Rich vs. King

Alex: What's up, everyone? Welcome back to another episode of Founder’s Journal. I'm Alex Lieberman, co-founder and executive chairman of Morning Brew. Before hopping into the episode, I would love to hear from you; shoot me an email, introduce yourself. I will 100% respond. There is nothing better than getting to meet my listeners and getting to learn about them. I've heard from dozens of you over the last few days, and I'd love to keep the momentum going. So shoot me an email at alex@morningbrew.com and let's get the conversation going. Today's read was recommended by my buddy Sam Parr, and it was written by Jason Cohen, who is a serial entrepreneur who has built four businesses resulting in two exits and two unicorns. The essay is called “Rich Versus King in the Real World,” and it explores Jason's decision to sell his business, the unexpected criticism he received from friends and colleagues, and why he believes it was ultimately the right thing for him. So without further ado, let's hop into the episode. 

“Rich versus King in the Real World: Why I sold my company, reflecting on selling SmartBear in 2007, offering insights for entrepreneurs facing similar decisions” by Jason Cohen. “I sold my company, SmartBear, in December of 2007. I haven't talked about it at all on this blog, and it's time I spill my guts about the whole affair. You'd think selling a company would be a glamorous, exuberant experience, but I was surprised at the reactions I got. These are actual quotes. “How could you sell your baby?” “I'm shocked. I thought you said things were going well.” “Hmm, you're such a sellout. You used to be one of the few cool people I knew.” Interestingly, a hundred percent of the negative reactions were from people who had never started their own company, but that doesn't make them wrong, and it doesn't make their words sting less, especially when they're your friends. So I want to just share my own experience here.” 

This is Alex, not Jason's words. Jason hit the nail on the head. Selling a business is not glamorous. Few founders talk about this largely because they're afraid of complaining about quote unquote “champagne problems,” but it is a challenge that people experience nonetheless. I personally found that selling my business was relatively anticlimactic, and it's largely because we knew we'd have our financial exit for a while, so it wasn't a sudden thing that just came out of nowhere. On top of that, unless you immediately leave your business, once you've sold, your life doesn't really change after the exit. The only thing I remember from our sale is sitting in my mom's place during the pandemic. I'm on a Zoom call with my co-founder, Austin. It also includes our banker, a bunch of lawyers, and our acquirer. There is this virtual countdown to starting the wire process, and once it's done, I hear my mom and now wife jump in the background with champagne and cheering as my co-founder and I awkwardly smile into the Zoom call. That's basically it. What happened? 

Now, let's go back to Jason. “Now that almost two years have passed, I can relate exactly why selling my baby was right for me. Hopefully this thought process is interesting to you and possibly useful in the happy event that you're faced with the same choice. But the truth is, I just need to get this off my chest. I need to explain to those who still consider me a sellout. You may have heard Noam Wasserman's Richer King Choice. Company founders are either in it for the money, aka rich, or in it to build a lifestyle and personal identity, aka king. Fog Creek and 37signals are built to be king. All venture funded companies are built to be rich. Noam says that successful founders make the rich or king decision up front, and that though it doesn't matter which path you take, you must be consistent in your actions. You can't mix being king tactics with getting rich end goals, except I did mix rich and king and it worked. See, it's good to be king, but what do you do when you're at Trudy's North Star Tex-Mex restaurant, tucking into a chile relleno (I don't know what a chile relleno is) with salsa verde, black beans and the ground beef filling, and the guy across the table looks you in the eye and offers you enough money that you never have to work again.” 

So this is Alex. I just wanna share my experience with this same type of thing. Our Trudy's Tex-Mex experience came in the form of an email with our acquirer, who said that they would be willing to explore an acquisition price that my co-founder and I had decided that we would have to entertain because we would be foolish not to. And for context, we never had an intention to sell our business. Our business had done $13 million in revenue in 2019. The goal was to hit $20 million in 2020, which we would end up doing, and there were no signs of slowing down. We had been approached three or four times by folks interested in investing or acquiring us, and we had always said no politely because we had everything we wanted while running our business. We had freedom of time, professional freedom, the ability to work with really talented people, good salaries, and building something we believe deeply in. But no matter how much you love what you're building, I do truly believe everyone has a price, especially if they haven't yet hit their financial freedom threshold.

Let's get back to the essay. “I was always in it for the money, especially in the form of an acquisition. Everyone who came to work at SmartBear was indoctrinated with this attitude in no uncertain terms. Even before hiring someone, I would tell them that we're here to make money, and if someone offers to buy the company someday, I'm going to sell it and all of us will make money. Profit was the rule behind every choice we made. Although the end goal was always acquisition, my attitude was and still is that the best way to get yourself acquired is to be profitable. Profits prove the business is operating well. Profits validate the market. Profits make minimum valuation easy. Profits mean the buyer converts balance sheet money into bottom line profit and loss money, a trade that every large company wants to make, and most of all, profits mean you don't need to sell, which gives you the ability to walk away from a deal. You have little negotiating power in any deal unless you can happily walk away. 

On the other hand, I knew I would only be happy building a genuine great company where the product solves a real pain, where customers are given white glove service, where tech support is the only sales force, where we leave the world a little bit better than we found it, and where every employee is smart and gets things done and is trusted with any decision.” 

So I wanna go a little bit deeper here. This completely tracks with me. I believe there are two types of businesses. Businesses that are built for the founder and businesses that are built for the customer. Businesses built for the founder may get you rich, but they'll never add real value to the world, which means that the business success will oftentimes be short-lived and the financial outcome will ultimately be capped. As for building a profitable business, I do think there are generally two very different mentalities to building businesses. One isn't right or wrong, there are just trade-offs. The bootstrapper’s mentality is about making a lot out of a little, getting to profitability as quickly as possible. Building your org from the bottom up and patiently waiting for an inflection point in growth that could take five plus years to hit. The biggest trade-off of thinking like a bootstrapper is time. Everything takes more time because you have less resources to accelerate your business. It takes more time to win customers, attract senior employees, invest in your growth, get a big exit, et cetera. 

Second, there's the blitz scaler mentality, and the blitz scaler mentality is about growth over profitability. Generally, you'll associate blitz scaler mentality with VC-backed startups. It's about being resource abundant as quickly as possible so you can scale as quickly as possible to win a market. It's about exponential growth from day one rather than linear growth, and the goal is ultimately to sell or IPO. The biggest trade off thinking like a blitz scaler is risk. Generally speaking, this way of building is higher risk and higher reward. The fundamentals of your business are not as good as a bootstrapper’s early on, but the hope is that you can grow fast enough where ultimately your economics are great and you get to scale far faster. Let's get back to the essay.

“And I wanted the ego inflating trappings of running a company. It's cool at parties to say, quote, “I run my own company.” I wrote a book that got so popular in my little corner of the world that people would bring it up to me to sign. We gave the books away for free. So the joke was that by signing I doubled its value. When I walked onto a trade show floor, it was like Norm on Cheers. I knew everyone and they knew me. I got to present at cool venues like the Business of Software conference, and I write this blog shamelessly exploiting the fact that SmartBear and two other companies were successful, to convince you that I'm worth reading. In short, although the goal was rich, I achieved it by behaving like the goal was king. I don't know why people find this contradictory. After all, acting like king means building a long-term sustainable business, and that's exactly the kind of business that gets acquired.”

So I just wanna share a little bit of my own thoughts here. The ego part that Jason mentions is real. When founders say they don't have an ego around being an entrepreneur, I generally think they are lying or they aren't self-aware enough to know that it is a large subconscious driver of their behavior. You can of course be an entrepreneur that is driven by the intrinsics like growth, learning and building something valuable for the world. But everyone, and I mean everyone is driven by some level of ego and money. It's also not something that people need to be ashamed of. It's just the 2024 version of how we've been biologically hardwired for hundreds of thousands of years. 

That said, it is important to understand the cost of having an ego when being an entrepreneur or being money driven. First, when you do end up selling your business and stepping out, you feel like you've lost a part of yourself, given how much of your self worth was tied to your business; you start feeling like you're in crisis when you lose the thing that made you feel important. Second, when money becomes a goal versus the goal being what money can do for you and your family, you risk being driven to do things that don't actually fulfill you, but simply allow you to rack up more dollars, which may or may not do anything for your overall happiness. Let's keep it going.

“Still, because king was enjoyable and SmartBear was profitable, I still need to explain why becoming a quote unquote “sellout” was the right choice. The first thing to understand is the non-linear relationship between cash and personal savings and financial freedom. There's a line you cross where your savings alone will fund a reasonably lavish lifestyle. At the risk of sounding like George Bush, this is a freedom line. Freedom from restrictions about what you can do with your life, family, and career. My observations: A movement from left of the freedom line to the right of the line changes your life fundamentally, giving you the freedom to do whatever makes you happy forever. If you're crossing from left to right, it doesn't matter how far to the right you go, sure, a hundred million is a different lifestyle than $10 million, but it's not as critical to lifestyle or happiness as just crossing the line. One is what was offered to me at Trudy's Tex-Mex; two means it almost didn't matter what the offer was, so as long it was big enough. Some people give me a hard time about two. The typical argument was “your company is growing a hundred percent year over year. It's profitable and throwing off cash. Why not wait another year and let revenues double again, which will make the company six times more valuable, assuming three times revenue valuation, a reasonable ballpark for a growing software company?” Here's the best analogy I've come up with to describe why this is flawed logic. It's called the box game. Imagine I have two opaque boxes. Box A contains $10, box B has a 50% chance of containing $20 and a 50% chance of containing nothing at all. You pick either box and take whatever's inside. Which box do you pick? Of course, statistically there's no difference. So this isn't a question of math or economics or intelligence, it's a measure of your attitude towards risk. Most people pick box B; after all, the difference between $10 and $20 is trivial and it's more fun and exciting to pick B. But what if the numbers were different? Now, box A holds $10 million. Box B either holds $20 million or nothing. 50% chance. Which do you pick? You pick box A, of course, because it moves you from the left of the freedom line to the right of the freedom line, and because a quote unquote chance of moving even further isn't worth giving up the certainty of that life altering event. This is my argument in favor of number two and against wait and see.

This is why I sold. In my case, the correctness of my choice was made painfully clear by the economic crash in 2008. Had I held out for another year and quote unquote far more money, box B, that was choice B, I would've found an empty box. I know this for a fact. Another company, can't say who, sorry, was offered a deal at the same time I was. The founder wanted to roll the dice, box B, and delayed the buyer. Two quarters passed and revenue failed to grow. The buyer nixed the deal. Months later with the recession in sight, the founder approached the buyer again this time, willing to accept a low offer. The buyer refused; that ship had sailed. 

There are those for whom this calculus doesn't apply because they want to be king no matter what. I'll bet Jason Fried wouldn't sell 37signals for a hundred million dollars. Neither would Joel Spolsky sell Fog Creek. Are Joel and Jason being irrational? Of course not, but neither was I.” 

Now I want just dive deeper and share my experience here as Alex, not Jason. This is exactly what I experienced when selling our business. A number of people said to me, “Alex, it's too early to sell. You're growing your business over 50% per year, and you're only four years in full-time. You're shorting yourself so much of the upside you could capture if you keep growing this way for another few years.” But similar to Jason, I looked at it pretty simply. An acquisition at the price that was being discussed would take me across the freedom line that Jason talks about and put myself and my family in a place of financial independence for the rest of our lives. If we didn't do the deal, one of two things would happen. As Jason mentioned, the people who doubted me would be right, and we'd continue to grow the business, ultimately selling it for far more a few years later. But all that would do is take me further past the freedom line to the right, and my happiness would likely increase marginally, not exponentially. But the other scenario is that the 10 year bull market would run out. The economy would go through tumult, advertising would get hit, and the business would no longer be worth close to what the original offer was. And in that scenario, I am back where I started, to the left of the freedom line and no longer in a place where I feel ultimate security for me and my family. Looking at things this way made the decision crystal clear to me, just as it did for Jason.

Now, before I finish up the last bit of Jason's essay, I do want to call out one more thing that drove me to sell, which I felt acutely as I assessed the decision back in 2020. I was afraid that Morning Brew was my one chance at financial freedom. My feeling of imposter syndrome made me think that I had to capture and hoard as much value from my business while I could, because the odds that any other major financial outcome would happen in my life would be slim. Now, while I don't think that is actually true, and I do think that's the wrong reason to sell your business, I understand why I felt that way at the time and I understand why many founders feel similarly. Okay, let's finish off the rest of the essay. 

“As of December 2007, I have the freedom to work on any project I want for the rest of my life while simultaneously providing for my family, never again worrying about bills, debt, having a place to sleep, or sending our daughter to any college she wants. I can stay home with my wife and new baby girl for as long as I want, having all the precious time and experiences and memories that they say money can't buy, but in the sense of securing that freedom, it can, and by crossing the line, I did.”
And that is “Rich versus King in the Real World” by Jason Cohen. As always, thank you so much for listening to Founder’s Journal. Remember to shoot me an email at alex@morningbrew.com if you haven't already, and even if you have, say what up. Let's start a conversation, and as always, I will catch you next episode. Thank you so much for listening.