What You Need to Know Before Raising Capital, and The Billion-Dollar Media Company You’ve Never Heard of

Jesse Pujji: People who join a five-person company, they generally are not going to walk in and go, "I need a laptop, and I need a T-shirt, and I need lots of proper healthcare."

Alex Lieberman: That's not why they're joining.

Jesse Pujji: That's not why they're joining.

Sophia Amoruso: I mean, millennials, I don't know, man. I don't...

Jesse Pujji: In my experience having started these three things, nobody's expectations are that you're clean there, even for me. They get it. Then you just have to be honest like, "Hey guys, we're switching between this and this. Can you just buy your own insurance? I'll give you money."

Alex Lieberman: I'll say one last thing.

Sophia Amoruso: Not if you're a girlboss. You can't get away with it. If you're the girlboss, good luck.

Alex Lieberman: Oh, wow. Dropping that in the last minute. What's up, everyone? I'm Alex Lieberman.

Sophia Amoruso: And I'm Sophia Amoruso.

Jesse Pujji: Yo, this is Jesse Pujji.

Alex Lieberman: And this is The Crazy Ones. What's up, everyone? Welcome back to another episode of The Crazy Ones, the greatest startup show on planet Earth. As always, joined by my cohosts Jesse Pujji, aka Baby Buffett, and Sophia Amoruso, The Dean. I think an audience member called me The Mailman the other day, so I'm going to be The Mailman until you guys give me a better name.

Sophia Amoruso: Can I be the sandwich artist?

Alex Lieberman: I mean, it's kind of long, but why? Do you make good sandwiches?

Sophia Amoruso: Subway was my first job. I don't know.

Alex Lieberman: Oh, I kind of like that.

Sophia Amoruso: Really detailed.

Alex Lieberman: :Okay. So the sandwich artist.

Jesse Pujji: We'll call you Modern Murdoch. How about that? If I'm Baby Buffett, you're Modern Murdoch.

Alex Lieberman: I like that.

Sophia Amoruso: Sure.

Alex Lieberman: Okay, I'll be the Modern Murdoch. Anyway, for those of you have watched The Crazy Ones before, welcome back to the show. For those of you who somehow stumbled here, whether it's through YouTube's amazing algorithm or a friend telling you that you have to watch or listen to this, welcome. We're excited for you to be a part of the community. And quick housekeeping before we hop into the show: Shoot us an email at thecrazyones@morningbrew.com, introduce yourself, give us feedback on the show, share ideas for how you want this to get better for you, the listener. We want this to be a community of just amazing entrepreneurs, so make sure to do that when you're done watching and listening.

Rundown for today, pretty simple. First, we're going to be talking about an amazing company called Red Ventures. It's a multibillion-dollar media conglomerate that you've basically never heard of that our co-host, Jesse Pujji, is intimately familiar with. Then we're going to talk about fundraising. How we've done it, the lessons we learned, how to do it well, how not to do it. And we're going to finish up with another Startup AMA, where one of you, a viewer and listener, sent in a selfie video asking a question about running a business, and we're going to answer that question. So let's hop into this thing. Jesse, I'm going to turn the mic to you. What's the Red Ventures story? How did you even find out about Red Ventures?

Jesse Pujji: Yeah, it's a crazy story. We found out about it in 2011. One of my co-founders, Chris, one of his pods in investment banking was a guy, he was an associate at General Atlantic, which is a big private equity firm, and he introduced us to them because General Atlantic had just invested in them and that was their first outside money. And we got a chance to meet with Ric and Dan, who are the founders, and then kind of had a lifelong friendship since then, and then they actually bought a big stake in Ampush in 2015, worked super closely with them, and yeah, so they've become like partners to us. But yeah, let me tell the story. I love telling it because it's just such a crazy story. It's a bootstrap giant I actually haven't written about. 

I'll start with Ric. I will. Yeah, Ric was born in Puerto Rico. His dad was a Lebanese immigrant, which I didn't even know people immigrated there, but was a very successful businessman but didn't pay his taxes, and I think got all his money taken away or locked up or something bad happened. And that really left Ric with a lesson, and he tried to become a professional basketball player, didn't work out. And he went from Puerto Rico at the age of 17 and a half, only speaking Spanish, to Boston College, and he decided to major in accounting. And the way he says it is "'Cause it's like I didn't have to talk to anyone, I could do numbers." Numbers don't speak a language. He spent some time in companies. He went to Harvard Business School, he worked at GE's famous program and I know GE kind of had a big imprint on him, and his CFO was his boss at GE, his CFO at Red Ventures later. But really the story gets interesting...you know, in the late nineties there was this company called Sendent. You guys may know it. It started Orbitz.

Alex Lieberman: Never heard of it. No.

Jesse Pujji: It was one of the biggest conglomerates of the first internet age. So tons of direct marketing stuff with travel. They had those coupon books, the entertainment books, a bunch of different businesses. And he met Dan Feldstein, his co-founder, there. And they started Red Ventures in March of 2000. And those who know, in April of 2000, the internet imploded in the stock market. Nasdaq was down 60%. And they had five years, after five years of toiling away this business, in their words, they had built a shitty digital marketing agency and it was project based. They could barely get any business with it. And the story they tell is Ric went to Dan and said, give me a dollar. And Dan gave him a dollar and Ric said, "Okay, you can have my half of the business. I'm out. This sucks."

Alex Lieberman: Wow. Where did digital marketing happen at the time? Because this is before all the major platforms. Where did he do it?

Jesse Pujji: That's such a good question. Yeah, it was all project-based email work or they designed emails and sent emails or they would do, let me make your website a little bit better. And it was total early days stuff. It was all project-based work and I think the business didn't go anywhere. So they actually...

Alex Lieberman: It's funny, I wonder if MailChimp was started around the same time, because I know the story of MailChimp is they started as an agency and they started providing email as a service to their clients, and then they were like, this is actually a really interesting product. So it's interesting to think about how actually agencies can be just great businesses for finding other products within the work you're doing for clients.

Sophia Amoruso: Something I read that was so interesting, he bought a million phone numbers and this was just like before...Oh my god, why don't you tell that story? I love that so much.

Jesse Pujji: I'll get to that. Yeah, so it's 2005, they just divested this business, they sold it to someone else for nothing and they said, what do we do now? And right around that time there was this thing that had been launched called the Google paid search engine. Google's maybe a few years old, but the paid ads had just started. And one of their big relationships was with DirecTV, the satellite provider. And they had this super creative idea. They went and said, you guys don't know how to do any of this stuff. DirecTV at that time was looking for dealers. So people who would sit inside of a mall and sell you a subscription. And they'd pay them a bounty every time they bought that subscription. So Ric and Dan smartly went to DirecTV and said, we want to be a dealer, we want to be a reseller of DirecTV. And DirecTV's like, okay cool, what's your region? What area? They go, this region is going to be called "the internet." And DirecTV didn't really know what the internet was. So they're like, okay, sure, you guys want to sell on the internet, go for it.

So what they set up was, instead of an agency, they became, actually they had a brand called DirectStarTV. They had tons of websites for, they're driving SEO, tons of paid search. They could bid on the brand term early on. And as Sophia started saying, they got amazing at connecting marketing and sales. One of the examples they give is they had a million 800 numbers. So you would call in...this is before any of this existed, this is like late two thousands. They would figure out, oh, you like HBO, you like the NFL? Okay, you're going to call in on an 800 number. It would connect you to your cookie and they're going to know your browsing behavior and it's going to change the script that they showed you. So they built all this crazy connective tissue and one of the things they always say is, if I can get 3% to 5% better at 10 different things, I'm 50% better all of a sudden. And they started selling Direct TV. So every time they would sell a Direct TV subscription, they'd get paid whatever, 500 bucks. And they literally became 20% of DirecTV's volume and built a hundred-million-dollar profit business just on selling DirecTV on the internet.

Alex Lieberman: That was their sole client.

Jesse Pujji: That was 80% of their business for the first five years.

Alex Lieberman: That's insane.

Jesse Pujji: Then they did the same thing with ADT Security. They did the same thing with any of these long home purchases and it became a multi-hundred-million-dollar business. Hadn't raised a dime of money. Around that time, Ric was actually in the Sully flight, so the famous flight that landed in the Hudson, and apparently...I've met his executives who knew him before and after, and they go, it really changed him. He really, really started to take the second chance at life. At that point, he started to go, I'm going to do Red Ventures for the rest of my life. Up until then, he wanted to flip it as soon as he could, and he said, nope, I'm going to just wake up every day and make this thing amazing, because life is not promised to me.

Alex Lieberman: One of the best TED Talks I've ever watched. It's 8.5 million views.

Jesse Pujji: Sure, five minutes.

Alex Lieberman: Five minutes. The three lessons he learned from that flight.

Jesse Pujji: And they were all about urgency, making the most of the moment, your family. And he lives them very much. I've gotten to know him really well, and he's home at six o'clock. He'll jump off something because his kids need something. He's done really well. So anyway, they started to expand this business into Verizon Wireless, American Express credit cards, you name it. If it was a high lifetime value purchase, they built a huge business line around it and it became a bunch of independent businesses. They would develop talent into it, it was all homegrown talent. All of their leadership team they hired out of college, trained how to do these things. And General Atlantic found them. And in classic Ric fashion, he's like, the story I heard from my friend was he's like, you have 10 days. Come here. Here's my terms. You either invest or not. And they came in and General Atlantic were like, please we're gonna invest.

So they bought $150 million stake, all kind of secondary. So that was a big win, and they started helping them expand into different horizons. And that business itself became hundreds of millions in profit. But after 10 years of running it, like Ric could see that, hey, I need to grow in different ways and there may be some threats. People are getting smarter about digital; they don't necessarily want to outsource their entire sales and marketing. That was always the question around their business. And so he started making a lot of bets. One of the bets was he invested in Ampush and we took their same business model and applied it to direct to consumer companies.

So we started taking on, we went from just doing paid social to doing everything and charging a more aligned compensation model. Not a percentage of spend, but a customer kind of fee. And that really changed our business a lot. At the same time he invested in us, they bought a couple publishers, so they were like, oh, let's buy reviews.com. And they applied the same skills that they had at SEO, paid traffic, onsite optimization, and I think most importantly, their unique culture of just move fast, decisive, get stuff done. And they bought, I think, a publishing asset and they tripled the EBITDA in eight months.

Alex Lieberman: Was that when they bought Bankrate or was this before Bankrate?

Jesse Pujji: So they kept eating...you know, Ric is one of the best risk/reward guys out there. Oh, let me buy a $4 million, I'm going to invest in Ampush. I'm gonna [inaudible] $4 million EBITDA. He did five things.

Alex Lieberman: He sizes bets well.

Jesse Pujji: Sizes bets well. Then they crushed it. And he goes, let me buy a $15 million one. Same thing happened. Then eventually he's like, fuck it. I'm going to buy a publicly traded company called Bankrate, which was owns The Points Guy, owns creditcards.com, you name it. And unofficially the same results. Multiples of whatever profit those businesses were generating, they generated via amazing culture and being really thoughtful and quantitative about all the pieces. And then they just went crazy with it. They bought healthline.com, which is the biggest healthcare business. They bought CNET, they bought Lonely Planet. And now by estimates are anywhere from $10b to $20 billion. But the company, they raise money from Silver Lake. But again, just in terms of secondary, as far as I know, they've never raised equity capital onto their balance sheet. So they've all been driven by their profits and their ability.

And now I admire Ric a ton, partly because I think his work life balance, his relationships with his wife and his family are just incredible. He really has done that piece of it. He credits a lot of that to the plane crash, funny enough. He's just like, I have perspective. But the other thing is their culture is just unbelievable. They let our leadership team come across the board. We had 15 of our top leaders come and screen kind of their equivalent leaders. And then we came together and we said, what did we learn? What did we see? And the consistency of their culture, and it was in that New York Times article, it's warm and generous and friendly...and ruthless, quantitative, analytical, it's a total combination of those two things. But it's an absolutely incredible story. And just a business I admire in so many ways.

Alex Lieberman: It sounds like the embodiment of Ric, the way you describe the culture seems like this embodiment of...he seems like a very warm, empathic person, but on the other side of it, he's very quant-focused.

Jesse Pujji: Hundred percent. To the T. I think Jeff Weiner says "compassionate about people, ruthless about business." And he is that. And I think in a way that you kind of know where he stands and you know why. And so that it never really offends. They bought a big stake in us. They were going to buy the rest. They ended up not doing it for a variety of reasons. But it never bothered me, because I sort of understood the rules I was playing by and he never stopped supporting me. At one point he called me I think maybe eight, nine months into the investment. He's like, "You never call me, Jesse, you're busy." I'm like, "Dude, I'm 2% of your business." And he's like, "Yeah, I don't care about that either, but you're my friend and I want to support you and I want to be there for you. That's why I did this." And I was like, oh shit.

Alex Lieberman: For entrepreneurs listening to this, what are the biggest lessons that you've actually taken from your experience with Ric as a friend and a mentor, and you really try to put it into practice in your own businesses that you run?

Jesse Pujji: God, there's so many. I think I've written about it before. I mean, I think I'll do a mix of a few different types. I think one is, Ric does not know the revenue of Red Ventures. He could tell you the profit down to five decimal places. And he had the story he told me; he met Jamie Dimon. Jamie Dimon was like, what's the revenue of your business? He's like, you know what, I'm not going to lie. I have no idea, but here's my...and Jamie's like, you must be an amazing entrepreneur. And I think he says, profit's the only thing you can take to the bank. I'm definitely in that school of thought, that you gotta make money in your business. You've got to be profitable. Doesn't mean you can't grow, but getting addicted to burning cash is a very dangerous thing. And I think that's one he blazoned into our head. 

I remember one time we were having a board meeting with him and I was like, our revenue's growing. And he's like, look at the product. He's like, but you're hiring a lot of people. And I was like, yeah, but revenue's growing. And he just put his hand and he's like, "Jesse, have I taught you nothing? I don't care about revenue. I only care about profit." So I think that's a great lesson to take home. I think this is a three-fer. I like to tell everybody this. Oftentimes when you're debating with your business partners or executive team, it's like, okay, we can do initiatives that grow us or we can do initiatives that make us more profitable. And we're like, oh, there's a trade-off, there's all these issues. What about all the ones that can grow you and make you profitable at the same time? And in fact he's like, grow you, make you profitable, and teach you about another business line. So his view is because you have such limited time anyway, you should always pick initiatives that give you the three-fer. It's a really hardcore way to prioritize, but it's essentially to say, I have to find three ways I can win in this situation. Same thing for M&A deals; he has to have multiple ways or he just won't do it and he'll just say no. And he's incredibly disciplined about everything they spend time on, every business they buy, "I have to see and be able to articulate the three-fer." So I love that one. That's another really good one.

Alex Lieberman: I'd be so fascinated in how he spends his time on a daily basis now.

Jesse Pujji: Yeah, I mean I could tell you. He's like a doctor. He spends 15 minutes, he has 15-minute meetings, he's scheduled probably 80% of his day. And they're all just meeting his business leaders. "How are things going? What needs to get done? Let's talk about this." And one of the things about their culture to hallmark is you could show him a Facebook campaign and he could go to the bone and say, what's the click-through rate conversion? Why is that happening? All the way back up to financing a multibillion-dollar transaction or whatever. And the whole culture operates that way. So everyone has that ability to go up to down in terms of the detail level. Not that they do, but they can if they need to, which is probably a good third lesson. 

And the third lesson actually I'll talk about I think is just very not normal. I sat down with them in a meeting once and I was like, "We're going to target a 25% EBITDA margin next year." And he looks at me and he goes, "Cool. Why?" I'm like, "I don't know, it's a good margin. What are you talking about?" He goes, "Well, why not 28%? Why not 15%? Why not 40%?" And I was like, "Well, I don't know, just picking this number." And he's like, "How are you teaching your leaders about that?" I'm like, "Well, I give them targets also." And he goes, "But what if they could do 30% and they're going to do down to 25% because you've just managed it that way?" And I was like, "Oh, that's crazy." And he was like, "Look, lots of people run their businesses by giving top-down targets and then people managing to those targets. We don't do that. We give people targets based on the input metrics. We talk a lot about what's click-through rate going to be, what's conversion, what's head count, what's number of phone calls a sales team is going to make."

Because in his experience, margins can always be better and higher by focusing on those metrics and not giving someone the ability to manage to a top-down target. And so that blew my mind when he said it, and then I started trying it and realized, oh my god, it really is. It's a totally different way of running a business and managing people that unlocks all kinds of opportunities you wouldn't otherwise find, when you just kind of say, well, here's the package; go hit this package. So that's another thing to play with, which is manage your input metrics and you may see your margins and everything else beat whatever goals you could ever imagine, versus giving margin targets and then trying to manage to those.

Sophia Amoruso: I also think something that's really interesting is that he bought these companies like Health...net?

Jesse Pujji: Healthline.

Sophia Amoruso: Healthline, The Points Guy, these businesses where the commission that they're getting on these sales is based on this really big lifetime value of the customer. So the commission for something like a credit card affiliate might be something like $300 to $900, where with something like Wirecutter, it's just like, I don't know. A few bucks.

Jesse Pujji: $15, $20, yeah.

Sophia Amoruso: It's very little. Really, really smart. Just kind of looking at a product that already exists or a way of making money that already exists and figuring out how to make the margin of that and the revenue of that doing the same amount of work so much greater. I also saw that he said something that everything is written in pencil. And for someone that is that disciplined, being able to instill that culture of curiosity and innovation in an organization that has been pretty formulaic with its business model is really interesting.

And I think gives people permission to run and not feel like this is the formula, even though it has been the formula. So there are kind of oblique ways that he's building his business, and think both culturally and strategically from his product and financial perspective, that is really inspiring. And also I think a takeaway here is just, one, if you bootstrap your business and you're building the Facebook ads, you know everything, you can hold people accountable to that. If you raise a bunch of money and you hire people who know how to do that, it's really hard to hold them accountable. So in the beginning, being in the weeds and being that kind of founder can be a really big strength.

And then also what a lot of people don't think about, they think about bootstrapping, but they don't realize that bootstrapping isn't always about taking money out of the business just to pay yourself, but that just like a venture-backed business, your goal can be to build enterprise value and take secondary out of it, which a lot of founders are like, well, I don't want investors. It's like, well, when I took $50 million from Index Ventures and my company was profitable and didn't really need it, that was a really big deal and I owned 80% of that. And it's rare, but it's possible. And it's another...

Jesse Pujji: And you call the shots, too. I mean, again, he gave them 10 days. He gave him 10 days; he said, you can invest or not, doesn't matter to me. And that really flips the whole relationship in a unique way. And I think the other big thing, just as a story, there's that Steve Jobs, you can't connect dots looking backwards. They would have these big business lines, by the way, just to be clear, they would have 30 to 50 marketing people and 200 salespeople. They actually did all the sales themselves and they got really good at it; they'd bring on American Express as a client and they'd reassign 20, 30 people from the marketing team and a hundred people from the sales team that were some of their best. And they just got amazing at this whole "everything is written in pencil," moving people around massively. Massive orgs. Well, guess what? When you start buying huge businesses, if you're really good at moving people around in new orgs, that's been part of their secret sauce. If they buy a business, they literally will put a hundred new people on the business and those people will start to reinstall their playbook, which then leads to massive gain. So there's so many little pieces to it that add up to a crazy and insane sort of story.

Alex Lieberman: The final thing I'll say is, I think as you were talking about, Sophia, this idea of their focus on high LTV products, whether it's like credit cards or DirecTV packages, it makes me think about something that frames a lot of my decision-making in life, which is this concept of talent arbitrage. When I think about why I've had successes as an entrepreneur, I think I can attribute 80% of it...maybe not 80%, maybe I'm like being too much of a jerk to myself. A lot of it to leaving finance and going into media, because I think, quite literally there was an arbitrage on the talent and skill of people in financial services versus in the media industry on average. There are still a lot of smart people in media, but I would say the density of smart, skilled, ambitious people was way higher in financial services.

And I would say it's actually kind of the same thing when I think about using the example of affiliate businesses. There's an arbitrage of, not to say you don't have to be skilled at selling DirecTV packages or selling credit cards, but you just have so much more buffer to work with of selling a credit card, that all of a sudden you get a kickback of $700, or selling a DirecTV package that you get a kickback of $300, versus selling a sweatshirt that you get a kickback of $20. You have so much more margin to play with. So you can be more mediocre at your job. Not that you want to be, but you're afforded that opportunity.

Sophia Amoruso: I also think, just speaking about curiosity inside the business, what they're playing to are the curiosities of their readers. And so someone's looking to save money, to finance their business, to get their credit card, to get points, to think about their health, to Google every last ailment that could possibly be affecting them. And these are, they're fears, it's playing into fears in some ways, but it's also playing into people's egos, but also their livelihoods. And also they're not beholden to the advertising industry, the algorithms where anybody can go into Apple News and see all of the news. And the news is very much commoditized now, where something that's specialized and something that's built on SEO, which is free, is a higher-margin, much more specialized product that gives them kind of a direct line to selling products in a way that a news organization may not have the same opportunity to.

Alex Lieberman: Totally. We need to push forward. I'm hitting the mute button on you. I wish it was like, pardon the interruption where you could actually mute people. Okay. You were talking about a minute ago, Sophia, how you had raised the $50 million from Index. And I want to go deeper into this topic of fundraising. So let's start with you. Talk about just your fundraising experience when you've raised money for your businesses. And some of the biggest lessons that you learned in the process of fundraising.

Sophia Amoruso: Yeah, I mean it was easy the first time. I didn't mean to, they sought me out. I had built this really successful business with Nasty Gal, bootstrapped it to $12 million, from one to six and a half to 12, and it was exploding. And e-commerce was still pretty nascent. There weren't a lot of fashion e-comm businesses out there, so it was unique in its space. And they came in and they plowed $50 million into the business. I, as a bootstrapped entrepreneur who wasn't a management consultant, who didn't go to business school, who...I think a lot of founders who are listening relate to in that they're an accidental entrepreneur. They don't have the pedigree, maybe they think they can't do it. There is a learning curve. There are advantages for starting a business from the outside and not looking at it in the same kind of formulaic way that someone may be taught in business school.

But at the same time, without the exposure to that, either inside of an organization as an employee, or an executive, as a consultant, or through business school, your learning curve is much higher. And the whole serendipitous story of that has been very acute. But once you plow $50 million into a business, understanding what to do with it is an entirely different game. Turning one into three into six with a bootstrapped business is pretty simple. And in a perfect world, you don't know your topline revenue because you're doing something as simple as making more money than you're spending, which should be the most essential metric of your business. I think you have to understand the objectives of the investors. Understand that their goals are not often aligned with yours. They may say, we support you as a founder, we believe in you. We want you to do what you want. We're going to continue supporting you along the way even when things get bumpy. But their attention can shift when things do get bumpy. And that's when the...

Alex Lieberman: What were the objective of your investors?

Sophia Amoruso: I mean the objective of all investors, just like the objective of any business, is to serve their customers or their bosses, and venture capitalists are beholden to their LPs or the bigger fish that invest in them, as one asset that is among a variety of diversified assets. It's their job to, on paper, take your company and say, Nasty Gal is worth $350 million today when we invested in it, and push you, push you, push you, to maybe even be an overvalued business because their investors don't know that. What they're showing those investors, even though you haven't sold the company, and that is kind of funny money, it's on paper, is that their investment has been successful and they can show them that they've marked up their investment and that their return looks amazing. And so that's their job, that's their ultimate job. And if that's not what's happening, they move on. It's not their money, they're making a lot of bets. Even $50 million is something that out of a growth fund is not much to lose, and their attention will shift.

Jesse Pujji: I think it's a great thing as long as your eyes are wide open and you're understanding. Everything is alignment. The three of us, we all have reasons to do this show. It helps us all in different ways. And so as long as we all feel aligned to it and whatever the objectives of it are, we're going to keep doing it. And if we don't for some reason, we will change our perspective on that. And that's true for every single business, every employee of yours; they're there because they're getting something that's beneficial, but not in a bad way, but benefiting them. Money, learnings, et cetera. And I have a funny story about this and I want to share just as an example of how things change a little bit. So we raised money for Kahani, everybody knows that. And one of the final terms of the negotiation was, there was this term that if I died, that my equity would...I would stop vesting, and my family would get whatever's vested, but the rest, the company would own.

Alex Lieberman: Bad incentive.

Jesse Pujji: And I was like, I'd never seen that before because I've never raised seed money. And seed money's very different. They're betting on an idea that really hinges on my ability to deliver it. Let's be very clear. And everything I had raised had been more mature businesses. And looking at GrowthAssistant as another example I own, it's a little further along, but if I die, my family owns that. That's like our equity. No one's going to touch it because it's me and a partner.

Alex Lieberman: Did you raise anything for GrowthAssistant?

Jesse Pujji: No. GrowthAssistant's totally bootstrapped. I die, my family owns that and they'll sell it.

Alex Lieberman: It's getting morbid fast. I don't know how many times they're talking about you dying.

Jesse Pujji: But I was like, wait, why, guys? I started this thing, why would the company...And they said, "Look, Jesse, this is pretty standard in this type of deal. And the reason is, you die and you own the whole company and we need to find someone to run it and grow it because we've put money into it, we've put investor money into it." And it occurred to me in that moment that the second you raise institutional or professional money, which I define as sort of money raised from people who have raised from other people, like Sophia said, it's their business, not a person's individual capital, your business becomes a financial product.

That doesn't mean you have to treat it that way, by the way, but you just have to understand that it has become a financial product for somebody else, and that financial product has to have a return. That's part of the point. So I ended up giving on it, because I understood where they were coming from and hopefully I won't die, but I think it was just a really stark contrast to someone whose bootstrapped business is his whole life. For the first time I was like, oh yeah, this is a financial product for these guys. They have to make sure that the cap table stays clean in the case where I die.

Alex Lieberman: I feel like you have to have been the first person in months that asks these investors about the death clause. I feel like...

Jesse Pujji: I didn't ask, I redlined it out. I said, what are you talking about? I die, this is all my family's equity. Screw you. That was my starting position. I didn't say screw you, it was a very...but I redlined it out. I said, no, no, this is zero. I'm not giving you...this is mine. And then they came back and they said, no, Jesse, this is a really...it was a sticking clause. It was a thing that we got down to the wire on. I horse traded other stuff for it, but ultimately it was important to them, and I get it. I get why it was important to them, but it is different, just to be clear.

Sophia Amoruso: What kind of businesses do you guys think should raise money versus shouldn't raise money?

Alex Lieberman: What a great question.

Sophia Amoruso: Yeah, Jesse, anybody can use Facebook, or an ad agency doesn't necessarily need to raise money. A commerce business, depending on the amount of R&D that they have to do to create their product may need to raise money. If you're going to trade shows and buying shit and starting small, probably don't need to raise money. If you're building software, may need to raise money. Engineers are expensive. So I guess, curious on your thoughts of what kinds of businesses should be raising money and what kinds of businesses shouldn't.

Jesse Pujji: I have an answer, but Alex, you go first.

Alex Lieberman: My answer is if you have an exceptional reason that you need to buy time, and the payment for that time aligns with the incentives of the person that is putting capital into your business. Because there are examples of businesses where you may want to buy time, as in, be able to accelerate the business in a year that you could have done with your own capital in five years, but you can only grow your business 10% a year, and the average institutional investor is looking for you to double for three years straight once you hit a million dollars in revenue, and then keep growing fast. And that may not make sense. And then there are a lot of businesses where you don't need to buy time. 

And when I talk about buying time, I think one of the biggest reasons there is for business to buy time is if you are in a winner-takes-all market. And so a winner-takes-all market is, I would say, generally markets that are defined by network effects. So businesses like Uber or Airbnb where every additional customer that you bring on, it makes the product better for previous customers. And because network effects are so strong, generally there'll only be one or two players that win in that market. That's where it makes sense to me. And I would say the other place that it makes sense is if not just buying time, if you need to buy the ability to run your business, meaning the cost of capital up front is simply something you can't do on your own, and it is impossible to prove product market fit without this initial cost of capital. 

Just to provide a stark contrast to that, for Morning Brew, I would say we operated very intuitively in the early days because we didn't know what was status quo or the right thing to do in entrepreneurship. But for Austin and I, we had always heard kind of these horror stories of raising VC money. And we'd especially heard horror stories with media businesses, because again, we grew up in media at a time where kind of the golden children of media were Mashable, Mic, Buzzfeed, Huffington Post, Vice, Group Nine Media, and basically every business that I just named has gotten whacked as a function of their cap table and how they've grown. And so we didn't need to buy time. We were college students that didn't even know we needed a business or were running a business, and we didn't need to get capital to prove that there was product market fit, because the cost of our business for the first few years was $100 a month on MailChimp. And so I feel very grateful that our intuition was right, and we weren't necessarily so thoughtful about it. But yeah, not raising VC money and raising $750k from family and friends, I think was one of the best decisions we made in the business.

Jesse Pujji: Yeah. I'll give a quick kind of framework. When people ask me the question, I'd say there's two questions. There's a question personally, which is the most important one, I think, and then there's a question about the business. And the sub-questions personally are, what do you want your life to be like in five or 10 years? Do you want to be the king and own it and run it and make the calls? Or do you want to have something bigger and potentially bigger and more meaningful, but have a board and have this kind of structure where you're essentially working for the company, you're an employee of the company? I think that there's a big difference there, personally. I think also personally, it's like how much money do you need and how much do you have? And how much can you stay without money? And I think in either case, let's say you don't have very much money, well, that's either a reason to start a very cash flow-oriented business, or a reason to raise money.

If you can go without it for awhile, like you did, Alex, with your parents' help and I did early on my parents, then yeah, you can get away with bootstrapping something that might also be a fast trajectory. But anyway, the first question is personal, very personal. The second question is business. And I think I agree with Alex covered off on the business questions. Is it linear growth or exponential growth? Is it network effects, not network effects? But depending on the nature of that business and what...you know, the easy thing, by the way, my easy hack for this is go find a bunch of similar businesses to yours that are five, 10 years out and look at their market caps. There's not that many big agencies that haven't ultimately done a lot of M&A using their profits. There's not like, whereas there's lots of software businesses that have huge market caps. You can just see where things go by looking ahead at similar businesses to kind of glean what type of business you might be starting.

Alex Lieberman: I want to go around the horn before we move on to the last topic, with one question and one recommendation from everyone. Let's assume an entrepreneur's watching or listening to this and they know they're going to fundraise. So they've already listened to our warnings as well as our frameworks for when it makes sense to raise capital. They've decided to raise capital and they're wondering, how can I stack the deck in my favor? How can I effectively raise capital, especially right now in an inflationary, potentially recessionary high-unemployment environment at the moment? What is one recommendation you have to successfully raise around a capital? Sophia, we'll start with you.

Sophia Amoruso: I would say, don't optimize for ownership, optimize for evaluation that you feel like you're able to fulfill on. And don't end up in an overpriced purgatory where you're unable to raise because you've had the glory of having a 10x valuation for a business that has a million dollars in ARR.

Alex Lieberman: Love it. So don't be greedy, and be realistic about your value. Jesse.

Jesse Pujji: Prepare and plan to take a hundred phone calls, a hundred meetings, and you'll be successful. That's it. Just talk to a lot of people and build a big pipeline. That's the best advice I can give anyone.

Alex Lieberman: Sophia? No, I asked for one. Fine. You could do one more.

Sophia Amoruso: Show your deck to the investors that you care about or want to work with the least, and bounce it off of them before you take it to the ones that you really, really want.

Alex Lieberman: I love that. My recommendation will be, it's actually a combination of what Jesse and Sophia had just said. Get in a ton of reps of telling your story to people who don't matter, so that you can be a great storyteller to the people who do matter. That is fundraising in a nutshell. I'm sure we're going to talk about it a lot more in future episodes, but let's move on to Startup AMA. So we have a Crazy Ones listener who sent in a selfie video; they're an early-stage entrepreneur. We're going to listen to it, and then let's opine.

Listener: Hey Alex, how does a startup get attractive benefit packages at competitive rates before they hit a large group headcount?

Alex Lieberman: Okay, Jesse, you said off cam that you've dealt with this recently. So how do you think about benefits in the early stages of a business?

Jesse Pujji: Yeah, I mean a couple interesting things is there's certain state laws that are different for different places. So one cool thing about California is they force you, or whatever they provide for, you get the same benefits as any small business of a certain size. And that's actually a requirement for the insurers. So if you're starting in California, that's a benefit. In Missouri, that's not the case. I don't know what the case is in New York. When we first started, we just did normal insurance as a small business because we were starting in California, and that worked. This time around, and we looked at PEOs, and what PEOs are, I don't even know what it stands for, but they essentially take your employees onto them as if they're their employees. The famous one is TriNet. It's like a big publicly traded company. And by aggregating a bunch of small businesses, they basically can negotiate and get as good of benefits as a big company. Now the process of TriNet used to be a total disaster. They were on their payroll; they legally weren't your employees. They sent the paycheck and they were employees of...it was this really messy thing. So I never did it before. But now these newer companies like Gusto and Rippling have made it basically seamless and totally a white label, like employees don't even know any different and they offer amazing benefits. So we did a whole analysis and ultimately chose to go with the Rippling PEO.

Alex Lieberman: And just for context, there's all these options, like you said. There's Rippling, we used Justworks in the early days. Before that, the true OG days where there was just a few of us, we used Oscar. How much does health insurance in the early days cost? How are you charged by Rippling as a business?

Jesse Pujji: So these guys have a normal payroll service like an ADP where it's some per head count, say 20, 30 bucks. They also make money on the float. They're amazing businesses, by the way, separate topic. But what you normally just pay out for a family of...I think before, what we were doing for a family of three or four, we'd pay $1,500 bucks a month. For an individual who's younger, you maybe pay $300 to $500 a month. When you join the PEO, you pay Rippling more money, but they get you a way better plan for less money. So actually, we did all the math and it nets out way better to do the PEO, assuming it's not disruptive to the business. Now TriNet, from our experience, was just so disruptive to the business and the operations that it wasn't worth it. But it seems like Rippling has solved that problem. Well, I'll let you know in a few months, but that's what it seems like.

Alex Lieberman: Sophia, what are your thoughts?

Sophia Amoruso: I think what we're not talking about are the kind of benefits that you can give people that aren't necessarily through a payroll system or through something like Justworks, which is what I use with my team of two at Business Class. But things like unlimited PTO. People, they don't take advantage of it. They'll leave for a couple weeks a year. But it sounds really great. Things like flexible work schedules, being able to work from home, there are these softer benefits that you can give people that really cost the company no money. And if you treat your employees like adults, they're gonna show up, they're gonna do their job, it's going to be more about their contribution than it is about their butt being in a seat 40, 50, 60 hours a week. And that really gives people a sense of respect from a company in a way that typically isn't...

And we've talked about companies literally measuring the time it takes for someone on their team to send an email. And I think that is the complete opposite of how companies should be thinking about their businesses, unless it's a fulfillment center or something just super simple like that. How fast does it take to pack something, but giving people room to run. Yeah, culture. These are things that can feel like benefits to people where they're not going to leave your company because of health insurance, the company only paying for half of health insurance. They're going to leave your company because your culture sucks, or because they're not learning, or because somebody's micromanaging them. Like yes, it's a carrot, but it's not what keeps people around.

Alex Lieberman: I think we're going to have a great debate on some episode about if unlimited PTO is actually valuable. Because I think it's an absolute farce and I don't think people actually use it, because they feel the pressure not to use it. You could argue that if your culture was better, people would use it. I still don't buy it. It is a debate for another time, but I'm not going to be able to provide that much value to this conversation because I'm...

Jesse Pujji: You're living the executive German life. You're like benefits, what is that?

Alex Lieberman: To be honest with you, I would give anything to be back in the seats that you guys are in right now. But all I'll say is, it's so funny to think back to the early days of the Brew, of things we didn't give to people. And if we didn't give those things today, we would get shit on. I don't think we originally gave healthcare or health insurance to a few of our early employees. Our first provider was Oscar. And Oscar was like pure cat insurance, catastrophe insurance, where it's like you pay the lowest premium, you have the highest deductible. So basically your insurance only is going to pay out if something really fucking bad happens in your life. And I'm trying to think what else. Oh yeah, we didn't give computers in the early days. We made people bring their personal computers into the office. We thought that was normal for an early-stage business.

Jesse Pujji: I think that's a good point, though. I was going to say that in Sophia's comment is, one thing to keep in mind is this is one of the hallmarks of being a great entrepreneur is worrying about what matters when it matters. And example, we were starting GrowthAssistant and Adriane was like, well, we need to figure out if it's legal to do what we're doing. And I'm like, well, no, we're not going to spend any money on that. Let's go see if there's a business here. And then if there is, in a year, we'll actually have the resources to figure out if it's legal and how to make it legal, which is exactly what we ended up doing. And I think people who join a five-person company, they generally are not going to walk in and go, I need a laptop and I need a T-shirt and I need lots of proper healthcare.

Alex Lieberman: That's not why they're joining.

Jesse Pujji: That's not why they're joining.

Sophia Amoruso: I don't know, man.

Jesse Pujji: In my experience having started these three things, nobody's expectations are that you're clean there, even for me, it's like they get it, then you just have to be honest. Like, hey guys, we're switching between this and this. Can you just buy your own insurance? I'll give you money.

Alex Lieberman: I'll say this last thing...

Sophia Amoruso: Not if you're a girlboss, you can't get away with it. If you're the girlboss, good luck.

Alex Lieberman: Oh wow, dropping that in the last minute. Roll that over to the next conversation that we have. Last thing I'll say is, biggest lesson or one of the biggest lessons I learned is you can't hire HR early enough. Or like, you can, but I would just say when we hired HR, it was too late. It's one of those things that you're never going to feel like it's the right time, but if you hire a great HR person early, a lot of these things like the conversation we're having right now, you don't even have to worry about if you have someone you trust to do this. Sophia is giving me the eye roll.

Jesse Pujji: She disagrees. That's another good debate.

Sophia Amoruso: I think HR is where complaints go to die. I think anybody can administer benefits and payroll. I think learning and development is important, and I think all of the benefits that we're talking about can be run by someone much more junior or by someone on the finance team.

Alex Lieberman: Well, if you end up working for Sophia's future company, make sure not to apply to HR.

Sophia Amoruso: Complain to your boss.

Alex Lieberman: Crazy Ones listeners, we'll leave you with one simple question. Do you think that HR is where complaints go to die? Shoot us an email at thecrazyones@morningbrew.com. We'd love to hear your thoughts, and this feels perfect for a future debate. Thanks, everyone, for listening, and we'll catch you next week.