A Product Market Fit Show | Startup Podcast for Founders
00:33:07 · Rand Fishkin
[00:33:07] S1: I'll tell you the way SparkToro did it and , and Snack Bar is doing it, and then, you know, you can tell me what you think, but I, I think it's fairly functional, which is in 2018 , uh, we raised , we spark Toro , right? Casey and I, with essentially an idea and a piece of paper raised $1.3 million from 35 angel investors. Uh, they put in between 25 and a hundred thousand dollars each last year. We repaid them , uh, their $1.3 million. And now every couple of years we hope to make a dividend payment to them of between, let's say 10 and 30% of the amount that they put in. And at the end of the company , you know, at some point in the company, we'll probably sell it, maybe for some reason it'll go out of business or whatever. But by, by that time, I hope they've gotten three to four times their money and they've gotten that in dividend payments. So we basically are using the profits of the business to , because the only way that Casey and I can get paid more than our salary is to make a dividend payment. When we get paid, they get paid. And it's a really, really nice low risk kind of way to run a business, you know, even even at our, you know, sort of scariest months . So for , for folks who don't know , the previous version of SparkToro was, was very dependent on Twitter data. We had a relationship with Twitter's API team and all this kinda stuff. Anyway, when Elon bought it, obviously, you know, everything fell apart. We had to rebuild the product. She entirely based on new data sources, very expensive, very time consuming, whatever. But even in our worst , uh, months, we were still adding tens of thousands of dollars to the balance sheet , um, in terms of profit, right? So it , it's like a, it's a low risk kind of business. It's not a high growth kind of business. Sure. We're growing like, you know, 20% year over year
00:34:41 · Pablo Srugo, Rand Fishkin
[00:34:41] S0: Investment perspective. You're think, okay, like the upside's lower, but there has to be materially less risk. Like the odds that you fail in a year have to be not zero, but let's say close to zero <laugh> , you know, [00:34:51] S1: If I were building a portfolio approach to this, seven outta 10 companies have to get to profitability, right? May maybe even eight. And I think the, the venture mindset is like, well, no , startups will never have those odds. And my view is, well that is because the culture of startups is grow fast or die trying and enter huge markets where there's lots of other people who are gonna enter those markets. There's gonna be one winner for a bunch of losers. Uh, you're gonna basically spend in order to try and get growth fast. [00:35:20] S0: For sure. I think if you take Tam outta the equation, a lot of , uh, optionality opens up and , and risk, you know, goes down dramatically that you won't get one to 10 million in, in revenue. It's because you're unwilling to go after markets unless you see a possibility of them being billion dollar markets. And even then, when you're in one and you think it's one, you gotta double, triple, quadruple down to make sure you're the winner. Yeah. All that stuff dials up risk
00:35:20 · Pablo Srugo, Rand Fishkin
[00:35:20] S0: For sure. I think if you take Tam outta the equation, a lot of , uh, optionality opens up and , and risk, you know, goes down dramatically that you won't get one to 10 million in, in revenue. It's because you're unwilling to go after markets unless you see a possibility of them being billion dollar markets. And even then, when you're in one and you think it's one, you gotta double, triple, quadruple down to make sure you're the winner. Yeah. All that stuff dials up risk [00:35:45] S1: For sure. And, and I think that there's a , there's a risk focused mindset, right? Like as a venture entrepreneur, I think I was probably in mil in the much lower risk than most bucket, right? I, I just have a mentality around keeping a sane balance sheet and, and making sure that income is similar to expenses. Um, whereas, you know, my friend Dharmesh and , and Brian from HubSpot, right? Were like, they were very venture investor, very venture entrepreneur. Yeah . And [00:36:09] S0: It worked for them, obviously. So yeah, we, we
00:36:09 · Pablo Srugo, Rand Fishkin
[00:36:09] S0: It worked for them, obviously. So yeah, we, we [00:36:11] S1: Are happy to lose whatever, $4 million on our annual event because we know that it really builds a lot of brand in the thousands of people who come to that event. And I had this like, what are you talking about? Like, we made sure MozCon is break even or better every year, you know, like <laugh> , that's insane. Um, but maybe , you know, clearly their thing worked, but most of the time it doesn't. And, and so I think there's a fundamental shift. So what my goal is, is I want to see not only Spark, Toro , do well, hopefully Snack bar do well, there's a few other companies who've fundraised using SparkToro's , uh, documents. We open sourced our docs so anyone can go and use them to [00:36:48] S0: Fundraise. What was that ? Tell me just quickly, like the, you told me how it would play out, but is there a valuation implied, or like, what's, what's the structure of that agreement? Uh,
00:36:48 · Pablo Srugo, Rand Fishkin
[00:36:48] S0: Fundraise. What was that ? Tell me just quickly, like the, you told me how it would play out, but is there a valuation implied, or like, what's, what's the structure of that agreement? Uh, [00:36:55] S1: We used a pre-money of 4 million and a post of 5.3. So our investors own a little over 25% of the business , um, or sorry, right around 25% of the business. And , uh, we have , uh, essentially they own units in an LLC, although a friend of mine just fundraised for his business using the SparkToro docs , uh, and did it with a C Corp. So it , okay . It , it's very, it's at your option, what you want to do. Um, both by the way, qualify for QSBS, the , the qualified small business , uh, stock exemption, which means that the first $10 million of, you know, earnings that you make on a, on a sale of your units or a sale of your stock is tax free . Uh, so that's very compelling for a lot of investors too . Um, and the valuation is flexible, right? So I think that because of my reputation and network, my valuation was higher, I think. So, yeah. Um, I talked to, you know, there was a couple guys, I think they were in Atlanta, they raised using the SparkToro Docs a few years ago. Their valuation was like 2 million and they raised 600,000 or something . So, you know , you know , kind of a different, depends on who you are and where you are and what you're building, network, all that kind of stuff. But you could raise $50,000 on a $200,000 valuation [00:38:09] S0: Company. Sure . And how long did it take you to, to get profitable?
00:38:09 · Pablo Srugo, Rand Fishkin
[00:38:09] S0: Company. Sure . And how long did it take you to, to get profitable? [00:38:12] S1: We were pretty good at <laugh> . We were pretty good at that. You know, one of the things we did early on, Pablo, is while Casey was building the product for the first year, I was out there like basically building our email list people who were , who wanted the product that we were building. And so when we launched, we had maybe 15, 16,000 people on that list, possibly a little bit more. And we were profitable seven months after launch. [00:38:35] S0: That's awesome. That's [00:38:36] S1: Great. So break even profitable, right? Sure . In Casey and i's salaries were lower? We, we , there's in the docs, there's a built in thing, again, sort of protecting investors and also encouraging founders, which is that our salaries were capped to the Seattle software engineer average until we repaid our investors, their 1.3 million, at which point our salaries could be two x the Seattle software engineer average. [00:38:58] S0: Got it. Okay. That's helpful. You know, you mentioned with , um, with Moz, and it sounds like maybe with this one, like you spent quite a bit of time, let's say building an audience before, you know, launching the product building community, I think that's a skill set of yours, but is that something you would recommend, like generally to founders? Like you think that approach still works today?