Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Tom Digan, Greg Stewart
[00:00:00] S0: Slicing the garlic. [00:00:00] S2: Slicing the garlic. With the little razor blade. For us, our version of that, we're cooking steaks on the grill. We're smoking cigars in the office because no one else is coming in. I'm shaking martinis up there. And we're high-fiving about raising $10,000 checks. That was exciting because, frankly, it felt more like the startups that were romanticized by the podcasts and books and all the fun stuff. [00:00:00] S1: It was survival. And when you're in a moment where it literally is survival, it's not hard to know what to work on or it wasn't hard for us to know what mattered. We needed to not run out of money. So Digan was spending time trying to solve that problem. We were in debt and owed a lot of people a lot of money. And it's a startup, so it's really hard to get a clear picture of the financials and where money is going. And it was the first thing I worked on was, where's the money going? We put that piece together and no one can really see this or is looking at it. You realize money's going in different places that we're not totally aware of. And mission number one was figure out the cash flow. And we got visibility into that. And then we had some money that we owed to people. And we owed some hardcore creditors like American Express, who doesn't really mess around. And I learned and Digan learned all about how to negotiate with creditors. And that was a new skill set for me. [00:00:00] S0: What's the key to that? [00:00:00] S1: Begging. [00:00:00] S2: Telling them you had no money.
· Tom Digan, Greg Stewart
[00:00:00] S2: Telling them you had no money. [00:00:00] S1: We get them to really believe, and it was true, that there's a chance you get zero. There's a door to negotiate. And we were negotiating with big creditors at 20 cents on the dollar. We knew the list of groups that we owed money to. And it was like sales. We're like, all right, we got to go one by one and figure out how to close the door on this and not let it overhang the business. And so we raised money, get money back to the right people, clean up the house to survive. And then we had this moment around this time where we had this existing business. It's not working. There's some insights that are coming out of it, but it's really not working. But we're still trying to maintain it. So we're living in this in-between moment of keep that thing alive so we can pitch something to folks on the outside. But also, what are we going to do? What are we going to build? It isn't this. There's no path in this thing that we've built. So there are really funny stories where Digan was pitching, I'm pitching, and you're basically trying to figure out what the investor likes. Let me tell you about this one-to-one business we got. It's like super exciting. Oh, you don't like that? We're thinking about this social concept. You just live in this world of figuring out, how do I make it through? And there were enough wins. The micro wins on survival felt big to us. And there was enough to celebrate to keep going and wake up and go do it again.
· Patrick O'Shaughnessy
[00:00:00] S0: If you were to teach a class on fundraising for startups now, you've done this as masterfully as anyone with the cards you were dealt. What would the lesson plan look like?
· Greg Stewart
[00:00:00] S1: One of the biggest lessons, particularly from that moment, is selling people on your conviction. In that moment, we were selling both the product that we were about to shut down, but we didn't really even have visuals yet for the new product. So it was as much just selling the team and the conviction on what you were about to build. I think the best example of that is a story about another friend of ours, we'll call him Bill, in March of 2020, trying to kickstart a round. But no one's going to lead this round, naturally, because who would lead a round in our business at that moment? And so I was about to lead another inside round, where basically I'm pricing the round and passing the hat to all the boys and whoever would listen. What happened there was, now I need some more cash. I don't think Brayden knows how many times I wrote a check into the business. This was another example of being like, all right, the only way to get this going is to write the first check and lead with that conviction, showing that you had skin in the game here again. At this point, I'm trying to figure out how to sell anything that's not nailed down. And so it's 401k, put that in, done. What else can we do? This story here is funny because I'm looking at the line items on the balance sheet, if you want, I'm like, oh, permanent equity. That's Patrick's friend, Brent Beshore. And Brent came and told this story on this podcast. He has an unbelievable strategy, and it's called permanent for a reason in that he buys these family-owned awesome businesses and then holds them forever. And so there isn't a liquidity profile here. But I read the documents, and it said that if you found another LP to sell to, that you could sell. And so I called Brent and said, hey, I need your investor list. And he's like, S&P's down 35%. We're in a global pandemic. Of course, I'm not giving you my investor list. They were my smallest investor. But he does me a solid, and he's like, hey, you should call Bill. Bill's a friend. He's Patrick's friend. You know Bill, another Notre Dame guy. So I called Bill. And Bill's a gamer. So he's just like, what are you looking to do? When do you need this by? What are you thinking? How do we mark this? And I'm like, market's down this. What about down 10%? And he's like, what about down 50%?
· Greg Stewart, Patrick O'Shaughnessy
And we do the dance, and we end up somewhere in the middle. And I'm like, you're done, but I need the money tomorrow. And he's like, I'll send you the money tomorrow. And I'm investing in whatever this is going into. He doesn't even really know what Ladder is. But he's like, but I'm in. The point there is, in particularly those early days, it's important to have skin in the game in whatever way you can. For us, it was about being able to show that level of conviction and urgency. Bill didn't need to see a deck. We didn't have a new product yet. He knew you were involved, and he was just like, if you're willing to do this, I need to be involved too. [00:00:00] S0: So he bought your stake and then also invested in the round that you were investing in. [00:00:00] S1: Yeah, I think he matched what he was sending me, which was awesome, and that kicked it off. [00:00:00] S0: Wow. We're glossing over a lot. Maybe we'll keep returning. I love that story. Let's get to the point now where things are starting to feel like, okay, now we have to build this next thing. Maybe this is a good opportunity to ask you what you now know about the world of fitness and people that want to get fit. What becomes your North Star for what product can we build here that's scalable, that can get to what it's become?
· Greg Stewart
[00:00:00] S1: Yeah, it was no magic bullet that said, go do this and you'll win. But we spent a lot of time, the first two, three months I was there trying to dissect the current business. And the current business was this one-to-one, essentially a marketplace connecting an independent contractor coach with a consumer who was looking for personal training. We're studying the behavior and watching what's going on here. And what I noticed was that coaches could set their own price. And some people had crazy high prices. Some people have more approachable prices. And they're building this as a customizable program, building it for you based on your very specific goals. And that's why I'm charging you this amount. And on the back end, we could see that it really wasn't personalized. It was big bucket personas. The names were Sally Pilates. And that was being billed as super personalized programming and charging like you would work with a coach. But we could see these big bucket personas. We're like, okay, maybe personalization isn't the secret here, but it's having good programming that's relevant to you. And that same moment, I went through the list of coaches. And there weren't a lot of coaches that were making a lot of money on this. But we had a couple that were making four or five grand a month. And I spent time with them. And I asked them, what are you doing differently? How are you making this thing when everybody else is struggling with it? And we had one in particular. And I was like, all right, so you're making four grand a month. Your earnings are growing. How did you get there? Why isn't it growing anymore? And Lauren was a trainer in New York, like a high ticket trainer in person. And she was filling up all of her downtime with online clients with Ladder. And we had no idea how to grow. So she figured out, I have this Instagram profile. She had 5,000 or 10,000 people. And she was telling a story to her audience. And they were coming in. But she filled up all of her time. And she couldn't take on any more clients. I'm like, that's a bad business. You've capped how big this can get. The constraint is human time. So these two insights of calling bullshit on personalization, watching what Lauren was doing and seeing how she was growing, and piecing those together into what became a trial test or an MVP of this vision.