, well, I go to a trade show every weekend, or I go to a, you know, farmers market or a festival or, and I set up a table, you know, and I sell this many every, every month. And nowadays it's a little bit more of, you know, I can set up a website for a couple hundred bucks and I can do, you know, online marketing and really push people to the site and build up my instagram and do all the social media things that allow you to not have a significant amount of overhead. And you can see if people are buying and you can do some surveys and you can see, is this really going to have the impact on a national level that I need it to in order to live? You know, and that's the part that I think just gets lost because it just gets into this, you know, high finance, you know, we're going to raise $3 million to go, you know, light it on fire in a bonfire in the backyard.

[00:18:56.24] - Dan Paulson

Well, you got to be careful with online, too, because you could very quickly do the same thing there as well. I mean, any sort of SEO marketing or adwords buys or, you know, even on social media, you start adding all that up. It's not a problem to spend tens of thousands of dollars a month on just the marketing side of things. Now, again, if it's a good product, demonstrative, in other words, you can show visually how it works. It does work the way you promise it will, and you have the resources to fulfill sales. You've got a good opportunity there, and then it's worth the investment. I think going back to the shark Tank example, when these guys are rolling their eyes at what are you gonna spend on marketing? Well, a, what's your competition like? Is your product demonstrable? Is it better than anything else out there? If it's not, you put yourself in the same situation and you're just burning money. Then you pointed out a lot of these guys, they go to trade shows, they go to farmers markets, and it seems like when you look at what succeeded on shark tank, even, especially if it's a product based thing, it's typically those items that, you know, they're doing it out of their garage and they're producing it and they just need to ramp up.

[00:20:14.21] - Dan Paulson

But it's proven that it's worked. Their sales are increasing, and sometimes their sales are phenomenal for what they're doing out of their garage. But if you don't have those in place, you really don't have a business yet. You just have a bunch of money and an idea and the idea hasn't been proven.

[00:20:29.24] - Rich Veltre

Agreed. I think that's the, I think that's my kind of key point, right? Is that if you can show the sales, that's, that's proof already. That's a, that's a starting point. And I agree with you too. I think at that point, if somebody can sit there and say, you know, my sales are good, my margins are not as good. I need the money because I need to go and get a better, more efficient co packer or, you know, I'm using shark tank terms, you know, but whatever's going to drive my cost down, you know, wherever I can get something, you know, manufactured or, you know, wherever I can get to the point where scale gets me a lower cost to put out my product, I think that's a viable pitch to me. I think. Now you're talking, well, first of all, now you're talking my language, right? You're talking the language of the numbers. And the numbers say, you know, your margins can get better if you can put out a million units as opposed to 100,000 units. So if you have those statistics, you should have no problem finding people who have interest. They may not write the check.

[00:21:37.24] - Rich Veltre

You might have to do, you know, some of your, you know, some of your pitching and, you know, locating investors, but if you're really pushing it, people will be looking at you already.

[00:21:50.01] - Dan Paulson

That is true. You know, it, this reminds me of another story. So do you remember coolist? Do you know what coolest is?

[00:21:59.06] - Rich Veltre

No.

[00:21:59.20] - Dan Paulson

Ah, well, so this is the Kickstarter days, right? So other ways that you can invest money as you go to Kickstarter and people put their ideas on there. Coolest was a cooler and it was a cooler that had a handle. It had, it was like one of the first ones to have wheels on it. It had a built in speaker, it had a built in bottle opener. It had all this stuff that basically it made this ultra high performance cooler that you could take to the beach or wherever. I believe they were one of the highest Kickstarter funded campaigns in the early days of Kickstarter. I actually have a coolist. Coolist is no longer in business, by the way, because another problem is when you're collecting cash, sometimes you don't do anything until you over engineer the product. So coolest problem was they had a really good idea, but instead of launching their base idea, they went through several revisions to improve that product before they even got the first ones out. So what happened was they reinvested a lot of that money back into R and D, and then by the time they got to the point where they were ready to send the product out of, they had no money to actually produce the product.

[00:23:15.09] - Dan Paulson

So then they went out to their Kickstarter campaign and said, well, if you pay us an extra $200, we will guarantee that you will get this product in the first round of shipping. That created a whole big mess, and it created a number of problems, a number of legal issues, and within about two years, coolist was gone. So it went from a good idea that was actually viable, that had a lot of interest in sales, but they killed themselves, because instead of investing that money in getting the base product that they created out, they said, we'll make the product even better. We're going to over engineer this thing, so it's going to be so great. You're going to tell everyone about it. And in the end, they killed themselves because they had no money to produce the product once it was all said and done. So I see that as being an issue, too, where companies out there might have a good idea, but they won't release that idea until it is absolutely flawless, which it never is, by the way. And instead of going through different iterations, they now spend all that cash that they get in trying to create the ideal product or service and never get anywhere.

[00:24:24.22] - Dan Paulson

So another good lesson to come out of this is if you're always chasing cash, be careful, because it might influence you to wait to release a product and not actually generate money income through the product or service that you're creating.

[00:24:43.28] - Rich Veltre

Yeah. And I. And again, it goes back to, as you said, I think sales is your proof. Right. It also tells you that people want the product. So I don't think you even get there with the Kickstarter, because if I remember right, Kickstarter, in the early days, what people usually did was they said, look, give us the money and we'll send you the first. You know, the first. Right.

[00:25:07.13] - Dan Paulson

Yep.

[00:25:07.24] - Rich Veltre

So that's not really a sale. That's. That's, you know, it's kind of, somebody liked your concept and invested in you, and they get a free cooler.

[00:25:16.01] - Dan Paulson

Right.

[00:25:17.16] - Rich Veltre

So when you put it out on a regular market, how well did it do exactly? So that's a little bit of the scary part for me. You know, you're gonna put out a product and then everybody returns it. And then you went, well, I took a million dollars worth of investment, but.

[00:25:34.08] - Dan Paulson

I spent a million two on R and D, and now I don't have any money to actually produce the product that I promised everyone they were going to get.

[00:25:41.06] - Rich Veltre

Yeah, yeah. I mean, I think this was a great discussion. I think this sounds like we hit on the points that we wanted to. What do you think, Dan?

[00:25:50.12] - Dan Paulson

Well, I mean, I guess let's leave our audience with what the hell do you do besides raise money? Then let's clarify it. What should you be spending your time and effort on versus just raising capital?

[00:26:04.21] - Rich Veltre

Well, I think. Get your coolers out there. Yeah, I think that. I think that. Build the business. You know, don't just build the product, build the business. All right. I'm not saying that you have to go hire a whole bunch of people and rent an office or a warehouse or I anything else, but build the business. You know, understand that that's what you're raising the money for. The ideal piece is if you can build the business and somebody's going to come in and make an investment in you, there's more of the share that you're going to hold on to because the valuation is going to be higher because you already did all the work. If, you know, if you're going to somebody like shark tank, they don't want to do all the work. Do they want to be involved? Sure. Will they help you out? Sure. Okay. But there's a cost to that. And, you know, you hear it every once in a while. They're Only giving you, you know, $50,000 for 50% of the business. That $50,000 not going to last very long, and they own half. So if you can build the business when you sell it, okay.

[00:27:09.15] - Rich Veltre

Or when you bring in your investors, you can hold on to more of it for longer. Okay. Let it grow. The business itself, as long as the product really is good, it will grow.

[00:27:20.08] - Dan Paulson

There's the key. I think it comes DOwn to patience. You know, treat it as a marathon, not a sprint. So if you can grow the business on your own, why do you need the investment capital? The whole point of the investment capital is for a quick ramp up. And those are the people that are chasing the money and chasing the idea and have their end game being, you know, I'm going to run this up and in three years, I'm going to cash in my chips, I'm going to be a millionaire, and I'm going to sit on a yacht for the rest of my life. For a vast, vast majority of business owners and entrepreneurs, that is not the case to me it makes more sense to what you said, build the business. I would also add in shameless plug for you is hire a financial expert so that when you do have cash or if you are raising money and bringing cash in, somebody is there controlling the purse springs or guiding you on how to invest that money to make the most of it, not try to figure out how to get more cash and burn more cash without actually producing any product.

[00:28:24.02] - Dan Paulson

So many people just don't have the financial literacy and I don't by any means consider myself an expert. I lean on people like you for that. But we take things for granted and before we know it, there's no money. There's, you know, then you're in a pickle. And now you get into the situation that I brought up where you're at the end of your business career because you made supposedly all these smart investments, but there's nothing there to support it. And now you want to sell the company, but there's no value in the company. So there goes your retirement out the window. And that's where I think looking at your operations, looking at your finances and really making sure that what you're doing is going to put you on track for growth is better money spent than just trying to figure out a quick out. And I guess that that's my takeaway from our conversation here, is quit looking for the quick outlandish as we titled the thing. Quit chasing the money, focus on the business, focus on producing a product or service that people want and the rush should take care of itself.

[00:29:26.04] - Rich Veltre

Can I just say, ditto, ditto.

[00:29:28.13] - Dan Paulson

Go for it.

[00:29:29.14] - Rich Veltre

Ditto, ditto, ditto. I totally agree. All right, this has been great. Anybody who needs help with what we were just talking about and the shameless plug that Dan gave me a my email is rveltre@veltregroup.com. You can reach me anytime that way. Dan, how do they reach you?

[00:29:49.20] - Dan Paulson

Well, if your operations are a mess or you don't have any operations to speak of, give me a shout at danpaulsonletsgo.com. Theres a form there you can fill out. You can schedule appointment with me and I would be happy to talk with you about whatever is ailing your business that you want to fix.

[00:30:07.11] - Rich Veltre

Sounds good. And until next week, awesome.

[00:30:11.02] - Dan Paulson

We'll see you then.

[00:30:12.08] - Rich Veltre

All right, see you then.