Latest / The Start, Scale & Succeed Podcast / Would More Money Kill Your Business with Yarin Gaon (stage 4) - Ep. 401

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Would More Money Kill Your Business with Yarin Gaon (stage 4) - Ep. 401 · The Start, Scale & Succeed Podcast

• 0:00
  Scott Ritzheimer: Hello, hello, and welcome, welcome once again
• 0:03
  to the Start, Scale, and Succeed podcast, the only podcast that
• 0:06
  grows with you through all seven levels of your journey as a
• 0:10
  founder. I'm your host, Scott Retzheimer, and today we're
• 0:14
  going to talk about a challenge that I have for you. You see,
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  just about every single one of you that are sitting there in
• 0:21
  level four, you know, those disillusioned leaders that are
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  just in the belly of this journey as a founder. One of the
• 0:28
  things that's keeping you there is this almost universally
• 0:32
  accepted belief that if you could just have more money,
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  you'd be okay. If you could just get more cash, it would be fine,
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  and especially if that cash comes in the form of outside
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  capital, whether it be debt or equity or some type of
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  fundraising for nonprofits, our guest today has the argument
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  that it may actually kill your business more often than grow
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  it, and so if more capital isn't the answer, well, what is?
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  Fortunately, he's not here to just show us the problem, but to
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  show us a way forward with us today, we have Yarn Gaon. I
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  think I said that right on personal part here, but he is
• 1:07
  awesome, excellent. He is here to show us the way. Yarn is the,
• 1:11
  as an entrepreneur turned investor with a proven track
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  record of founding, scaling, and exiting companies. He launched
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  his first company at age 14 and went on to build Israel's
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  largest e-commerce platform for military goods, which he later
• 1:26
  sold before relocating to the US. Welcome to the US of A. He
• 1:29
  served as an entrepreneur in residence at a venture capital
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  firm, where he specialized in turning around distressed
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  startups with an MBA from Tel Aviv School, sorry, Tel Aviv
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  University, and time spent at Kellogg School of Management.
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  Yarn now helps growing companies mature into strong cash flowing
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  assets. Yarn has mentored over 400 businesses through SCORE,
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  and the University of Chicago's Polsky Center is here with us
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  today. Yarn, welcome to the show. I want to start off with
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  this, this line that jumped off me. You have this - I don't know
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  if you would call it an online book. I don't really know where
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  Notion fits in the world of things these days. It just kind
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  of does everything, but it's really, really cool, interactive
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  resource. And as I was going through it, this line just
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  jumped out off the screen at me, and it says, giving capital to
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  an unclear business is more likely to destroy value than
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  create it. Now that's a pretty contrarian take for business and
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  nonprofit worlds. Quite interestingly, where founders
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  think that they know what to do, they just need more money to
• 2:35
  break through. Why is that not true?
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  Unknown: Ooh, for many reasons. So, it's, it's not true for a
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  very specific type of companies, a very specific stage of their
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  lifestyle life cycle. So, let's talk a little bit about
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  companies and stages and different needs for different
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  stages. So, as companies grow, you start with what I call the
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  hustle stage, right? It's all about zero to one, zero to $2
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  million in sales. It's all about saying yes to stuff, yes to more
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  customers, yes to more channels, to more revenue streams. It's
• 3:08
  just about yes, you're trying to find what works, right? So
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  you're really opportunistic about it, and that's a method,
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  or a growth method, method that I call growth by addition,
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  right? The idea is, what else can I add, and how can I
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  generate more revenue? What happens is, as companies grow
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  and find some success, or some traction, or some product market
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  fit, what happens is they try to emulate that mindset as they
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  grow, so they try to grow by addition, so they try to add
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  more customers, and more type of customers, more type of
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  products, more type of channels, and what happens is it becomes
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  extremely complex to manage, and they basically end up building a
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  very, very wide business model that is very hard to manage and
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  very expensive to scale. So, if you take capital, if you take
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  money or an investment, either it's equity or debt, and you say
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  to a $5 million company that serves multiple different types
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  of customers with multiple different types of product, and
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  say, "Here, here is $5 million go scale this. What usually
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  happens is they burn that on, they lit this on fire, because
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  it's an extremely hard business model to scale. So, a different
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  version of doing this is instead of growing by addition is to
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  transition to what I call growth by subtraction, and growth by
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  subtraction is a model, not forever, but until you get to
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  every company is, if let's say $20 million in sales, when the
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  idea here is let's find the 20% that produces really 80% of
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  profit, not revenue. Let's find the core engine of this
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  business, the stuff that we do extremely well, the type of
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  customer that we know how to serve extremely well, and
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  tighten the business, tighten the business model. And once you
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  have a super tight business model, then cash becomes
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  accelerant, right. It's the idea, let's build the machine,
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  and then put the gas inside the machine to make it go faster,
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  but if your machine is not tight enough and you bring gas, you
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  just lit up on fire. I hope that analogy made a little sense.
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  Scott Ritzheimer: Yeah, it's great. I think what makes this
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  so hard is, is the timing piece of this that you opened up with,
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  because maybe you don't agree with this, but I think you can
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  do that too early, before you really know who the right
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  customer is, or what the most profitable revenue stream is,
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  and so you know two groups of people will hear this, there'll
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  be the folks who apply it too soon, and then there's the
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  folks, the folks who haven't applied it yet, and should have,
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  and so first, do you agree with that? Is there a time for that
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  hustle stage? Is that actually appropriate for the early parts,
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  and if so, at what point does that scale tip? How do you know
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  that it's time to change tack?
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  Unknown: So let's start by saying there's definitely a room
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  for the hustle, right? That is how you get a business off the
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  ground. That's the zero to one, zero to two. It's how you
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  validate that there's demand for your product and services. The
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  interesting question is about the tipping point, right? I said
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  zero to one, I said zero to two, but it really comes down to
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  where you feel you have some version of a product market fit
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  or traction, so let's talk about what that looks like. Usually,
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  what it looks like is there is a one side of the business that we
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  know is predictable and generating cash flow
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  consistently, or there is a type of client that we see that we
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  are able to attract, and when consistency come into place,
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  right, when there's some side of the business that is clearly
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  working, the inclination of founders is to say, okay,
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  something is working great, what else can I do? So they abandoned
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  the core, and they ask, okay, so this is working great, what else
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  can I do what other customers can I do, or can I serve? That
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  is the trap, right? Instead of saying, okay, I'm a $2 million
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  company, I'm a $1 million company, I'm still in my
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  infancy, really, especially if you service, you're serving
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  customers in the US, you're so small, you haven't really
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  captured any market share, that is the point where you make or
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  break, so you either say, "Okay, I'm just going to kind of say
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  yes to everything and be opportunistic, or "I'm going to
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  treat this as, okay, I found something that works, that would
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  be my version one, or my first version of my business. Now, if
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  I really want to grow profitably, I need to make a
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  shift, so I need to design the version two, and the key here,
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  if you get anything, version one of your business is not
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  necessarily the version that is worth scaling. Not everything
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  that you've built so far is worth scaling. There is a pause
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  moment that, if you have it, allows you to really scale the
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  most profitable parts, and if we talk about this, this is
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  important, because there is a difference between scaling
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  revenue and scaling profit, and a lot of people get this
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  confused, right? Scaling revenue is all about saying yes to
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  sales, right, but you know better than I do, Scott, that
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  not all sales are created equal, and profit is the average of all
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  of your activities, right? Some bring a lot of profit, some take
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  away from profit. So, if you change your mindset from I want
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  to grow to be a $10 million company, which is a vanity
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  metric, because it's based on revenue, versus I want to be a
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  $2 million net profit company, start making different
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  decisions,
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  Scott Ritzheimer: yeah, yeah. One of the other aspects of this
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  that I find challenging, and, and some of our more astute
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  listeners may, may be connecting the same dots, but we've had
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  several folks who've come on who've talked about addressable
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  market, and, and, and for some types of businesses, one to $2
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  million may be market saturation for things that are brick and
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  mortar, very localized, if you're a hair salon or something
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  like that, and you've got a single location, and and so how
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  is it that you go about continuing to grow when you are
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  bumping into either a perceived or a real barrier on your
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  existing market.
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  Unknown: Okay, let's take an example of this salon. Let's
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  just take that as an example. So, there is a geographical
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  saturation at some point for a brick and mortar business, but
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  even then I would challenge this. So, the question is, like,
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  how much can you actually get from a single location? So, I'll
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  give you an example of a different company that I work
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  with. I work with a company that does valet. They have, they have
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  a valet service and. They basically provide valets for
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  events and for restaurants and all these, but what happens is
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  they try, so as they went through and they grew, the first
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  inclination was to expand geography, right, to expand to
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  different territories or to different markets, but if you
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  haven't gone through a tightening process of your
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  business and you expand to a different geography, what
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  happens is you lose control of your core business, so it's a
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  risk of expanding too early, especially if you are. So,
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  here's the thing, you expand into it, so let's reverse the
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  question. It comes as a loan comes to me and say, "Okay,
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  Yarn, when should I expand? When should I expand geographically?
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  When should I start a new location? And my answer would
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  be, when you have a super tight model, when you know exactly
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  what you need to do, and your entire model is super tight, and
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  you know exactly how you acquire customers, convert them, produce
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  an amazing experience, and make sure they come back when your
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  business is tight. Take that model, copy, paste it to a
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  different geography, but what happens is nine times out of 10
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  those models are not baked, so they see revenue, but the model
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  itself is not baked. Maybe they're not retaining enough
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  clients, maybe their acquisition method is still not really
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  tight, and when they try to copy paste this, they just create
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  complexity in a market that they are not in. Did I resonate?
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  Scott Ritzheimer: Yeah, yeah. No, it's, it's really good.
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  It's, it's the, the, the opposite of that. What I see
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  most folks do is we need more revenue next year to keep
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  growing, so how do we get more revenue? Well, let's go add
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  another location, and I love this, this somewhat - it's not,
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  it's not myopic, but this somewhat inward-looking approach
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  of saying, hey, what is the model that we're trying to
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  reproduce, not just how do we create more revenue. That's such
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  a brilliant insight, Yarn. There's this question that I
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  have that I saw all my guests. I'm interested to see what you
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  have to say to this, but the question is this: What is the
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  biggest secret you wish wasn't a secret at all? What's that one
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  thing you wish every founder watching or listening today
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  knew?
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  Unknown: Yeah, profitable growth is not magic, and profitable
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  growth, it's not, is a result of making better profitable
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  decisions. So that is why I built what you call the Notion.
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  It's basically it's a system, right? It's called the Growth
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  Clarity.. I'm sorry, the Growth Decision Canvas iterations
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  throughout time, Growth Decision Canvas, and what this says, it's
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  basically all of your growth decisions on one page, and I
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  built this because I wish I had it when I ran my companies. So
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  it's basically it's the version, it's helping you design the
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  version two of your business that is worth scaling. So a
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  business is basically a mind game, it's a game of the mind
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  plus people. If you're able to make smarter decisions, it
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  allows you to start saying no to stuff when you focus on your
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  core and what you do extremely well. Profit would follow, and
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  to just to touch on what you said a moment ago, revenue
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  doesn't fund growth, profit does. You cannot pay anybody
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  with revenue, you have to pay them with profit. So the shift
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  is from a revenue mindset into a profit mindset. It's a harder
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  mindset. It's harder to find that profit, but once you do,
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  that is what funds your growth as you move forward.
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  Scott Ritzheimer: Yeah, yeah, that is so good. That is so
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  good. Such a big shift, but an important one for folks to make
• 13:41
  your own. I know there's folks listening, is like this is just
• 13:44
  changing their world and their mindset. They'd love to hear
• 13:46
  more, get access to some of the resources we've even talked
• 13:49
  about today. Where can folks connect with you and find out
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  more about you and the work that you do?
• 13:53
  Unknown: Yeah, you go to Canvas at that Canvas dot fraction of
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  that partners. The Canvas and the tools are publicly open, so
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  it's a DIY system. You can do it yourself, you don't even need
• 14:02
  me. I help companies that want help going through the process,
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  but take that, take the first step is to identify what your
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  growth bottleneck is and what decisions you haven't made
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  explicit. If you're able to identify that, and we can solve
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  for that, so we can start tightening the business. Right,
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  where have you not focused? Are you serving too many clients?
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  Are you doing too many products? Are you trying too many
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  campaigns? Where exactly is the leakage happen? And then he
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  walks you through a process, how to focus, and focus is profit.
• 14:33
  Scott Ritzheimer: Very good, very good. Well, Yarn, that was
• 14:37
  absolute privilege having you on today. Fascinating conversation.
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  I know you got some folks thinking, I know you did for me.
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  So, thanks for being here. We really appreciate your time. For
• 14:45
  those of you watching and listening, you know that your
• 14:47
  time and attention mean the world to us. I hope you got as
• 14:49
  much out of this conversation as I know I did, and I cannot wait
• 14:52
  to see you next time.
• 14:54
  Unknown: Thanks for having me, Scott. Bye.
• 15:00
  Scott Ritzheimer: Hey everyone, Scotty Timer here. Thank you so
• 15:03
  much for listening to the Start Scale and Succeed podcast. I
• 15:06
  hope this episode gave you exactly what you need for the
• 15:10
  level you're in right now. If you want to discover what level
• 15:14
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• 15:17
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• 15:21
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• 15:24
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• 15:28
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• 15:31
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• 15:35
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• 15:39
  team, and all our incredible guests, so keep starting,
• 15:42
  scaling, and succeeding, and I'll see you in the next episode.