Ep. 64 – Don’t Let Anyone Pester You Into a Hasty Exit

FEBRUARY 15, 2021

The Federal Reserve is set to ratchet up federal fund interest rates from 0% to an unknown amount very quickly this year. It will be the fastest set of increases since the early 1980s. 

This will literally end the era of Bernanke easy-money in a matter of months. Mark my words. And troll me in December, if I end up being wrong. 

Why do you, as an early-stage brand care? 

Well, In Q1 this is already causing a flurry of panicked firms to raise new funds while rates are low. And to do this, they need to deploy out the money in existing funds before the LPs will pony up more. 

This is leading to folks hunting aggressively for deals as fast as they can. I’m kind of surprised Bevnet isn’t doing a special Q1 conference. 

And this leads to sloppy, insincere investing to move funds off the books. It also leads to aggressive attempts to get into ‘high potential’ businesses. When the bad investors get hasty and pushy, folks, they will deploy all manner of linguistic techniques to try and convince you a) that you don’t want to keep running your company anyways and b) they have ideal buyers in the wings (who they never disclose).

The reality is they don’t really have the buyers until they have you. They just have contact info and some cocktail handshakes in the pre-Covid past. 

Strategics are used to be shopped brands, but they don’t waste time on meetings about potential deals. LOL. 

The real risk right now for some of you is that you will either given to your exhaustion dealing with supply chain hell or that you will be fooled into an easy cash exit when, if you simply ignored these people, you’d be…just fine!

There is no future in which there is NO exit opportunity. There is always an opportunity to monetize the business you have built later. 

And if you give yourself more time to scale it and make it profitable BEFORE you present it to potential buyers, you will almost always make far more money in absolute terms.

A $35M business with 0.5% EBITDA may garner a 4X multiple if the storytelling is good enough and there is exponential growth ongoing. That’s a $140M check to split among shareholders.

But, a $125M Skate Ramp business with 5% EBITDA (in part because it now has enough volume to garner preferred supply chain pricing) that only garners a 2.5X multiple actually produces a $312.5M check to split among shareholders. Yum!

Larger businesses tend to command lower multiples in part because their organic growth rates and distribution upside is lower. But, you generally make far more money. 

Don’t give in to any investors who suddenly want an exit, just because they have an interest rate problem. That’s bullshit. This assumes you still have controlling shares.

And this kind of moment, Q1 2022 is precisely why you want to build a business intelligently so that you only bring on investors who remain minority shareholders. Because, you can’t predict when these kinds of moments will arise in a long journey up the Ramp. And neither can they.

Depending on your background, though, the temptation of a 2022 exit may be too hard to resist. I won’t judge. I just want to make sure you’re taking investor calls maturely and with your own long-term best interests in mind. 

When asked about the many private equity firms that tried to get onto Hamdi Ulukaya’s cap table, he said the following in an interview, “They try to make you feel insecure.” 

Don’t fall for that shit. 

This is your business. Don’t let random, short-term Wall Street issues indirectly force your exit timing. The problems of trillion-dollar funds are not yours. Nor are they really problems at all. 

Keep steady. Keep heading up the Ramp. And don’t get distracted by finance people offering you Gatorade and a Towel from the side of the quarterpipe. 

On a barely related note, I’ve already got a bunch of applications for guest spots on the show later this Spring. These spots are for bona fide Skate Ramp brands building organic growth. I want to highlight objectively vetted emerging brands of tomorrow. 

If you want to grab a spot, apply by Feb. 1. E-mail my assistant for deets. Her e-mail is [email protected]. 

Be safe out there!

James