How to Increase Your Company Valuation

How to Increase Your Company Valuation

In this episode of Startup Hustle, Matt DeCoursey and Lowell Ricklefs, Founder and Managing Partner of Traction Advising, talk about how to increase your company valuation. Hear what you need to better position your business to succeed, and increase in value along the way.

Covered In This Episode

A business valuation is a process used to establish a company’s economic value and provide owners with an objective estimate of its worth. A business appraisal is typically performed when an owner wishes to sell all or part of their firm or merge with another. But how can you gradually increase your company valuation?

This is what Lowell Ricklefs wants to impart to the listeners of the Startup Hustle. As you build and grow your company, you also want its value to increase.

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Here are the highlights of this talk-provoking episode:

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Highlights

  • When does a business valuation happen? (4:31)
  • 2 biggest things that people will pay for (6:03)
  • Why the chances of acquisition are lower with a business with less than a million in revenue (13:39)
  • What is valuation? (15:16)
  • What investors are looking for (17:35)
  • Top 5 things you need to do to increase your company value (19:13)
  • You’re more interesting to investors if you raised money & revenue and succeeded alone. (29:29)
  • How fun it is to build your own business (35:01)

Key Quotes

If you have a mass exodus out of your company regularly. That’s a signal flare that there’s a different problem, and sometimes culture and leadership problems.

Matt DeCoursey

Investors are looking at where they’re going to spend their time, and if they don’t think you may go off in four other directions.

Lowell Ricklefs

Onboarding clients and then onboarding employees, those are both scalable. But if you don’t do it right, the wheels will fall off both sides.

Lowell Ricklefs

Find out how to increase your company valuation straight from the entrepreneurs who have successfully achieved it. Don’t miss this episode, “How to Increase Your Company Valuation.”

Startup Hustle Podcast Is Now Available for Entrepreneurs

Rough Transcript

The following is an auto-generated text transcript of this episode.

00:00.00
Matt DeCoursey
And we’re back for another episode of Startup Hustle. Matt DeCoursey is here to have another conversation I’m hoping helps your business grow. All right? So you’re listening to Startup Hustle which means you’re an entrepreneur. You want to be an entrepreneur. Maybe you’re involved in the startup or something along those lines. Anybody that’s involved in that stage or that type of business. The term valuation is always brought into conversations, and basically, your valuation is what the company is worth now later, or perhaps how do you even figure out what a valuation is now today I’m going to. Talk with my guest about how to increase your company valuation, and there are a lot of ways you can bring it up and there’s a lot of ways you can bring it down before I introduce who I’m with and deeply converse this subject with, a quick reminder that today’s episode the startup hustle is powered by fullscale io. Hiring software developers is difficult, and full scale can help you build a software team quickly and affordably and has the platform to help you manage that team. Visit fullscale io to learn more if it helps. That’s my business, and I’m looking forward to helping you solve these problems. Now with me today, I’ve got Lowell Ricklefs.

01:02.00
Lowell Ricklefs
Next.

02:32.92
Matt DeCoursey
And Lowell is the founder of Traction Advising that’s an investment banking firm and an advisory out of Seattle, Washington. You can learn more about what they do at http://tractionadvising.com. There is a link for that in the show notes. Hopefully, it’s not raining on our valuation up in Seattle, so Lowell, welcome to Startup Hustle.

02:11.00
Lowell Ricklefs
I Appreciate being here. I Love startups and look forward to talking about them.

03:20.88
Matt DeCoursey
Yeah, and you know there’s plenty of stuff to talk about today. So but let’s start that conversation with a little bit about your backstory.

02:33.66
Lowell Ricklefs
Yeah, I yeah, you know is a circuit this route like most startups are computer science electrical engineer long ago went to work for a force of 500 company rock automation as a sales engineer kind of worked my way up the sales ladder over fifteen plus years eventually um a global vice president and managed a software business for 3 years jumped out into a startup just I missed the startup world and went to work for a million dollar online Market Research Data Collection company as a VP sales scaled that up to 50000000 that company is later sold at WPP. To work for another company based in France, a $10000000 company, as their chief operating officer. We scaled that to 20000000, sold it to private equity, and then co-founded. Ah ah, a fintech company for healthcare and as a CEO and worked on that for 6 years, and that was sold to a company in Chicago. And then, along the way, I became familiar with m, and a just in my different roles, had acquired about a dozen companies. So um, really, through no training but just experience became familiar with them and a process, and when it came time to sell a company that I co-founded, I decided to run the process myself. I’d not been particularly impressed with the sales capabilities of the bankers that we’d worked with. So we ran our own process. We were successful, helped out an investor with another project, and decided there’s an opportunity out there to help small. We’re pretty focused, but small technology companies find a buyer. Small, meaning you know 5 to 5 to 10000000, but anyway, you know 3 to 20000000 is the sweet spot. Where we play in. So that’s what we do. We started six years ago, and it’s the most fun I’ve ever had and super interesting.

07:02.68
Matt DeCoursey
That’s a lot, man. You’ve done a lot, and that’s probably why you’re our subject matter expert today on this now, you know, so I think probably one of the at both is the host of this show which you know we’re coming up on our nine Hundredth episode which is crazy and.

06:27.34
Lowell Ricklefs
Well.

07:34.40
Matt DeCoursey
You’ve recently had our three millionth download, and you know there’s a whole lot, and you know how I got a two-year break from in-person events. But I just started going back to some of them, which invariably means I get a lot of echo in the questions that get asked me, but I think one of the most popular.

07:02.20
Lowell Ricklefs
Um, and.

08:12.53
Matt DeCoursey
One is what’s my business worth, and you know that’s it’s such a loaded question because I don’t know what’s someone willing to ]pay for it, invest in it at, and it’s kind of like reminds me of when I was a kid and I, you know, have baseball cards I’d be hey dad this is worth $10 he’s like yeah you got someone to give you ten bucks for it.

07:11.64
Lowell Ricklefs
Um, yeah.

07:24.80
Lowell Ricklefs
Um, yeah, yeah.

07:44.48
Lowell Ricklefs
Yeah, it’s true. Yeah, right.

08:51.80
Matt DeCoursey
No, no, I don’t, then it’s not worth $10, so but with that, you know valuations. So, the actual textbook definition of a business valuation is the process of determining the economic value of a business giving owners an objective estimate of the value of their company.

08:21.58
Lowell Ricklefs
Um.

09:29.80
Matt DeCoursey
Typically a business valuation happens when an owner is looking to sell all or part of their business or merge with another company. Um, I kind of agree and disagree with parts of that. Um, you know the thing that’s like we said so like when you think of a company valuation like what’s your definition.

08:44.16
Lowell Ricklefs
Um, yeah.

08:59.00
Lowell Ricklefs
Well, I think it’s important to understand traditionally, companies were valued much like ah as a financial instrument, so not unlike a bond, right? So that’s where they would look at Ebita and, you know, discounted future cash flow. And that’s why bankers were involved in the business to really kind of crank down on those. I really look at technology companies that are, in theory, they’re infinitely scalable, right? You don’t require a lot of assets. Um, you don’t have a lot of you don’t often have. You don’t have any work in process and a buyer if you’ve got a hundred customers. But the buyer has 2000 customers they could, and you’re doing 5000000 revenue. If they rolled out to their clients and get even 10 percent adoption, they add 200 clients. Ah, you’re now triple the size, so that’s why it’s very, very different in software. But. So the short answer is it depends on a lot, right? So I think the biggest reason software companies are bought on top-line multiples of revenue is because that revenue is sticky. It’s a long-term revenue stream. So the 2 biggest things that I see are that people will pay for what they desire. It’s its retention and its growth. So the higher your growth is and the stickier your revenue stream, the more valuable it is, but other things factor in um, and you can stop me but there, you know, so logo churn ties into retention um your net revenue retention is a big one. How much do your customers grow but are you profitable if you’re burning a lot of cash? It can be hard to sell if you’re breaking break-even. It helps a lot if you make a little bit of money. That’s great is 80% of your revenue with one customer like what’s your ah what is your customer concentration looks like how big is your market if you’ve got 10000000 revenue and it’s a $15000000 market. It. It’s going to be a limit. You know how much people will pay for it. And then part of it really comes down to who’s the buyer. You know we will often do a search for a hundred to two hundred buyers, and that hundred and ninety-ninth buyer that we reached out to has 50000 clients whereas, um, all over simplified. Everyone else had maybe a thousand. They can genuinely value your business at 25 to 50% more than anyone else can because it’s worth more to them. So it really depends I have some short answers I can give up like ah, like a range where they typically fall in, but it’s more complicated than what’s my business worth.

14:37.20
Matt DeCoursey
Yeah, and that was my point. That’s like a loaded question. You can’t really answer it, so you know how I’ll unpack some of that a little bit so when we’re going to go with the most simplistic formula Possible. It’s at a times X Equals b. And you know so a meaning that for many software as a service companies is often that annual recurring revenue total revenue monthly recurring revenue times. Whatever number, now that number is that multiple that so many people talk about.

14:25.58
Lowell Ricklefs
Yeah.

15:47.54
Matt DeCoursey
That can kind of ebb and flow, and there’s, you know, there are so many factors that I mean everything from, and you and you nailed it, and that’s why I said I wanted to unpack it a little bit because that was ah a whole lot of stuff and like but with that, you’re looking at like okay, so you’re. It’s going to depend on your buyer. It’s going to depend on your industry. It’s going to depend on a lot of things, so when we go back to a times, x equals b, so in some cases like if you own just a pure service company. Your revenue isn’t going to probably be the multiple that’s going to end up. Equaling b, it’s going to be something like Ebadi. So that’s earnings before interest, taxes, depreciation, and amortization. I almost forgot the a there. But so so.

15:50.22
Lowell Ricklefs
Yeah, it is.

16:09.54
Lowell Ricklefs
Um.

17:14.16
Matt DeCoursey
And you know that’s so you know different businesses are looked at for different things now you know here on Startup Hustle we talk so much about technology and what Lowell’s talking about with infinite scalability. So always actually use one of the companies. I found it so like http://gigabook.com; it’s a scheduling platform which, if we have to go out and acquire users, can cost x amount for us, and then they stay for another amount of time, and that becomes their lifetime value, then you look at a company like paychecks. For example, who already deals with businesses and has 700000 small business clients. They might want to come to acquire a company like Gigabook because they could get it at an affordable rate and immediately plug that into their 700000 clients with that they already collect money from that they already have relationships to and the and the cost of acquisition.

17:41.40
Lowell Ricklefs
Um, exactly.

18:53.72
Matt DeCoursey
For a new client can be remarkably less so, and then one other thing I want to key on too is that you use the term sticky, so sticky means how when you talk about the stickiness of a product, a platform, or anything. So Let’s go back to that service. For example, if you own a cleaning company and you’re not happy with your cleaning company. You can probably get a new one to come in tomorrow, and so there’s not a lot of stickiness there potentially now; maybe they’re really good. Maybe they’re really affordable. So the clients stay longer. So either. You’re easily replaceable, or your client has stayed with you for a long time now at Fullscale.io. I’ve got a really sticky product because we sell development services and build teams, and no one wants to swap their teams out once they get moving, so very sticky there and then a lot of Enterprise Software. Ah, you know you look at like a Point -sale system or something like a retail chain will deal with ah a crap Pos system as opposed to bringing in something new because the ah the cost focus and everything of bringing in Company-wide Enterprise systems are sometimes. I really like you’re like, hey, we got other problems to solve. So yeah, a lot of that. So yeah, yeah.

20:11.16
Lowell Ricklefs
Yeah, right, very true. Yeah, it. Um, I mean, I look at you you look at the you you look at saas companies privately traded saas companies. You know in the multiples on revenue can be. You know 3 to 10 times revenue called that range whereas traditional software companies like on-premise or you know shrink-wrap software typically would trade-in, you know, 2 two and a half times revenue. So you know why the difference is well because it’s a sustainable revenue stream of new licenses. You have to sell new licenses every year, or your revenue drops to near 0 if your churn is 50% which is high on average for your clients. Only stay for 2 years, so you look more like a traditional software company. They’re not really buying a perpetual license. They’re buying on average a to your license, and your valuation is going to look much more like a traditional software company valuation.

23:13.92
Matt DeCoursey
Okay, so now that we’ve kind of set the table for this like what are they, what are some of the things that a company needs to do to succeed and increase its value like where are some of and once again, a loaded question because it’s the question is what do you do? But let’s just stick with like it. Let’s just let’s start with like a SaaS company.

22:34.46
Lowell Ricklefs
Yeah, yeah, yeah, yeah.

23:53.20
Matt DeCoursey
So like, what are they, what are the key performance indicators and objectives, and key results that we want to see and accomplish as a Saas company to increase that evaluation.

22:58.70
Lowell Ricklefs
Yeah, well, it’s easy to say it’s hard to do, but I mean, size matters, right? If you’re less than 1000000 in revenue. It’s it’s difficult. It’s very possible, but it’s difficult to get acquired. You’ll have fewer. Options once you can get across 5000000. It’s a little bit. Great. The 3 4 5 6000000 range. You’ll become more and more attractive to more and more buyers, and then 10000000 is really a threshold because of private equity. There’s five trillion in private equity out there represents 20% of the value of the stock market. Ah, the stock market is worth quite a bit less than it was last week, but ah, um, so and they’ll buy platforms and platforms, or they’ll have a strategy or thesis. They’ll buy a platform then which looks like a real company. It is a real company, but then they’ll actively be looking for it. You know, 2 3 4 5 companies to bolt onto that you know to build a platform right? and operate it integrated for 5 years and sell it and make a fair amount of money. So once you exceed 10000000 in revenue, you are now a viable platform for a company with a strategy or thesis. So so not only is the. One of the digits in your equation does it just get larger, but the multiples, you know the multiple may go from you know a 3 to a 5 to a 7 simply by going from 2 to 5 to 10000000; now again, I know I know how hard it is to get to 10000000? It’s easier so than done.

26:56.80
Matt DeCoursey
Well, let’s well you, but let’s talk for a second about why the acquisition of a company with less than 1000000 in revenue is harder.

25:58.68
Lowell Ricklefs
But that makes a pretty big difference.

26:14.78
Lowell Ricklefs
Part of it is. They’re skeptical that you’ve really hit product-market fit, and I don’t want to minimize how hard it is. I’ve built companies to get to a million revenue; I know how hard it is. It’s really, really hard. But as a buyer, it is. You’re still questioned. You just have a niche. Do you have a handful of clients you know? Does it really make money at scale? It’s hard to tell how profitable a company is really going to be, um, so that’s the biggest, and the other thing is revenue matters. Ah, every company, most companies in the world are struggling to grow as fast as their investors would like them to grow, so they acquire companies to augment their organic growth if you are a meaningful percentage of their growth. If you’re a hundred million dollar company and you buy a company worth 5000000. That’s 5 % of their revenue that gives them a 5 % boom; it’s meaningful at a million is just hard to move the needle very much, and then the third thing is just cost that is on the low end. It’s going to cost and acquire. You know, 2 3 4 $500000 at the high end eight hundred thousand to a million in cost just to acquire the company. Why would you spend a million dollars just to acquire a million dollars in revenue? Yeah.

29:29.98
Matt DeCoursey
The million-dollar company, right? Yeah, and yeah, another thing, too, is you know? So I mean that the cost is the key ingredient. There are a lot of big companies like publicly traded stuff. I mean, they have a hard time. Ah, even just justifying or admitting that they’re. Like, hey, why are you? Why are you focused on these puny little things over here? So there has to be, ah, a level of utility. There. Okay, so now, and that was a great answer. Um, and you know so, so when we talk about evaluation, we’re.

29:07.88
Lowell Ricklefs
Um, death. Yeah.

29:31.18
Lowell Ricklefs
Issue multiples for the special.

30:36.40
Matt DeCoursey
Referring to multiples for more of an acquisition. But so, while you might not be attractive for acquisition at less than 1000000 in revenue, you might be very attractive for investment.

29:59.34
Lowell Ricklefs
Absolutely yeah, if you’ve got the Right Metrics. It’s I would agree, you know, different investors have different criteria. I would argue most seasoned investors look at traction and accelerating traction. And then stickiness is the biggest predictor of success going forward.

31:39.42
Matt DeCoursey
Yeah, so when it comes to, I mean, do you think the same sweet spots exist when it comes to an investment as it is for acquisition, like are you as attractive for investment at the points and you know the ah revenue that we mentioned. Are you as attractive for investment as you are for acquisition, meaning should you maybe go into those conversations expecting 1 or the other?

31:31.30
Lowell Ricklefs
It’s a good question, I would argue, and we do purely sell-side m and a, so we don’t do any fundraising. I did fundraising as ah a Ceo, so I’m familiar with it, but most of the companies that we work with are interested in a controlling stake, so they may want you to roll over. 30%, but they want 51% or more of the toll stock now; having said that, some of those companies also will make growth investments along the way. But there’s a larger group of companies that are purely looking to invest. They’re not looking to control that we actually don’t interact with but. It’s a fair thing to know, like when you go out to raise money, you say, well we want to raise, but we’re open to being acquired, but I would I think they’re different processes there are different people that want to invest generally speaking. There’s a small group, you know, concentric circles where there’s overlap, but there there are 2 different processes.

34:19.52
Matt DeCoursey
Yeah, the advice I always give is you need to know what you want and what you’re offering when you walk into that meeting, and you don’t. Well, I’m open to 6 different things. Lol, and that tells me you don’t really know what you want or what you need, or you know it’s like what direction is this going in, all right? So.

33:25.20
Lowell Ricklefs
Um, yeah, yeah, yeah.

33:51.54
Lowell Ricklefs
And it, but was it add 1 comment under. That’s a really good point because the reason that matters is the investors are looking at where they’re going to spend their time, and if they don’t think if they think you may go off in 4 other directions. Even if they like your company. They know they’re going to compete with others.

34:58.80
Matt DeCoursey
Ah, go ahead.

34:30.34
Lowell Ricklefs
They don’t want to waste their time on something that’s not likely to come through even if they like it, so it’s important to have a clear story with the people you’re talking to.

35:49.68
Matt DeCoursey
Yeah, more the idea of like a quick flip sounds good in some places like a lot of funds just don’t want to touch you unless you have ah you need to be a good fit. You know this is these things. It’s kind of like dating, you know, like you need to you Want to find the right fit that makes the that.

35:15.20
Lowell Ricklefs
Um, yeah.

36:28.83
Matt DeCoursey
That’s good for you, and honestly, so you know, ah, the advice I give to people I’m not a relationships expert when it comes to like marriage. But I say the key is you got to find someone that’s going to put up with your shit which is, I think, the key.

35:51.12
Lowell Ricklefs
Yeah, yeah.

37:01.86
Matt DeCoursey
Um, and I think that’s kind of the same thing with investors. So I want to ah, you know, talk about some of the top 5 things you need to do to increase your company value before you do that finding an expert software developer doesn’t have to be difficult, especially when you visit fullscale io where you can build a software team quickly and affordably. You can use the Full Scale platform to define your technical needs and then see what developers, testers, and leaders are ready to join your team visit fullscale io to learn more, so when we like what you are? What is? Okay, so we’re talking about how to increase your company value. Obviously, okay, revenue cannot be on this list. We’re just going to make that an assumption you want to increase your value and increase your revenue. What are the like I feel like that’s a given that’s like that like it? Yes, yeah, yeah, yeah, so.

37:30.80
Lowell Ricklefs
Yeah, everyone’s trying to do that all day. Yeah, that’s already their full-time day job. Yeah yeah, I think what I often see with early-stage companies is they spend.

38:46.94
Matt DeCoursey
So what are 5 other things that you can do to increase your valuation?

38:03.50
Lowell Ricklefs
All of their time on acquiring new clients and 1 of the things they don’t spend as much time on is the client services side, like how do we? How do we keep people right? It’s like the leaky boat you work hard to bring them in, um, take time out or put someone in charge at the first thing they think about when they wake up every day is how do we. Keep people from staying so that they’re motivated and scented rewarded for figuring out why people leave or the ones that stay why they stay, but you want people to stick around, so that’s a big deal to kind of have a client that’s true. Exactly yeah, because when a company scales, I mean what you’re scaling is, um.

40:03.34
Matt DeCoursey
But both employees and clients. Yeah.

39:19.52
Lowell Ricklefs
Onboarding clients and then onboarding employees, and those are both scalable. But if you don’t do it right? The wheels will fall off both sides of it. So that’s probably, ah, a different podcast, but the other part related to that I talk a lot about churn, so that should reduce your churn. If you’ve got call it 20% growth, but you’re losing 10 percent a year, you’re a 10% growth company if you can reduce that 10% ideally to 0 and maintain your 20% also, and you’ve doubled your growth number with the sales with the same front end on the sales side. The other thing is to look at how you. Second, they’d say talk about how you report your metrics when you’re a young business. You’ll sign up for anyone and everyone because all revenue is good; I get that. But if you look at the publicly traded companies. They’re very, very, very good at not putting clients that are likely to bounce. Don’t hit their numbers, right? So they’re in a trial, or they’re in something they’re not considered long-term contracted customers. So whether it’s two weeks or three months, it’s a different category of client that that that is likely to bounce or you make it tougher to become a client which you know when you. An early company like, why would you turn down any revenue but customers that aren’t likely to stick around if you can profile or qualify them. It’s hard to say no to them. But if they’re probably going to disappear anyway, that hurts your numbers, and if you’re at a, it depends on whether your s and b midmarket or enterprise. But if you’re. Sure, the numbers are high. You know, if you’ve got a sixty seventy eighty percent retention rate, so you lose a third of your clients every year, that’s a problem. There are a lot of buyers who are skeptical. Um, if you’ve got ninety ninety-five ninety-six percent retention Annually, that’s really impressive. So it’s important. Least takes some time to figure out how to improve those metrics, and a lot of this comes back into the product just making the product better, so that has to do with how you actually count the metrics.

44:13.12
Matt DeCoursey
Okay, so we had a few things now; a couple of those are closely related, and I want to get to 5 Lowell. I want to make sure we get there. So we want our metrics to add up. I don’t want someone to try to acquire this episode, and we’re like, man.

43:22.80
Lowell Ricklefs
Thought and yeah, because we want our need this data. Yeah, just try to acquire this episode. We’re like, man, we said we are able to 1 book. Yeah, it’s line 3 when we talked about my attention which was the same as sh reduction. Yeah, in other words, yeah, every.

44:42.26
Matt DeCoursey
We said we were going to deliver 5, but we only delivered three, so we talked about client retention, which is the same as churn reduction. You know, you know, improvements in churn rate. I put employee retention on there because here’s the thing it is like.

43:59.12
Lowell Ricklefs
I put the quality of your retention on there because just think that like if you have a has to actually us out of your company regularly. That’s a signal flatter that there’s a different problem, and sometimes cultureulturing leaders start problems because if well when we talk about the infinite scalability.

45:10.66
Matt DeCoursey
If you have a mass exodus out of your company regularly. That’s a signal flare that there’s a different problem and sometimes culture and leadership problems because while we talk about the infinite scalability of the software. There is still always a people component to businesses, and attracting talents is a big thing now.

44:34.42
Lowell Ricklefs
Where their emotional still is to be able to component death assist and attracting Talent is a big thing about you know that got agree more.

45:49.90
Matt DeCoursey
Um, you know then I couldn’t agree more with the understanding of who your ideal or your target client and customer is now as you mentioned in early stages you kind of, yeah, I mean I don’t disagree with the kind of taking in a wide variety.

45:08.36
Lowell Ricklefs
Yeah, I mean, I don’t disagree worth kind of speaking out about a wide variety of client options.

46:20.40
Matt DeCoursey
Of clients and options, because you need to figure out who that is and why you might have a good idea of what you’re aiming for and who you’re trying to reach, you also might find some surprises in there.

45:23.74
Lowell Ricklefs
Figure out through that Len, and yeah, like my how good.

46:47.54
Matt DeCoursey
Um, but I think the key is, and I went through this at Full Scale. So you know, we very quickly identified what kind of companies were the best fit for us, and they are sticky sticky sticky, and we helped them do a lot of great things. We also quickly identified. What clients are not now the reason this is important is the majority of the work is in is prior to signing them up and then getting them onboarded, and if they’re going to be gone at the end of the second month, ah, it just creates a lot of organizational drags. So.

46:38.70
Lowell Ricklefs
Yeah, yeah.

47:46.48
Matt DeCoursey
Um, you know, I think another thing that we need to add to this list is burn rate or profitability, meaning where you are at. So if you’re talking about like if if you’re trying to get acquired and on top of the acquisition. The acquiring party is going to have to pony up even more money just to keep the thing afloat.

46:56.86
Lowell Ricklefs
Yeah, yeah.

48:26.40
Matt DeCoursey
Ah, that’s a different conversation. Now you know one of the things I think is a hot topic. So this is coming out in late June, but we’re actually recording this in early May, and Lowell mentioned earlier that we’re in the middle of a crypto meltdown and a stock market correction. Um. The news out there is that venture capital injection is at the lowest level. It’s been out for a year, and you know I’ve been predicting this for a while because I’ve felt for the last few years that there is going to be a return. Okay, it wasn’t, as I don’t understand why profitability hasn’t been the most glamorous thing in a lot of companies. You look at Uber, who’s a multi-billion dollar company and still loses billions of dollars every quarter. Like when are you going to make some money, Uber, like when are you going to make a profit because eventually that.

48:56.90
Lowell Ricklefs
Yeah, right, right.

50:16.48
Matt DeCoursey
You’ve got to because there’s no way around it. So so burn rate profitability, but it was actually the Uber, the new CEO, the newer Ceo that was talking about, hey, we’re changing our model. We’re going to try to turn back around and look at FCF free cash flow, and I think that that’s a.

49:12.60
Lowell Ricklefs
Um, yeah.

50:54.18
Matt DeCoursey
You know, companies that have the profitability-free cash flow or available resources. So the companies that raised money over the second half of the pandemic got a big valuation. They’re going to have a love-hate with that because they also got to live up to that valuation in subsequent rounds.

50:17.18
Lowell Ricklefs
Um, yeah.

51:27.44
Matt DeCoursey
This means you’re going to see a lot of companies are going to have down rounds meaning they’re going to be, so they’re going to be making an investment at a lower valuation because the multiples aren’t there. But I think that like overall, like when it comes to like free cash flow. So free. Cash flow is defined as.

50:28.58
Lowell Ricklefs
Yeah, yeah.

51:57.38
Matt DeCoursey
It’s kind of like a measure of EBITDA in some ways. It’s the amount of free cash that you have available to pay back debt or stockpile cash or do whatever, and I think that that level of flexibility, I mean obviously, but they like to say it’s hard to go broke taken profits.

51:23.60
Lowell Ricklefs
Yeah.

52:30.42
Matt DeCoursey
So there’s something to be said there, and I think that I mean, how do you feel about that part.

51:34.32
Lowell Ricklefs
I couldn’t agree more. I think the users some of those are dangerous anecdotal um models out there that people look at, or there’s a lot of anecdotal stuff that people will reach talk read about that that hit the highlights and but it’s just not. What we typically see, um, and so a couple threads we go down there one is you know the whole Vc investment model right? I’ve got a fund. I’ll make 30 bets. I know that 15 will return zero, and they don’t care. You know the goal is you’ve got 2 or 3 or 4 that. That hit it big that return 100 to 200 x returns, so they’ll pour money into it, and they want you to either. They want you to blow up; you want you to blow up the good way or the bad way, right? They just really don’t care. They don’t care, and what’s what I find, what I struggle with, and I get it, and they and often they do quite well. What I think is hard about that is most of the companies that we work with. They’re linear growth companies. They’re good businesses. They’re not the hockey stick. They don’t have the exponential growth; if you have exponential growth, I usually coach people you should stick with it but being profitable or at least break-even makes it much easier to be acquired you hit it at the lead in companies. Don’t want to spend. Pick your number ten twenty fifty million dollars to buy your company only to have to keep writing checks into it. Owners typically just don’t want to do that, so you don’t think even you don’t have to be 50% you know profitability. But even breaking even is a big deal break-even or better is helpful. Yeah, some people talk to you, say? Yeah, we’re only. We’re only burning, you know, 30% per month, and I’m just like most buyers don’t want to take on something like that. So. It’s important, so you know, Bc-backed bootstrap companies. I talk to them on a pretty regular basis where they’ll have 1 or 2 or 3 owners. It’s a. A 4 or 5 six-seven million dollars business, but it’s 20% profit. Can you do the math, right? If it’s 2 owners 1.4, you know $7000000 business one point four million profit they pay themselves a salary and they pay each other a $700000 bonus at the end of the year profit’s a great thing. That’s a good life for most people. That’s a pretty good life. Um, so it is important to look at that, and it’s so I think, and part of it is. There’s a culture, and I’ve seen it before, where the culture is I raise money, I spend money, and then I raise more money, and I spend money. It’s this never anything and the thought of. Breaking even is just not even on their radar; they just don’t even think about it. They minimize it, and then sometimes there’s a forced switch by the board that we’ve got to reach profitability by then a q 2, and all of a sudden they have to start looking at things that they’ve really not looked at before and making difficult decisions.

57:03.12
Lowell Ricklefs
And then once they hit that a little bit profitable. It’s just a very different mindset of yes, we want to grow and reduce ah Churn and all those kinds of things, but we don’t want to go out and have to ask for more money.

58:30.96
Matt DeCoursey
You know, when you mentioned at the beginning of the show you were talking about. You know I’ve been on the, and I’ve gone out, and I’ve raised funds before; my usual response to that is, I’m sorry this, I mean it.

57:56.32
Lowell Ricklefs
Ah, well, the other thing. Yeah, the first thing I’ll throw in there is is on the acquiring side. They love Bootstrapped or capital-efficient companies. If you haven’t raised a lot of money, so people feel like I haven’t raised a lot of money, so I don’t look that sexy. The reality is you’re actually more interesting because if.

59:30.26
Matt DeCoursey
Yeah.

58:33.00
Lowell Ricklefs
If you’re at 5000000 in revenue. But you raise 200000001, your cap table looks terrible, but they think you’ve thrown everything in the book at this thing, and it can’t grow if you’ve raised a million bucks and you’re at 5000000, they think wow, we could bring in more,, resources because it hasn’t been done yet. Yeah.

01:00:00.94
Matt DeCoursey
Yeah, and I think that’s ah, I think it’s a fundamental shift. You’re going to see with a lot of Vc, and you know, I mean because as interest rates rise and you know all of it, I mean the era of free money is over at least for a while, and you know that’s a real thing and you know like.

59:22.22
Lowell Ricklefs
Yeah, yeah, so.

01:00:38.24
Matt DeCoursey
I don’t know, you talk about private equity, I mean, you know, a fifth of whatever I mean that comes in a lot of shapes and forms now. Do you think that so this is ah yet another loaded question because you know some people prefer the family office and some people prefer the fund?

01:00:01.78
Lowell Ricklefs
Yes.

01:01:12.12
Matt DeCoursey
I’m ah personally I kind of like family offices because I think that they’re and they’re individualized like they’re all. Okay, so what’s a family office? A family office Well, usually is a rich family or a group of them that have put some of their money into ah a.

01:00:11.66
Lowell Ricklefs
Yes.

01:01:48.40
Matt DeCoursey
Ah, a fund that doesn’t have boundaries. It doesn’t have, you know, so we’ve mentioned these things like some companies, or some funds don’t want to touch you unless you’re at this revenue that growth your exit strategy within this window and all of that family offices have ultimate flexibility to make a lot of sense now I think if you have. Ah, a business that does have free cash flow, and it’s profitable. I find that most people I know are in and around the family office. Love those. That’s more of the family office where the funds are more along the lines of hey, we’ll put that $10000000 in why you only have 2000000 in revenue because we think you’ll get there faster burn. It.

01:01:32.24
Lowell Ricklefs
Yeah, they do? Yeah.

01:03:00.72
Matt DeCoursey
You know, go go go where you know family offices might yeah I don’t know have a different approach and then for me I mentioned like earlier in the episode like the best partners on the personal side like my wife puts up with my shit, and that’s why we just had our ninth anniversary yesterday and.

01:01:57.50
Lowell Ricklefs
Yeah, yeah.

01:03:37.72
Matt DeCoursey
Super happy about that now. My first wife did not put up with my shit now; I say you shit that we all have it, man, but when you bring in investors or other people into the mix. They’re kind of like your husband or your wife. They’re going to have something to say. You talk about the controlling factor, but I don’t know. I think a lot of family offices are a lot of them.

01:02:38.75
Lowell Ricklefs
Congrats.

01:04:17.66
Matt DeCoursey
I’ve talked to him in the past. They’re like, well, we don’t want to show up and do your job. We want. We want to own a piece of this, and we want to make money with you, and it’s, I don’t know, it feels like a different situation. What’s your take on that.

01:03:18.14
Lowell Ricklefs
Um, yeah yeah yeah, I couldn’t agree more because the reality is, you know? Um. Vcs people think of like the Vc the as the person that they interact with, but the reality is it’s somebody else’s money that they’re spending, and their job is to make money on that money and improve their rankings. There’s a lot of pressure on them, and they are on your board, and they’re not going away. They can change your life quite a bit. They can make your job not a whole lot of fun.

01:04:56.42
Matt DeCoursey
Yeah, yeah.

01:04:22.46
Lowell Ricklefs
Family offices, but they’re looking to generate wealth from wealth, and it’s not that family offices aren’t, but they’re already uber-wealthy, and they’re taking a small percentage of their wealth, and typically they do a lot of real estate deals. The things that generate cash flow, I mean, they’re very, very good at that. You know they’re building generational wealth, but often it’s fun for them to get involved. Cool stuff and close to the ground and like look you in the eyes at board meetings and kind of feel like they’re kind of go back to the roots early days so that can be It can be interesting. Is it usually more patient money, right? They’re not. They don’t have ah a fund clock that’s ticking that they have to show a return for. If they like the business, they might sell it in two years, three years, ten years twenty, they may never sell it. They may keep it for a long time. Yep.

01:06:44.42
Matt DeCoursey
Well, I think they’re more likely to make highly strategic investments, too, because a lot of these funds and families have others they might own, whatever it is that made them rich. They might be like, you know we’ve been. We’ve been paying all this money out to all these years for all these different things that all these you know I don’t know they’re sending money all every which way that you can imagine and you know they look at something like well. Why don’t We just buy a business that does this, and then we’re kind of pumping we? We’re blowing up our own balloon in the whole process, and I don’t know if I agree with everything you said. So.

01:06:29.32
Lowell Ricklefs
Yeah.

01:07:49.66
Matt DeCoursey
Right? So we’re on ah for those of you listening. We’re on an ah compressed timeframe today. Both Lowell and I, so we’re going to move forward to our founders’ freestyle and before I do that, do you need to hire software engineers, testers, or leaders because let fullscale help? We have the people and the platform to help you build and manage teams of experts. But you visit fullscale io. All you need to do is answer a few questions, then let our platform match you up with our fully vetted, highly experienced team of software engineers, testers, and leaders at full scale. We specialize in building long-term teams that work only for you. So go to fullscale io and learn more now. Mentioned the founders’ freestyle, so Lowell, you know so many founders ah in and around the show and as as as advertised before we hit record. It goes by pretty quickly, so I’d like to let everyone rock a quick freestyle and talk about any of the things.

01:08:23.30
Lowell Ricklefs
That does.

01:09:43.14
Matt DeCoursey
You may have forgotten the advice that I don’t know. It’s freestyle, man. So here you go, here’s the mic.

01:08:48.24
Lowell Ricklefs
Thanks! Well, I want I appreciate how hard it is but also how fun it is to build your own business. I think startups are like pure oxygen. It’s ah, it’s just exciting, and anything can happen. There’s a lot of energy. Um. I have been around a bunch of them as ah as an investor as um as an operator, and now we talk to buyers all the time. One of the things I learned when I was pitching investors and talking about an exit. You’d always find you do a quick Google search, you’d have an idea of a few acquisitions in your marketplace that you’d use as hey, this could be us in the future but really didn’t. Really didn’t know what buyers were thinking, and now for the past six years and I have talked to buyers every day. The full spectrum from the um, the high multiple private equity firms to some of the value. Oriented funds. You know you talked about the family offices, and search funds are out there. It’s under the category of buyers I would recommend to people where they’ll take a young, typically young Stanford MBA grad, and then investors will invest in that person to go buy a company. They’ll typically step in and operate it. Usually, the CEO is not always. And that’s a good source. They do well, and you can roll some money over, but I encourage people to feel free to reach out. We have conversations. I do this. This is fun. I love this. This is the most fun I’ve had in my entire career, just learning about people’s journeys. What. Happy to share. You know we’ve done some things, right? I’ve also made a lot of mistakes along the way, and I think you can learn more from those than you do from the things that you do, right? But happy to share those and, um, give you know quote unquote free advice to the extent that it’s helpful. So encourage people to feel free to reach out if you just want to have a conversation talk about your business. What you’re struggling with, what you’re working on. And say you know have the question. What do you think my company is worth? I’ll ask these same questions. But where do you sit here, and we can have we have a pretty good idea of what that range would be to kind of set expectations for people? Um, and they’ll say, well should I sell it now or should I sell it in a year and again? It’s just like our earlier questions. It said well depends, it depends. There are macro-level things that might matter like your business wasn’t sexy last year. This year it is because of covid or whatever, which is great. The valuations went up but also meant that Microsoft just put a billion dollars into this well. Can you compete with Microsoft? Can you know? Can you compete now that so? There might be a rollup that’s occurring. You know the other thing is on the personal side. A lot of times, I’ll talk to people that are five, seven-eight years, sometimes 10 years in, and it’s not the hockey stick unicorn. You know that they thought it would be. They may have taken on some investors that they may or may not like ah they may or may want to.

01:14:11.52
Lowell Ricklefs
Want to continue to do this, so they’ve got a good business. You know 5, 6, 7, 10, 12000000000 revenue, but it’s not going to be the billion-dollar thing. It’s more operational. It’s less exciting and entrepreneurial than it was in the early days, and they want outright? So that’s a. Often, there’s a personal conversation that we’ll have as well. You know life is short, right? So what do you want to do with the days and the years that you’ve got to go do something? Anything, so it encourages people to feel free to reach out. You know at Lowell L O W E L L at Traction Advising dot com you know or by our website you know. Traction Advising http://onewword.com, and we’ve got some materials on there as well. But we enjoy the conversation, so feel free to reach out, and there’s no obligation. There’s 0 pressure, but just to kind of get to know each other and learn about your business and see if we can be helpful.

01:16:48.28
Matt DeCoursey
Yeah, as I kind of wrap this up as well. You know a couple things for my freestyle here is you know when people will say, Well, what kind of valuation are you seeking? Who’s asking.

01:16:14.90
Lowell Ricklefs
Yeah.

01:17:19.60
Matt DeCoursey
Right? Like I mean because that’s for me like yeah, I’m forty-six years old man and like you know, and I’m not raising capital, but I’m not opposed to it. It depends on who is asking and what that looks like. I think that these are situational, and I think that. You know you’re going to run into a lot of people who are going to tell you, so I get some people that are like I talked to them. They’re like yeah, well, so-and-so, so who’s ready to write a check says I’m worth 3000000, but my buddy Eric says I shouldn’t be settling for less than a five million valuations, and my response is always then to tell them to write you a check.

01:17:13.54
Lowell Ricklefs
Remain. Yeah.

01:18:29.44
Matt DeCoursey
Because if he’s because if they’re not going to do that, Then you know you get a lot, the peanut gallery wants to chip in a lot and give you a lot of things I think you keyed on a very important thing is like also where are you at.

01:17:35.38
Lowell Ricklefs
Yeah.

01:18:53.80
Matt DeCoursey
Like, you know, if you talk about owning a fifty million dollars business and you own it fifty-fifty with a partner, and someone’s like hey, here’s a check for $25000000 like I mean that is the generational wealth that is like you can spoil your great great great. Grandchildren.

01:18:12.18
Lowell Ricklefs
Yeah, it is.

01:19:27.48
Matt DeCoursey
If you put that money aside properly and you know, so the thing is just different for all of us, and I think really the best you know? So when to sell, what valuation. All of that is when you feel good about it. I mean, if you do, if you feel good about it then, then you won and.

01:18:44.62
Lowell Ricklefs
Um, yeah, yeah.

01:19:57.92
Matt DeCoursey
And guess what, no one’s going to know how it turned out until a lot. Ah, ah, way down the road anyway, and it is what it is. I mean, I think if you get a chance to change your life. Your family’s life. Your employee’s life or create or take something that had a foundation made of sand and turn it into concrete, then why not? So.

01:19:07.12
Lowell Ricklefs
Yeah.

01:19:27.20
Lowell Ricklefs
Yeah.

01:20:34.66
Matt DeCoursey
You know there are a lot of loaded questions in here, and we might have to do a follow-up episode when we have a little more time about some of these things because a lot of this stuff is really great advice. So well. Thank you so much for sitting down with me today, and once again, if you want to learn more about Traction Advising, there is a link in the show notes. You can find Lowell on Linkedin Lowell at http://tractionadvising.com. Not everyone offers their email. I will Deco at full http://scale.io. I’ll see you down the road, Lowell.

01:20:31.78
Lowell Ricklefs
Thanks, Matt.

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