Startup War Stories That Will Save Your Company | Equity Splits

I looked him straight in the face. I literally said straight to him, "This is the single worst idea I've heard in my entire time at this university." And his face went white as a ghost. I mean, it was lit. All the blood went out of his face. >> He's like, "What are you talking about?" >> And then he goes, "What are you talking about? Everybody in my life tells me this is such a great idea." I go, "No, it's not. And here's the five reasons why." I didn't just say it was a bad idea. I said, "Here's this, this, this, this, and this. Five reasons why it's not." I go, "Who are the people telling you it's a good idea?" He goes, "Uh, well, my mother, my roommate, my best friend from high school." And I go, "Anybody that has a prior relationship to you is completely bad data. It means nothing." >> Bias, >> completely biased. It's not valuable to you. You need to say, "Who is your target market?" and go ask the people in your target market, and that's who you need to go ask. He goes, "I don't get everybody." So, I know he was just completely flustered. I said, "Well, just go to this target market and go talk to some people in that who you're trying to sell to your actual target market." Goes, "I'm going to go do that. I'll be back really quick." And he came back, sat down, and he goes, he sits down and goes, "You were right. My idea sucks. It sucks. I can't believe I thought it was a good idea." Says, "I need to hang around you more." He became my TA. And the end of that story is after becoming my TA, he learned the right way to do things. He joined up with some folks and he became he became a multimillionaire. >> Yeah. X rock. >> Welcome back to the Startup Ignition podcast everybody. I am Tyler Richards. This is John Richards. We are your favorite fatherson duo. Probably your only father-son duo that you actually listen to startup advice from. Unless you listen to your own father. That's also a thing. But today we are here together. We have no guests today and we're excited to talk shop with you guys. Hopefully this podcast is helping you. A cool story. Uh like two nights ago I was out out at an event here locally in Utah and someone came running up to me and told me, "Oh my gosh, I watch your podcast. I send them to my my husband. We're both working on something and they're so helpful. I'm making sure that he's watching every episode. I'm like, "Wow, thank you so much." >> I get that a lot, too. >> So, that was that was a cool, you know, pat on the back shoulder of myself moment. But, you know, it's just really cool that this is impacting actual founders and actual entrepreneurs that are executing and doing things. So, that's what we hope this is is a practical advice and helpful for you on your journey in entrepreneurship. But, let's get into the podcast. This is episode 30. We've already done 30 of these episodes. We've had a lot of cool guests, but we also have a lot of cool conversation just between me and my dad. But today we are going to to focus on a cool part of the boot camp that we really uh that a lot of feedback comes back from all of our attendees that the coolest part of the boot camp are the war stories are the the memories are the personal experiences the things where we have firsthand experience in mentorship or uh startups or investments that we've had in our >> during the boot camp. Sometimes we tell so many war stories you have to tell the audience remind us to move on and teach the principles. >> Yeah. Because every principle that we talk about, we for sure have war, >> 5, 10, 20, hundreds of war stories that go along with it. >> So that is what this podcast is going to be about today. We're just going to go over basic startup principles and give real life, real world experiences that have come out of our past and that we think are relevant to the topic at discussion. But before we do that, I'm doing an icebreer with you. >> Oh, you are? Okay. I didn't know you were doing that. >> Okay. We are going to do an icebreaker. It's going to take a few minutes cuz we want to keep this um podcast episode really short and sweet and really concise. But today we are doing a terminology icebreaker. Okay, this is not generational. This is just simple English versus VC terminology. >> Okay, got it. >> Okay, so I'm going to say a VC term >> and I want you to quickly as simply as you can state it what that means in real world English, just plain English. Okay, you ready? So, Unicorn, >> Unicorn is a company that achieves a $1 billion market capitalization or greater. >> Okay. So, in plain English, it's a billion dollar startup. >> Yes. Well, a billion dollar >> valued. The company could be, you know, years old, but it achieves $1 billion in value. So, all of its shares times its share price is at a billion or more. >> Okay. Bootstrap. Bootstrap means to start a company with the founders's own resources and not taking external financing, no debt, no equity sales, etc. >> Okay. Runway. >> And by the way, the founders's resources means also going out and getting customers to pay. Yeah. >> Okay. What now? >> So runway. >> Runway is how much time you have before you go cash flow negative and can't pay your bills and you run out of cash. >> So another VC term, deal flow. Deal flow is how are you seeing good quality companies that you can invest in? Cap table. Cap table is a simple statement listing all the owners of a company and what percentage of the company they own. Next one, burn rate. Burn rate is some people get this mixed up. There's two ways people express it, but the burn rate should be how much negative cash flow you're experiencing every month. So, how much more do you spend than you take in? So if you took in 30,000 but spent 50,000, there's a $20,000 burn rate. >> So like the money that you're losing every month, basically >> the >> money loss. >> Cash depletion. >> Yeah, cash depletion. There we go. That's a good one. That was as simple as it gets. Okay. Due diligence. >> Due diligence is the process of checking things out. It could be in both directions. An investor could check out a founder. A founder could check out an investor. It's doing your homework to see if what the person's claiming on the other side is true. >> So like investor startup homework. >> Yeah. Well, validation or verification of truth >> and research >> and truth. Yeah. Yeah. >> That what the other side is claiming is true. >> Yeah. Um okay, here's another one. Seed money. >> Seed money is the money to get started in a company. Uh they're at an early stage, but now we have the term preede even. But that's also money in the early stage. But it's like seed money or seed capital like really early stage investor money. >> Yeah. The company's probably it's not cash flow positive might not even have revenue yet. >> Okay. Here's another one. MVP minimum viable product from the lean startup movement and lean startup methodology. So MVP is where you build a product to get more learning not even to get revenue and it has a minimum feature set and you're trying to find out which features attract customers. >> Okay. So simplest form of that definition, MVP is the intersection of a minimum feature set that has enough value that somebody would buy it. >> Yeah, there we go. I like that one. Okay. Pre- money. Pre- money. Pre- money valuation is one of the most important terms. Pre- money valuation means when a founder comes up to an investor says, I want you to invest my company and the company is worth X dollars. The pre- money valuation is X dollars. >> So what about post money then? So how would you define pre- money to in simple plain English and post money in simple pl >> pre- money valuation is what the founders claiming the company's worth at this time and post money is after a round of investment then what is the company worth which is the pre- money valuation plus that investment >> okay last one here we go dilution >> dilution is the experience of realizing that as you take in more equity financing into a company all the existing shareholders percentages go down in that So, in simple plain English, because I don't think anybody who had no idea what startups or investment were would understand that definition, >> it's as you take in like you're explaining it to an 80-year-old grandma. >> As you sell more ownership in your company to outside investors, the existing investors percentage of ownership goes down, relatively speaking. >> Yeah. So, share share shrinking. >> Yeah. It's it's diluting. Just like if you have concentrated soap and you add water to it, there's less soap in the mixture. >> Yeah, there we go. Okay, so hopefully that was some plain English terminology that we could that we could uh share with you guys so you understand these VC terms a little bit better. Um, but they are kind of complicated, but you could tell that all these words like if you didn't know what they mean, dilution, pre- money, MVP, seed money, burn rate, deal flow, bootstrapping, uniform. >> Can I speak to our viewers and listeners? It's super important that not only you're passionate about a great idea that's going to change the world, but you learn the business side of business so that you can understand ownership, equity, financing, and these terms because that's also a part of success. I've seen many entrepreneurs with a great idea and passionate and they don't get to the finish line and reap the rewards of entrepreneurship because they don't understand all of the business documents, the financing issues, and all those things that can be a little boring. >> Yeah. Yeah. Yeah. So you got to get well verssed in that if you're going to go >> you need to do both sides. Yeah. Passion, >> great product, change the world and >> how do I preserve the valuation and the equity and keep things so that the entrepreneurs and founders get rewarded, >> right? Okay. So that was our icebreaker just real quick there. Some VC terminology converted into some plain English for those that might be just starting out or just budding in this journey. So hopefully that helped everybody out there. Um we had fun doing it. Okay. So, we in our boot camp, we have recorded our boot camp that we've ran now multiple times and part of our online software platform um on our website at startupignignignignignignignignignignignignignignignignignignignignignignignignignignignignignignignignignignignignignignignignignitition.com we have created a library of videos. So, we've chopped up, you know, the hours and hours and hours and hours of video teaching footage that we have over the course of the last 10 years, and we've created snippets of videos. And in that library, the most popular videos on in our library are always the stories, the war stories. >> Yeah. The the sto where we teach a principle, but then we've made like a five minute video about the story that correlates with that principle. And those, you know, us as admins, we can see the view count on all of the videos in our library and those are always the most watched videos. I we talked to somebody just recently, they said, "Yeah, all I did was go and watch all the stories." I love John's stories. I love Tyler stories. >> Yeah. One entrepreneur told me, he gathers his team around and just watches the war stories >> and watches the war stories on our library of our content library online. But so today, I what I thought I would do is I'd propose a couple of principles to you. I'm cheating a little bit because I know a lot of these stories and I've heard them multiple times, but you have endless amount of stories because you've you've mentored thousands >> because I'm OG. I'm the old guy. >> Yeah. And and you've probably mentored thousands. I've mentored hundreds and you know, we have a big long list of resumes of startups that we've been, you know, involved with. But I'm going to propose principles to you for this quick short podcast today. And I would love you to say, "Okay, here's the principle in action or here's a story that comes to mind when I talk about this principle." And maybe just teach me and teach our listeners and viewers just about that principle, but via these war stories because they're so intriguing. And so I'm going to start off with I know something that we've talked about on the podcast before, which is um equity ownership. and that, you know, we preach this. I'm, you know, I'm now teaching a class at at um a university and the students are constantly asking me how to divide up the equity ownership and how to divide up amongst co-founders and you are an infamous line is that you always preach is never do 50/50, never have equal partnerships because that just causes problems. So first of all, tell me the principle behind that and maybe going into, you know, cutting up and slicing the pie around a startup. Why do you not do 50/50? And tell me of an experience or a story that first comes to mind about that principle and the why behind it. >> Okay. So uh the reason we don't do 50/50 is because >> or 25 25th four people 25 or three people at third third are all problematic but 50/50 is the principle and you can look this up on the internet and it's the only wrong answer for how you divide up equity. 50/50 uh just leads to a lot of problems. Companies are not meant to be a democracy or a decision-m by committee and that's what'll happen when you have equal shares 50/50 or four people at 25%. And you don't want to have sty decision-making so that the company doesn't make decisions and go forward. A lot of people said, "Well, unless all of us are unanimous, we're not going to do anything." Well, that's interesting. So, you're not going to do anything. Uh, you need to do something. So, basically, companies need to be a benevolent dictatorship. There needs to be one person who has the final say to say, "This is what we're doing. We've taken in all the advice. We've heard everything, looked at all the data, and this is what we're going to do." And that's much more comforting as an investor. CEO that calls the shots. >> As an investor, I would never invest in a 50/50 company because I don't want the brain damage that's going to come. >> But I think that's because you've seen what happens because you have the you have the the history in your past that you've seen why those blow up. >> This is the very first principle we teach in the boot camp and it's it's really important. Now, here's an example. Um, and I have permission from people to tell these stories, >> but don't get me wrong, solo entrepreneurship is not the way to go. You definitely want co-founders. You want partners. >> If you're doing a highly scalable venture, you can't do it as a solo. >> You have to have co-founders. >> Solopreneurs don't do that. >> So, don't don't misconrue this this principle of, oh, I don't need partners or I don't need co-founders, but you do, but you need to do it correctly. >> Here's a simple example. If I had four founders and they each had 25%. I would run away from that. If instead it was, okay, the primary founder who's going to be the CEO, maybe whose idea it really was, but a primary founder had 60% and the other three had 20% 10 and 10. That already is so much better just on that. >> So when you think of bad 50/50 splits or even equity splits amongst co-founders, who first comes to mind? >> There's so many. I know. But number one, >> I'll tell you number one is this um because it's one of my favorite people. I won't say her name but she had started a company uh in college and first month >> by the way I think most people who you tell these stories about they own up to >> like I don't think they would be embarrassed so I don't know if it's if it's valuable to shout them out or if we should >> she g me permission to tell it in the boot camp I'm not sure about in the podcast >> yeah it's a little bit more of a stage >> a little more stage yeah so anyway she uh I knew her when she was a young girl and she came to college and she started a company first month, 40,000 revenue. She was catching on to an idea that was really timely and uh it was a a product. So, it was e-commerce selling direct to customer, direct to consumer and through e-commerce channels. And over the ne first few months, it was growing. And then she needed help. She needed help with fulfillment, with picking and packing, and just doing everything in a scrappy e-commerce product startup. >> Just doing everything that you need to do for an e-commerce store. She found a person in her social circles and matter of fact had the exact same name as her first name. And so they uh decided that this second person was going to join the company. They she the first one the primary founder had no idea what percentage to do or give and made the mistake of going 50/50 >> and going 50/50. And so the company's going along and it's growing and all of a sudden the second one says actually she's got to leave the company because her husband is moving a,000 or 2,000 miles away with a new job. And that caused a problem cuz she has 50% of the company. And they also had not put in place a mechanism for solving that problem which is a whole another issue. But just by 50/50, how do you make a decision on how you're going to handle all this? and they got to not getting along and >> so they wanted to both still be involved and >> well did the uh one the second one that got 50% she's going to leave is she going to keep her 50% not do any of the work and that's a problem and uh so they had to decide what they were going to do and so literally they just disagreed and they weren't the worst I've ever seen cuz I've seen cases where they become mortal enemies and nuke each other as best they can. This one was not quite that bad, but it was still tensionfilled. And so, as what happens in a lot of these cases, they went to their attorney, the venture attorney that they were working with, and the solution is often, believe it or not, where each partner writes down a number in there and put seals in an envelope that they would sell for, >> like a money value. >> Yeah. that they would sell for and um that they would take to be bought out of their 50%. And then they open the envelopes at the same time and the one that has the lowest number is the one that gets bought out. Okay? Or vice versa. It could be if the other one's a higher number, then you buy out. You decide how that's going to be done. and you open the envelopes at the same time and decide which way you're going to go and who gets to buy each other out. So, and that happens. Sometimes people aren't happy with the result there, but they agree in advance. Whatever happens happens and they live by what they agreed when they open those envelopes in front of the attorney. Well, this time the second um person in this story that came on later didn't want to have them open at the same time wanted the first person to open the envelope first. And if the second one liked it, they were going to buy out the primary founder and she or she wouldn't agree to it and just keep a stalemate going. So the first primary founder agreed to that envelope was opened. The second one said, "I'll take it and the primary founder lost her company in that mode and had to sell out to the other one and the other one got the company." Uh that was a really sad outcome. Uh but that's what happened. >> Did she get paid well though? Oh, do you know >> she got some money, but she lost. >> Did the company go on to success? >> I think the company went on and she kept going. And I I I think a year or two later, I realized it was there. I've seen uh these stories play out so many times. Um if I ever talked to a group of 30 or more, at least three, come up afterwards and said, I'm one of those people that did 50/50 and it's a nightmare. It almost always ends up in a complete nightmare. Have I ever seen a 50/50 workout? I'd say about in all of my comingings and goings about two or three times. >> Yeah. What about what about in that scenario? Let's replace maybe the 50% second co-founder with an investor. So, have you ever seen it in your career where there's a a founder or a founding team that has taken money with maybe the wrong investor or misalign investor or had a bad investor scenario >> or gave too high of a percentage to the investor >> or gave too high of a percentage >> all the time. >> So, because you know if you take money from a misaligned investor that can also really mess things up and be a bad partner. >> So, here's a here's a story for that. So, there was a um a fellow that went through a tech accelerator I had founded called Boom Startup years ago. >> And this uh entrepreneur took a $100,000 investment very early while he was still in the accelerator. didn't run any of the paperwork or anything by any mentors or anything. Signed the paperwork and a few months later after the accelerator was over and he was getting some traction, he actually landed a deal with the number one company he could have possibly landed a deal with and he was so excited and he told the investor and the investor said, "Wait a minute. We don't want that customer." And the CEO goes, "What? What are you talking about? this is the best customer we could ever get and you need and the investor goes, "You need to read the investment documents we signed." And hidden in the investment documents was a paragraph saying that the investor had the right to veto any customer. >> Oh my gosh. >> And it turns out that the investor ends up being a competitor to this number one customer the company could have. He was trying to get insider information >> and he didn't want and so he said no to that customer and the CEO after it was all said and done literally just walked away from the company and quit and gave it to the investor entirely and left. >> The founder just walked away. He's like, "Well, you're going to hold me back from any deal I'm trying to make or any business I'm trying to drum up. I'm out of here." >> And you know who this is and you know pretty well. >> I don't know who that is. >> Yeah, you will if I told you. >> Oh, dang. Well, whoever that is, I'm sorry. That's a horrible situation. So, yes. So, co-founders and founding teams, you need to do that properly. Investors, you need to read paperwork. So, not probably the terms on that $100,000 probably getting investment while he was going through the accelerator wasn't great already. And then two, the actual terms around the control. >> I think the percentage you got was okay and bad, but that you got to read every paragraph. Yeah. So, >> especially if the investor prepares the documents, you make you got to make sure you have an attorney read your documents and say, "Find any stinger in there that could bite me in the rear end." >> So, that's those are those are both great stories. So, um hopefully you guys are >> there's more, but we can move on the next >> Let's move on cuz I I do want to keep this podcast semi short so you guys don't have to be listening. >> I told one about really really fast. So, and you know this guy too. He had a he had a remote co-founder 50/50. He she was female. She was the tech. He was the business. And they came at odds, didn't agree on things, styied the company. And literally they she he went to hire an incredible person onto the company. She vetoed it and said, "You can't hire him." He goes, "What are you talking about? All these things." They got in a real fight. Literally, he had to go hire the meanest bulldog attorney you could ever find, a female attorney that just went after his female co-founder. And he had to really be tough and it nuked the entire relationship. Of course, it went and all that. And after one year of legal machinations, a year lost of life and in the company, she finally threw in the towel with some relentless legal work and he had to pay her only $400 and she walked away. >> Yeah. >> But took a year. >> Yeah. So, man, is that just because of the remoteness that that was that way? I think just she felt the new employee was going to come in and help on the tech side and she didn't want him on the tech side. >> Yeah, that's crazy to me. You would think that she would want more support and welcome that with open arms. So, that's crazy. >> Humans are humans. So, okay, moving on to another another principle here and because we can learn from bad co-founding relationships, bad investor relationships. What about what about hires? What about team members that maybe not aren't necessarily co-founders, but maybe first initial hires, bad hires, too early hires. I know that a principle that you always teach in the boot camp is that you can't just hire on people to be these white knights that come and save the companies. >> Um, specifically like a CEO or founder of a company doesn't like sales. That's a very common situation where they offload the task of sales and say, "Hey, I raised some money. I'm I have some money in my pockets. I'm going to go hire this white knight salesman who's going to come in and figure out sales for me." Yeah, there's even more. Let's start at the very beginning. So, the first principle I'd share on this is don't uh just make your roommate because he's your roommate in college, your CMO, chief marketing officer. Don't just give somebody because they're in your uh roommate in your dorm or wherever a position in your startup. You might have a great idea and on to something >> your cousin Brad. >> Yeah. You just don't do that. Second thing is do you really need this is and you've seen this many times. Does a founding team need a person? I'm in charge of marketing. I'm CMO. That's not needed in most startups at the beginning at all. And you've seen you personally because you know even in all of you and I and all the activity we've had, how many times have we seen that that early marketing or salesperson that's not a CEO is too early in the company and they're a waste of waste of equity and a waste of time. >> Number one that comes to mind, I have one that comes to mind. >> I have a lot. So tell one that comes to mind because probably one of mine. I mean, we just had a a recent company um that there was three co-founders and one was tech, one was CEO and one was CRO, which is the chief revenue officer. He was brought onto the team specific >> of a threeperson company. >> Of a threeperson company to specifically, >> by the way, who should be the chief revenue officer of a threeperson company? >> The CEO himself. But the CEO decided that it was not something he was strong at. So, he brought on a CRO. That CRO was remote in an office in California while the rest of the team was here locally in Utah working grinding out doing customer validation building out the product. But the CRO's the main task was to review the product, see what it does and go and sell it, right? 6 months, 12 months, almost 18 months go by that this company since fundraising that they raised, you know, hundreds of thousands of dollars around funding this CRO and a big salary because he came from a nice awesome sales position at a previous company. >> And who got most of the sales? >> And that CRO after 12 months of being in that company almost to the 18th month mark was almost responsible for less than 5% of the sales. >> Yeah. So who sold the CEO? what >> the seller was really the >> Yeah, the seller was CEO. He knows who I'm talking about here and probably whoever's if you're listening to this, they know who we are talking about too. >> But anyways, the CEO >> and it's not that CRO's problem or fault. It's actually more on the CEO knowing not knowing what he should do, >> right? And and after, you know, unveiling this and seeing this, they had lost 18 months of time, had spent almost 95% of the money that they raised on that fundraising round and they were up a creek without a paddle. And that CEO knew of his sins and repented of his sins and quickly acts that CRO and took the sales, you know, responsibility responsibility back under his wing. >> And now they're flourishing. And now they are flourishing. But for 18 months of time, almost 18 months of time, they were distracted, floundering, couldn't find product market fit. So they thought, but it was because that CRO was not pulling his weight. >> So one of the most successful entrepreneurs we've had on this podcast in the past few episodes, one or you know, if you go back, I'm not going to say who he is, but we've had a lot of successful people. So who are you talking about? So in his when he started his first company, his roommate he made CMO. >> Uhhuh. >> He had to fire his friend and roommate after about a year in the company. Just wasn't the right fit. It was too early. Not a good thing. So this is real. It happens all the time. Did that company go on to greatness and stuff afterwards? Big time. But that was really holding them back. It wasn't the right thing. It was too early for that. And it's not that CMO's problem or that individual's problem. It's actually the founders need to know the principles involved, >> right? Yeah. So I mean and a lot of people will say you know if you have the money you know you can hire this or that and the the biggest expense is HR and team and you know that CR CRO and the sales initiative is warranted and you know you can push and hire as many people and it's okay if you have the money right yeah but you and I every week come across a new company that raises millions of dollars gets to a huge burn rate with so many people and they fail Well, >> money doesn't solve problems. >> A story that is infamous in our boot camp that we tell all the time because honestly we are both just were flabbergasted when this news broke and when everything came out was the story of Quibby. >> Yeah. >> So you remember the story of Quibby, right? >> Where and for those viewers and listeners who are not familiar, go Google Quibby. Qui Bi. The two founders were Jeffrey Katzenberg and uh Meg Whitman Whitman. And me Whitman is a very famous CEO. Was placed at a ton of >> HMP. Yeah. Her Ber Packard HP and then um eBay. eBay. >> Yeah. A ton of awesome positions at very big large companies. >> Jeffrey Katzenberg headed Disney animation. >> Uh DreamWorks. >> No, first he was a Disney. Okay. Right. He was just a huge Hollywood guy and they decided they were going to take on Netflix um and kind of be this new TV ad. Pre-product pre-revenue raised $1.7 billion. >> Yeah. 1.8 or 78 billion. Almost $2 billion pre-product. Imagine every entrepreneur listening to this right now says, "Man, you give me $2 billion, I can do anything." >> This is the great test of lean startup because Steve Blank, the father of lean startup, called out this action of raising 1.8 billion pre product. Will having an endless amount of money almost mean you don't need to follow lean startup principles? And the short story is >> no. No. Because the story ends basically 7 8 months later they run out of money and have nothing to show. >> They built the product, licensed a bunch of content, but they lacked one other thing, viewers. >> Yeah. >> And seven months after launching, bankrupt. >> Yep. Out of business. >> No product market fit. No one wanted it. Crickets chirped and they just it was first called New TV and they also four months into it found out that they were infringing on a trademark and had you change the name to Quibby. And this these are super smart entrepreneurs and again they didn't follow the principles. >> Yeah. I mean so okay that's another principle up >> and you and I have made mistakes not following principles thinking we're special sometimes. >> Yeah. I mean we preach this stuff from the rooftops and we try to get every entrepreneur and their dog to follow these principles. >> We don't follow the principles even like a cardinal principle. We won't make it. >> Yeah. Because I think I think there's a principle there too that a lot of entrepreneurs are very idea and they just want to go go with it. But in reality that doesn't matter in entrepreneurship. That doesn't matter. Startups need to be problem driven. You need to find a problem that you are solving not just an idea that you're wanting to tackle. We often call that building a pedestal and finding a trained monkey to act on the pedestal. To make that analogy really quickly and it's so good that Quibby is that way. Everything's that way. What Quibby did was build the pedestal. They went and build a software product and licensed content. Anybody can do that. Training the monkey is attracting viewers. >> Yeah. It's >> and and that's what they should have started with. Your first job as an entrepreneur is to train the monkey. Then you build the pedestal for your train monkey to perform on. Yeah. And this is all the time what happens. >> And I mean I I hear this almost every day on campus that I'm teaching. I have you know budding entrepreneurs, students coming up to me. I have this idea for that or this idea for this. It's like I understand your idea but at the same time you're not tackling a big enough market, a big enough problem or something that's scalable. There's something wrong with it. I mean, in your career, if I ever were to ask you who comes to mind when I say who had the worst idea that you've ever heard, who who comes to mind, maybe without saying names over the idea because cuz we don't want to be pointing fingers here and I'm sure people will, again, like I said, they'll all own up to it, >> but who Okay, I'll tell the story. >> Okay, >> so uh while I was teaching entrepreneurship at a university, um I wanted to attract people to my class. So, I had a friend let me use his Lamborghini and his Ferrari, park it in the middle of campus, and said, "If you want one of these, take this entrepreneurship class >> to market your entrepreneurship." >> I got 200, it was the first time I was holding the class, and 295 students signed up. >> That's awesome. >> Okay. So, I did that, and uh one of the students that stopped by uh my uh signage and those two cars said, "So, you help student entrepreneurs with ideas and entrepreneurship?" I go, "Yeah, that's what I do, and this is what this class is about." and he says, 'Well, I got a great idea. Can I tell it to you? And I say, 'Yeah, make an appointment. Come to my office and let's talk about your idea. So, he does it. He comes to my idea and he tells me his idea. And I looked him straight in the face and because I this is was part of my I judge ideas all the time and I know how to judge them. We teach in our boot camp, but I literally said straight to him, this is the single worst idea I've heard in my entire time at this university. and his face went white as a ghost. I mean, it was lit. All the blood went out of his face. >> What are you talking about? >> And then he goes, "What are you talking about? Everybody in my life tells me this is such a great idea." I go, "No, it's not." And here's the five reasons why. I didn't just say it was a bad idea. I said, "Here's this, this, this, this, and this. Five reasons why it's not." >> And he goes, he goes, "I everybody." I go, "Who are the people telling you it's a good idea?" And he goes, "Uh, well, my mother, >> my roommate, >> my best friend from high school." >> Yeah. >> Okay. And I go, "Anybody that has a prior relationship to you is completely bad data. It means nothing." >> Bias. >> Completely biased. It's not valuable to you. You need to say, "Who is your target market?" And go ask the people in your target market. And that's who you need to go ask. He goes, "I don't get everybody." So I, you know, he was just completely um flustered and he I said, "Well, just go to this target market and go talk to some people in that what you're who you're trying to sell to, your actual target market." He goes, "I'm going to go do that and I'll be back really quick." They never come back really quick when I do this. They say they'll be back in 3 days. They're usually back in 3 weeks. >> Yeah. >> And he came back, sat down, and he go, he sits down and goes, "You were right. My idea sucks. It sucks. I can't believe I thought it was a good idea. And then he then he um says, "I need to hang around you more." He became my TA. And the end of that story is after becoming my TA, he learned the right way to do things. He joined up with some folks and he built a great business. >> He became a multimillionaire. >> Yeah. >> Yeah. So he learned the principles. I think I think something there is that a lot of entrepreneurs get really passionate about their ideas and think it's the best thing since sliced bread and they want to just forge forward and push through and like get it done and that ends up biting them in the butt but they don't talk to their market because they are a little bit scared of that negative feedback of the criticism that is going to come from it. So, for whatever reason, and I'm I've done this, too, where if I have an idea, I just kind of keep building and keep going and don't talk to the market in fear of of of failure. Right. >> Is there any story that comes to mind of where there's been an entrepreneur who's pushed through, didn't validate, didn't talk to market, maybe because of fear of failure, or honestly just because they thought that that their idea was so good. like that story you just shared, but where they actually went through and spent time, effort, money, resources. >> This happens all the time. >> So, what's the number one story that comes to mind of someone pushing through and building without validating? >> Well, that that's everywhere. >> I know. I know that's okay. I have one, which was I I mean, I could tell you some really grotesque ones, but go ahead. >> Uh, this person won't know who they are. Hopefully, I'll disguise the story enough, but you will definitely know who this is. We sat down at a restaurant PF Chens in um Orum >> with a very notable doctor. >> Yeah. >> In the area. You know this one already. You know where I'm going. >> Yeah. >> And he was telling us about his idea. He had this awesome idea. It was a marketplace idea connecting doctors and and and other providers. And I think you were the one that pushed him finally to say, "Okay, like how long have you been working on this?" And it was like four and a half years or something like that. like how how many times have you started to build it cuz they had been through three tech teams building the product. So he had just been pushing through like working on this thing forever not getting any kind of product market fit and usually when that happens I say well how much have you spent with software engineers already? Yeah, I was going to get there where he said where you basically said, "Okay, how much have you spent on this?" >> The normal answer I get is usually like $10 to $70,000, which is bad enough. >> Yeah. >> But this one was much more. >> Hundreds of thousands. >> 385,000. >> $385,000 >> and they lost that last tech team. And every time they start with a new tech team, it was a free uh it was a total from scratch again. So, do not be the doctor at PF Chains that has spent $385,000 pushing ahead without validation, without talking to the market and coming up empty-handed. >> He's a great guy, great >> and he will own up to that 1,000% to this day. But that is another story that I could come up with that I just think, okay, so many entrepreneurs do not validate, do not talk to the market out of fear of failure, but also because they just think their idea is that good. What it is is the average entrepreneur, the person with an entrepreneurial mind and idea just is a builder grower. They want to just build and just get the thing built because they're so sure that people are going to love it and buy it. And unfortunately, that's wrong most of the time. And the failure rate of entrepreneurs is high because of that problem. This is at the core of lean startup. >> Premature scaling is the cause of threearters of all failures. And that means they were doing the right things too prematurely and it killed them. And building the product, in other words, back to that analogy of they built a pedestal >> assuming they are going to have a trained monkey. But it turns out that building a pedestal is easy. Training the monkey is hard. >> Yeah. Yeah. Well, I just I just barely taught my course um today and I I went to my course is called creating software ventures in the computer science program at the university I teach at. And I just I want to show you this. I have it pulled up because I just went over this and I I pull up a because you talked about premature scaling because I pull up the Yoda quote. You know the Yoda quote and Jordan I'll have you maybe flash this on the screen or something where he says fear is the path to the dark side. Fear leads to anger. Anger leads to hate. Hate leads to suffering. I said assuming is the path to the dark side. Assuming leads to premature scaling. Premature scaling leads to waste and waste leads to quitting or failure. >> Yes. >> And I pulled that up in front of my my class today and they were just laughing. But it's so true. It's because these little simple things that you don't think are a big deal. Oh, this is such a good idea. I'm going to assume that I know what I'm talking about. But ultimately, as Yoda says, fear will lead to the dark side and lead to suffering. So, so >> let me look the viewers and listeners square in the face. If you're a viewer, I will tell you literally the most expensive thing you will ever do is act on assumptions. >> Yeah. >> If you act on assumptions, it's very, very expensive. You should act on facts, not act on assumptions. >> Yep. Because that again that opens up a whole can of worms of assuming to premature scaling to ultimately wasting cash, burning cash. >> Every entrepreneur listening to this podcast right now needs to stop and think, have I spent money, made decisions, acted on assumptions. How is that going? Did you get lucky and it turned out okay or did it lead to loss of capital, loss of time? >> Right? >> And you need to review and say what you're doing right now. Are you acting on facts? Where do you get the facts if you're only assuming you go out and talk to your target market? >> Right. Right. Well, okay. I I want to I want to wrap up today because, you know, we had a couple of war stories here. You know, join startup.com/toolswuite. That's where we host all of our videos and all of our content. And um you can go and listen to every single war story that we've ever told, that we've ever recorded, just like these today. And they're great, not only because they're awesome stories to listen to and they're in the trenches, real personal experiences, but also because they're just fun stories, too. And they're teaching principles, right? So, I hope you enjoyed the podcast today. Um, you know, join us online, join us on our socials, DM us, message us, email us. We're super open. We want to be here to help. And we think we have a little bit of value to provide. And I'm not as experienced as this guy over here. He has 10x, maybe even 100x the stories that I do. But at the same time, we feel like we can help you. So, let us know what you're working on. Let us know. >> You're doing great. And you're the world's greatest monitor moderator. I'm better than the Allen podcast now. >> I don't think so. He says that every episode, but I don't think it's true every time. But thank you for joining us. Like, subscribe, share, share this with an entrepreneur friend who's working on something and see if there's any insight to be had here. Thank you to that female who came up to me at the event two two days ago or two nights ago and told me you're sending this to every single entrepreneur that you know and especially to your husband and forcing him to watch it. I I don't know if that's a good thing to force him to watch it but thank you for doing that. We appreciate it and we appreciate all of you. So thank you. Next time hopefully we'll have another amazing conversation. So thanks for joining us. We are done. Rock next to Rock next to Rock.