Ep. 33 Why Saying No is the Critical Skill for Founders

NOV. 1, 2020

You might think saying ‘no’ is simply the luxury of an established business who has the privilege to turn down an opportunity that isn’t dead-on perfect.


But you’d be wrong. Dead wrong.


Saying ‘no’ is one of the fundamental business skills never taught in any school, let alone in business school. Hah!


It can only really be learned by uncritically accepting opportunities or offers that appear out of the blue, emotionally caving to them, and then suffering the consequences. This may already have happened to you. And I’m sorry. Don’t worry. You’re not alone. And you’ve probably learned from it. If not, this episode will ensure that you do.


For CPG startups, the art of saying ‘no’ is immediately necessary once you advertise your existence publicly. You will immediately become swamped with offers, pitches, etc. There is an army of small businesses that make ALL their money among the constant churn of sub-$500,000 a year startups in CPG. This is, after all, where 80% of the brands can be found.


It is essential to deploy ‘no’ in the early years when small CPG businesses often get approached by any all manner of predators in sheep’s clothing.


Am I being dramatic? I wish I were. So, let me describe these predators, large and small.


Digital marketing agencies (the loners, mostly). Accountants. Individual brokers (ugh). Angel investors with no track record in CPG. Short-term, high-interest loan outfits. Amazon agencies. Sales consultants. PR agents. PR platforms. Pay-to-play events with supposed ‘exposure’ for your brand. Trade shows looking to sell you booths before you’re ready.  Even creepy PR agents claiming to work for Martha Stewart(!). Seriously, that really happened to one of my clients.


Basically, any individual offering any kind of service totally unsolicited by you is almost always an excuse to say ‘no.’ They don’t know anything about your needs but are already pitching? How does this make sense? Chances are your Linkedin message box has already had many such unsolicited pitches from all manner of folks, offering things you didn’t even realize were things, let alone things you needed to pay for.


I’ve talked elsewhere about walking away from a bad retail negotiation as a form of saying no. But that is advanced stuff. I’m talking about basic training ‘no.’ If you can’t learn how to say no politely to these service providers, you will have problems later on. Especially the politely part. You never know which of these folk is a rising star you may want to hire in the future. It doesn’t cost much to smile and say no.


When anyone comes to you to sell something you didn’t ask for, though, you need to be concerned about three likely scenarios: a) they’re inexperienced and don’t have referrals yet, b) they’re not very good, so they can’t generate referrals/repeat business and c) they maybe were good once, and now they are scrambling for referrals that used to come easily. These three scenarios cover 90% of folks out there who approach founders with things that cost money. The other 10% are the authentic rising stars.


There’s at most 10% of service providers of any kind you should do business with at some point. But it may not be now or even soon. Be very skeptical when folks approach you when you’re small. It’s your smallness, which is the primary attractor. You’re new. And they prey on new.


You have to step back and ask yourself a straightforward question, like a cold-shower: why would an experienced consultant/agency bother approaching you? After all, most of you are tiny. You probably have very little money to spend anyways. You may very likely go out of business, providing a smart service provider no ‘success’ story down the line. Look, it’s also easy to be flattered when you’re this vulnerable, and someone strokes your ego to get your attention. Hey, someone’s paying attention to me!


Above all else, you have to say ‘no’ to the urge to seek external validation from ANYTHING else but the market. Especially from service providers!!


You’ll notice that with very few exceptions, you won’t find retailers coming to you at all (unless you’re standing at a trade booth they can easily walk by) ….Hmmm…why is that?


Well, they are the keys to the CPG revenue kingdom (and they know it). They do not need to find suppliers. LOL. I wish they could taste the pain myself of mustering up business, but they never will. Merchandisers at desks don’t know a goddamn thing about building a business from scratch. Nor do they really care much either. They’re focused on managing their careers, much like brand managers who also get rotated around very frequently.


Not now. Not the right time. Not ready. Or just plain ‘no.’ All these phrases accomplish the same outcome. They shoo away the predators and vultures who rely on a constant influx of new startups to make money.


They keep you focused on following a plan you made, not succumbing to the whims of others with a desire to make money off of your small existence.



It’s like the regulators assume that only well connected, rich men surrounded by attorneys get institutional capital deals.


In fact, institutional investors have no incentive to be very transparent. If there were super-honest, it wouldn’t look desirable to anyone.  It would drag out the term sheet iteration process.


For example, no investor goes into a deal intending to earn less than the founder when all is said and done because it doesn’t benefit their LPs on Wall Street to allow that to happen. I’m sure it has happened, but generally, they are hell-bent on earning far more than you on any exit deal.


And a messy cap table of angel investors will turn them off, even if it literally got your company to where it is today.


In a way, investors are like retailers, who make far more money per unit than you ever will. That’s the privilege they Lord over you in return for getting your brand in front of millions of eyeballs every week in their stores.


I remember shocking one client once when I offered, unsolicited, the lesser-known fact that there is a type of ‘deal’ out there in which the investor goes in with debt leverage (and more) because they don’t trust the founder at all and plan all along to replace him/her tout de suite. They wait for them to fuck up royally, and the debt converts to a controlling stake. The founder may be aware of this possibility intellectually or not, but it often doesn’t go over well.


There are many, many decapitated founders who get fired more or less. In better maneuvers, they get turned into figureheads.


The kind of take-over deals I’m referring to are product-driven deals coming from investors who never had the slightest faith in the founder and his/her team and have their own operating teams ready to assemble. I can’t say such investor take-overs have never led to good financial results for both parties. They have. But the entire process is incredibly shady, less than honest, occasionally bullying, and very, very old school.


In this episode series, I want to try and keep things fair. So, in that spirit, I want to share more balanced thoughts on brokers, agencies, distributors, retailers, and investors rather than highlight the negative patterns…


This will be a series, though, since I can’t be fair to all five classes if I give them two minutes each. Not without speaking in shorthand.


So, who do I start with? Hmmm….Roll a five-sided die? Nope. Don’t have one anymore.


Well, let’s begin with our dear Lords of Capital.


Trigger warning: this series involves social generalizations. Social generalizations are valid if they apply to at least ¾ of group members and aren’t random coincidences. That’s my standard. You are welcome to argue that I haven’t met it, but not that any social generalizations are invalid.


While it’s true that fast-growing brands almost always need to raise outside capital to supplement their gross profits, it’s not true that the firms you read about it in the media are the ones you have to do deals with to succeed. Some have good PR agencies.


I have a growing list of brands that grew steadily off gross profits, commercial loans, and angel rounds. It’s possible.


Institutional investors raise money from what are called Limited Partners or LPs. These folks manage large funds on Wall Street. These funds need ways to deploy enormous amounts of capital according to their particular risk strategies. Diversifying their investments into many splinters is key. Some splinters head toward private funds. PE or VC.


You’re not likely to ever meet these LPs. But the General Partners of institutional funds do, and their primary legal responsibility is to make money for them. Not for you. You are a secondary obligation. At best. At worst, you’re a tool to prove that ‘funds are being deployed.’


The better institutional investors in our world have accumulated a great deal of institutional knowledge of early-stage brand-building internally and within their network of advisors. They are strategy types, like me. They are the ones who endorsed my book. Nothing is random, folks. But, but they are not generally ex-operators like you. Remember that. There is always a gap in perspective.


Chosen well, these firms can deploy capital in much larger tranches than any bank will ever loan to you without crushing interest payments. They can also activate a network of other stakeholders to facilitate a more strategic and less capricious sequencing of retail accounts. They can network you with peers who are ahead of you on the Ramp, the folks who are mini-celebs, and very hard to get a hold of.


But you need to be ready for these kinds of assets. It’s easy to fantasize about the money and the connections early on. That’s when you’re most likely to be taken advantage of by venture capitalists who may or may not know what they’re doing. Or who may pretend to have access or networks they don’t.


There are two types of private institutional firms: the venture capitalist and the private equity firm. They differ in their investment theses, yes, but, to you, what’s more important, is that the private equity firms wait until you are larger and more stable and really will work hard to make their deal with you work out. They invest in fewer, bigger bets.


Venture capitalists have a meager success rate because they invest very early in unproven management teams. Therefore, they tend to invest broadly and don’t commit much time or money to anyone’s portfolio company. They are far less committed than you, even if their check is a big deal to you. Choose very, very carefully here because term sheets tend to grant them a lot of your company at your relatively low valuation unless you negotiate brutally. Which you should. Absolutely.


Generally, angel capital is a preferred alternative to VC as long as you have amassed advisors and others who can lend you advanced strategic wisdom. Not only is there more wealth out there to tap in family offices, but they are also far less likely to bully you into this or that strategy because they wouldn’t know what the hell a growth strategy is in CPG. And, even if they try to bully, it’s going to be a lot easier to counter-punch the paper tiger.


The grand bargain of institutional capital is very influxes of capital in return for giving away a significant share of any exit price.


But do you need that much money all at once? Maybe. Maybe not.


I’ve seen folks squander it and achieve little because they weren’t ready, but their browbeating investors were happy to tell them what to do. Money may have to get made, but a sour taste was felt.


All I can say is, you have to have very polished verbal skills to tell your lead investor that you disagree with their strategic recommendations…but I can advise you now that you’ll want to be super transparent and open when you do disagree because if you hide your disagreement and then act unilaterally against a prior consensus, you will have a very painful lawsuit on your hands.


Are you ready for what I just described? If not, don’t take institutional money.


If I were you, I would stay away from VCs entirely, professionalize yourself, and, if necessary, get private equity funds to help out later on up the ramp, where things like paid advertising become important and hard to fund off of your own P&L. I just pissed off some folks for sure with this one. I haven’t been impressed with most VCs in the CPG space…there are too many ideological missionaries and not enough savvy business strategists.


Remember, there is no rush to get this kind of money early on…criminy folks.


Look, if you’re growing exponentially off of a $500,000 base, you have at least 4-5 years before you need to scale tens of millions of dollars every year; before you probably do need to raise significant amounts of capital to continue growing exponentially (capital sums that neither angels nor your local bank will offer you).


Use these early years to research the top PE players and financial brokers (Whipstitch and Aspect Consumer Partners are the most experienced here) who can help position you properly in front of them. This patient approach is far better than hastily getting in bed with VCs of dubious value other than a relatively small check amid many they write for every fund.


Regardless of which institutional investors you work with, work with the best of the best with a strong, serial exit track record and a track record of treating founders with respect privately and publicly.


Run from anyone who acts like they stepped out of the Treasure of the Sierra Madre cast.  The moral of that film is:  everybody is friends before strike gold. Then what?


Then, you find out who you really climbed into bed with…