A Product Market Fit Show | Startup Podcast for Founders
00:14:14 · Rob Woodbridge, Pablo Srugo
[00:14:14] S1: Lazy, man. [00:14:15] S0: Lazy. You polish everything. Why wouldn't you do it? You have the money to do it. I think it was Jack from Clio, CEO of Clio who – one of the things he said to me was, “Because we – just think about the overhead when you start hiring. You think that, if you have 2X to developers, 2X to marketers, you move 2X fast. But if you don't even really know where you're going or if the market isn't ready to take that growth rate, it's not just wasted effort, wasted dollars, it's actually decreasing productivity. Because when you're smaller, there's no communication overhead. It's you. It's three other people. You're on the same boat. You're swimming the same way. You don't even need to talk about strategy because you know it, and so these are the things I think about back then. I'm like, man, this is a $100 million, $200 million market in shoes. There were these competitors that had market share. You’re only going to grow so fast. The fact that he was constrained and had to just do what he did and take it kind of slow – and by the time that Nike come – came out, as you said, out of opportunity, out of necessity, he had a whole distribution company built out. Never planned it, but organically, that's what happened.
00:15:24 · Rob Woodbridge, Pablo Srugo
[00:15:24] S1: He built it step by step. One of the best parts in the book, it totally resonated with my thinking as a business, as an entrepreneur, as an early entrepreneur. Never considered way back when I was young, like 100 years ago, VCs weren't something that you went after, right? It was reserved. There was not a lot of it, especially in Ottawa. So you're building a company based on revenue, and so there was this scene where the company lost, Nike lost $57,000 in a year. They lost 57,000. Think about that for a second. Nike lost 57,000. It's nothing today to any company. [00:16:04] S0: Right. It's like what an engineer makes in a day or something.
00:16:04 · Pablo Srugo, Rob Woodbridge
[00:16:04] S0: Right. It's like what an engineer makes in a day or something. [00:16:07] S1: Pretty much, yeah. Lament that. It's 57,000, and the board was beside themselves. They're like, “I can't believe you lost 57. What are you doing?” They were completely beside themselves. But that's the thinking that I always grew up on. For me, it was that I never understood how you could lose a penny at the end of the year and still be in business. It doesn't make any sense to me. That's illogical. So I get it. It was what drove me is that you, in essence, are an all-cash business. The cash that you have is what supports you. Maybe you get a line of credit or a credit card like everybody does, but at the end of every year, if you're negative, that said to me, hey, dude, you're out of business. And so I get that thinking that it was like you – and back then when this – when he was building it, that was the mentality. You don't lose money. You can't lose money. And that was the first hurdle to get through is that how do you convince a board of friendlies, no doubt, but a board nonetheless that it's okay to lose $57,000 in this company when that was unheard of? And that stuck with me because it seems so innocuous, especially when we talk about WeWork and the money that they're spending out and all of these companies. I work for a bunch of those companies. It’s $57,000 an hour is what they're losing. [00:17:32] S0: Yeah, that's right. No, it's nothing. [00:17:34] S1: Not in a year.
00:17:35 · Pablo Srugo
[00:17:35] S0: That's, I think, something that we don't realize. I think, in the startup world, we've become addicted to revenue and revenue growth, right? And that's like even – it was in the dot-com – it was just like eyeballs, right? And then at least we progressed over to revenue, but we forgot. We forgot for a while that all revenue's not made equal, and you got to look, I think, just one step below that, right? You got to look at gross profit because forget losing money when it's all said and done. I mean, what was happening in the last few years – think about WeWork. They're losing money on effectively every sale. Ultimately, yeah, sure, they probably have some locations that are really working. But I'm sure, if you look at it on a city level, how many cities were just completely unprofitable?w many cities were just like completely just completely unprofitable. I was talking to one of the – talk national companies that was literally a unicorn doing 70 million in AR. Now it's bankrupt <laugh>, right? So it went from like 100 million AR to bankrupt, and in this case, I had access to one of the top people of the company. And I asked him, “How does that happen,” right? “How can you go from literally unicorn to zero?” WeWork was even bigger, 50 billion to zero. And in his case, what he said was, “The only thing that mattered to us and the only thing that mattered to the board was revenue growth and customer satisfaction, and we crushed it. We were tripling even at that rate.” And WeWork was doubling. They doubled, I think, from – it was 2 billion to 3.5 billion in a year. That’s massive growth, and in their case, they have huge, amazing – 99% customer satisfaction, but we lost money on every single sale. Every time we sold, we lost more money. There was no margin, not even gross margin, and that's the difference. We just got so addicted to revenue, we just all over time stopped caring.
00:19:24 · Rob Woodbridge, Pablo Srugo
[00:19:24] S1: Yeah, it's supposed to sort itself out at some point, like where you're… [00:19:27] S0: But not if you're – yeah, how do you – you know what I mean? If it’s too many employees, yeah, at some point because you add more margin. But if you lose money every time you make a sale, how does that work <laugh>? How is that supposed to work out?
00:19:41 · Rob Woodbridge
[00:19:41] S1: It can’t, and this is the obvious outcome of it is that – it's what makes it so difficult to do. Because how do you get growth? How do you get new customers? How do you convince somebody? And WeWork, of course, they had a 99% customer satisfaction because free coffee, free everything. They built it around that experience. Not so much the real estate side but the services side around it, it was all free. I mean, Lyft's office was – in Toronto was in a WeWork, and I loved it. I loved it. It was a great place to go, but when you start to then have to increase your rent in order to be able to subsidize that and to get to that point, which is – we were eating into that point. We just said, no, we'll go find something that's cheaper. At some point there's a lost cause there, but you can't. For every dollar that you spend, if it – or every dollar that you earn, if it costs you a dollar and a penny to get that dollar, you are out of business. It's just a matter of how quickly, right? And it's your bank account. You can have a thesis, and that's where product-market fit comes in where you're saying, okay, listen, we're investing in figuring out that thesis. And then, at some point, something's going to hit or miss, right? You shift and you pull and you modify pricing and the service offering or whatever it is, and then there's a point in time where it does one thing or the other. And if you're not seeing the uplift naturally, you know that it's – you can't sustain it, but I think that's new. And it's new over the last – for this generation of entrepreneur, but it's been the same cycle every entrepreneur. The dot-com bust is exactly the same thing that happened that emerged out of that is that all of these companies had negative margin. It's the same lesson in 2000 that we're learning in 2023 is – and in between there was the ‘09 recession. And we learned that as well is that what's the most important thing to have? For me, it's cash on hand. It is a balance. It's margin. It's profit. You die without it. Pulling it back to Nike and Phil Knight, he – that's what he lived on was pure profit and any dollar that he could borrow from his family or somebody, and at some point, they all said no. So it was just what he could earn.