Avoiding the Shiny Penny: How to Stay Focused and Maximize Your Business Exit

Bruce EckfeldtWelcome, everyone. This is From Angel to Exit. I'm Bruce Eckfeldt, I'm your host. Our guest today is Walter Paulsen. He is an exited entrepreneur. He's had a couple of different experiences, and we're going to hear about them. I'm excited for this. Walter has not only had a couple of different experiences, but has also worked with a lot of companies, helping them figure out their exit strategy, and has a lot of insights. I always love speaking with people who have been on both sides of the equation. So I'm excited for this. With that, Walter, welcome to the program.

Walter PaulsenThanks, Bruce. Delighted to be here.

Bruce EckfeldtIt's good to have you. Before we dig into all the learnings and takeaways, give us a little background. How did you get into business and startups? What was your professional background? Give us a little backstory.

Walter PaulsenSure. I've spent the last 25 years starting, building, and selling companies in Silicon Valley. For the last couple of years, I've been a Vistage Chair, a CEO coach, and now a Certified Outgrow Advisor. We can talk about that a little bit. Before that, I actually started my career in media. I financed movies for 20th Century Fox: Speed, Mrs. Doubtfire, Home Alone, Braveheart. Then I ran home entertainment for Asia Pacific, so I spent a lot of time in Japan and Korea and Hong Kong, Singapore, Sydney.

Then I moved up to Silicon Valley in the late '90s when the dot-com boom was happening. I did a corporate venture job for a couple of years and then worked at startups and growth companies in various incarnations, from raw bootstrap to seed funding to incubated at a big company. It's been a great ride.

Bruce EckfeldtWhat was the big change from the media background, more corporate, into early stage and growth? Was that personal preference or situational? And what did you transfer in terms of experience and learning?

Walter PaulsenThere were a couple of things. First, I'd been at Fox in LA for about six years. I worked at the studio, upstairs from Barry Diller. It was super fun and sexy. But I was at the point where, if I did it a couple more years, I was going to become a studio lifer, which is not a bad thing. But you're always swimming with sharks, and it's always going to be LA or New York. I'm not one who hates on LA, but I wasn't sure I wanted to live there forever.

There was some interesting stuff going on in tech and multimedia, and Netscape. I'd done a lot of work with Japan, and NEC, a $40 billion Japanese electronics conglomerate, was starting a corporate venture arm in Silicon Valley, and they wanted somebody with media experience. That felt like a good transition. I spent a couple of years on that and got my feet under me in the Valley. Then I got introduced to some Israeli entrepreneurs who had some seed funding. I came in as VP of business development, and we were off to the races.

Bruce EckfeldtWhat was that growth process like for you? In the early stages, as you were growing the business, how did you think about exits? Was it a plan up front, or something that evolved as the business started to grow? How did you think about that next stage, that transaction?

Walter PaulsenGreat question. It was interesting to be on the company side as opposed to the acquirer side. A tough early lesson came with this Israeli startup. I loved the guy. Super smart, engineers out of the Technion and the IDF. We had an early browser chat technology, we raised money from Bessemer, and we had a lot going on. We had an opportunity to get acquired by a company called Scopus at the time. There's been a bunch of consolidation since. It was a public company, also run by an Israeli.

And the founder, super nice guy, we're still friends, said, "No, I think we can make it bigger on our own." Then it turned out we couldn't, and we ended up having to sell for a fraction of what the Scopus offer had been. That was an early lesson. Greed and hunger and desire drive capitalism, but let's keep it real here. Sometimes, take the win.

Especially for young entrepreneurs, they think they've got to make $100 million on their first company, and that hardly ever happens. A lot of times, it's such a great option to sell to somebody bigger, get some money up front, have an earnout, and then you've got your exit and your ticket stamped. You do that for a few years, and then you go off and do something else. That would have been a much better option than saying, "We're going to do this on our own." Instead, it dragged on for about three and a half years before it got sold for scrap, which was a shame.

Bruce EckfeldtA bunch of doubles is better than trying to hit one grand slam home run.

Walter PaulsenWhich is so hard in the Valley, because a grand slam isn't four runs, it's 400. There are enough of those around, and enough Ferraris driving down Page Mill and whatnot, that people think that's what they've got to do, and they've got to do it with their first company. The truth is, some of those happen, but a lot of those people get their money by hustling, having a small, super-motivated team, getting some product-market fit, getting some traction, and learning some things about how to build and scale in that first company. Then they sell, and there's a bunch you can learn from being acquired by Google or Meta or Salesforce about, and maybe this sounds bad, how the big boys do it.

Bruce EckfeldtWhat they're looking for. I always say you have to think like a buyer, not a seller. What do the buyers want to buy? You need to create a company that's not only valued well but is actually buyable from their corporate point of view.

Walter PaulsenRight. And it's hard to keep your feet on the ground. I just read something about how, with the AI stuff going on, Meta is offering $100 million packages for certain kinds of senior AI engineers. You hear that, and even if you're some measly mid-six-figure engineer who's doing great, you think, why am I such a loser? So there's a reality distortion thing going on that's hard.

The other thing is that things go in and out of favor. The last startup I did before coaching was a nutrient control system for indoor farming. There was all kinds of ag tech investment and all kinds of cannabis investment. We said, "Houston, we've got product-market fit. We've got some initial customers." And then it turned out we missed the product-market fit, ag tech has radically contracted, and the green revolution of cannabis has left a boulevard of broken dreams. So there's this weird balance: work hard, do a good job, work to create long-term value, and also recognize when you have a tailwind.

Bruce EckfeldtHow do you do that? How do you know if your success is driven by your intelligence, luck, or just the general tide rising in the industry?

Walter PaulsenThere are a lot of smart people working on a lot of good ideas, and there's always going to be competition. The hard part is... I lived through the first dot-com bubble, when the sock puppets were doing Super Bowl ads with no revenue and Webvan raised hundreds of millions of dollars. From the inside, bubbles just seem like good times.

Bruce EckfeldtIt's a party.

Walter PaulsenRight. Even in ag tech, there was a very gifted storyteller who was the founder of an ag tech company called Plenty. They hired some good engineers, and then he talked to SoftBank, and SoftBank wrote him a really big check. And the instruction was, "I think you need to spend money faster and be more crazy." So keeping your moorings, and actually knowing what's real and what's just hype, is a challenge.

Ultimately, you want to find a real pain point. You want to get a good base of customers. You want to land and expand. You want to drive revenue. And there's a balance. I was talking yesterday to a guy I coach about how fast they need to be growing. This company has been around five or six years and has about $10 million in revenue. He comes from a SaaS background, so he thinks they should be doing 200% growth. Given where this market is, that's actually going to lead to some bad choices.

If they're doing 20% to 30% growth, and you do 30% growth over three years, you've more than doubled the business. Most of the time, that's going to be really good. Particularly if you can meet customer needs, solve problems, build a high-performing team, and not get too much revenue concentration. That's one of the biggest challenges: "This customer loves us. They're half our revenue." That's not good.

But sometimes you have a tailwind, and you've just got to run like hell. You've got to do the blitzscaling. That happened at Blackhawk. We really hustled to get the first gift cards out in grocery stores. We got racks into something like 2,000 Safeways, and it worked, and people liked it. That was kind of a big discovery. Then we had triple-digit growth for the next three years in grocery stores, because we went from just having racks at checkout to these portable racks, and so on.

This is literally how the dynamic worked in grocery. The battery and film people used to have an end cap, and we were kind of Silicon Valley predatory: "Come on, just give it to us. You'll make a lot more money off it." And the poor film and battery people were desperately fighting for their lives. It was a dog-eat-dog world.

That was an interesting one where we really hit product-market fit. The retailers loved it. The consumers who were giving gift cards loved it. The people who were getting them loved it. So it was, okay, let's sign as many multi-year exclusive deals as we can and lock up the market. By the time I left, we had 80% market share in grocery and 100 multi-year exclusive deals with the category-leading retailers. It was game over. Blackhawk was a unicorn when it spun out and went public. The business has evolved a lot since then.

That was one where it was such a bell. "Okay, we've got this. Let's run with it." It's not that there weren't problems. We had a ton of problems, but they were kind of first-world problems: how do we maintain this growth, treat our customers right, and not confuse good fortune and timing with being commercial geniuses? We worked hard, we were smart, and we had some good timing, but I think we always kept running scared.

Bruce EckfeldtI think you've got to be a little scared. If you're not a little scared, something's wrong. You're probably going to get blindsided.

Walter PaulsenAndy Grove from Intel: only the paranoid survive. And can you be paranoid and have a healthy life? That's a whole different thing, because we celebrate these asymmetric individuals who create gigantic fortunes. Sometimes I think it's like the garage tribute band that wants to dress like Metallica or the Rolling Stones. They want the affectations of the rock stars. Sometimes I feel like people get caught in, "I just have to work all the time, because I know Elon Musk sleeps under his desk, so if I sleep under my desk, then I'm going to be a billionaire too." No, that's not how it works.

Bruce EckfeldtUnfortunately, it's not causal. How do you think about timing on some of these things? When to put the pedal down and really grow, and when to keep it at 30%, 40%? Are there things you look for, advise, or have noticed that help assess those things and make those decisions?

Walter PaulsenIt's pretty rare, but there are land grabs: we've got to go get as much of this new territory as fast as we can. That's rare, but you recognize it when you have it. Those are tough to sustain. There are times when you just have to put the pedal to the floor and hold on tight, but it's pretty rare, and it usually doesn't last that long. Truthfully, even for high-growth tech companies in Silicon Valley, if you're over 25% or 30% a year, you're doubling in three years. And building the systems, culture, and processes that will sustain that is important.

I think a classic cautionary tale was Zenefits. They were moving fast and breaking things, and it turned out you need a bunch of certifications and other things to legally offer the kinds of products they did. They said, "Oh, we'll catch up later," and it turned out really badly. On the other hand, Uber and Lyft, Uber in particular, pushed things hard. So there are times when you're disrupting a market where the incumbents are going to try to hide behind regulations and political clout.

Bruce EckfeldtIt's a fine line. Even the Theranos story. You can see how a couple of decisions left or right and it could go either way. It's tough to see the call in the moment. It's always easy to see it looking back. But having to make those decisions is probably the hardest part of leadership.

Walter PaulsenMaybe it's just because I've seen the flaming debris of things that didn't work out. Elizabeth Holmes is a notable one, but there are lots of smaller-time Series A founders. And it does matter who you get money from and what their goals are.

It's funny. I work with some guys who are in their second fund, and their target is enterprise. A couple of Indian guys who have been very successful as entrepreneurs, with family office money. They want to invest from seed to Series B, and they're looking for opportunities where they can have a nice exit between $100 million and $400 million. That's a different mindset than "I need the 500-run grand slam."

And it's amazing the difference between how venture investors think about things that fail and how founders do. I have yet to meet a founder who wasn't grievously psychologically wounded when their startup failed. It's a very traumatic experience.

Bruce EckfeldtIt's literally trauma.

Walter PaulsenWhereas good venture folks are playing a portfolio game. They have a handful where they say, "Okay, we're going to really pour on the gasoline. Of these five, four will probably fail, but we think one of them has a chance at a billion-dollar exit." It's not that they're indifferent to the suffering of the companies and the founders and the people who fail, but in the dynamic of their industry, they're ultimately not working for the entrepreneurs. They're working for the LPs.

Bruce EckfeldtI always say it's kind of a "we eat our young" culture. The weak ones are not going to make it, and we're going to use the resources to plow toward something that does.

Walter Paulsen100%. And the venture industry itself has only been around for about 50 years. There aren't very many firms that have really stayed through and managed transitions well. Kleiner was at the top of the game, and John Doerr is an incredibly successful investor. John Doerr also made a huge bet on sustainability. Maybe it was the right bet at the wrong time, and that fund lost its shirt, and Kleiner lost some of its luster. And John Doerr is as good a venture investor as there is. He's a billionaire because he made some really good calls. But it's very hard.

And how do funds transition? The funds themselves wrestle with staying lean and focused, and also with having their money be the money people want to take. Why should we take your money? I know the guys at a VC firm where the founders came from Sequoia and Accel. Super successful guys. They just wanted to focus on investing. Now they've got $8 billion under management, and they've got various investing partners and a talent partner and an operating partner and a go-to-market partner, because they've got to compete with Andreessen Horowitz, which has all that support. It's fascinating to see the rest of the world trying to catch up and do the stuff Silicon Valley does. And within Silicon Valley, it's ferociously competitive, dog-eat-dog. It's an interesting thing.

Bruce EckfeldtThat's brutal. For founders who have product-market fit, they're generating revenue, hopefully some profits, and they see some future, when do you suggest they start thinking about exit strategy? When they might exit, how they might exit, what they need to do to prepare? When should that thinking start to hit them, versus "I'm just trying to survive and get this thing off the ground"?

Walter PaulsenI won't say from day one, but certainly from Series A. The day that check comes in, you're generally going to have a board, and you're going to need to really think about it. Because it's not just you anymore. You've taken other people's money. You're on the back of the tiger, and you have to think about how you make sure they get their return. It's not just you and your employees feeding their families and solving a customer problem. You've committed to a particular kind of enterprise.

I always encourage founders to keep solving a customer pain point and keep focusing on delivering value. And to have employees who, they don't have to be happy all the time, but they kind of need to love their work. They need to be engaged. The one thing I say is: build the company like you're going to stick around and run it in perpetuity. Build value. Think like an owner. Because the game of "we're going to pump it up" ends up being challenging.

That's true whether it's tech entrepreneurs or what I'll call EBITDA companies. I work with a lot of SMB distribution companies, and a lot of them are looking at what the private equity play is. There start to be some things you shade: maybe we don't do this expense, maybe we do this thing, maybe we hike that. There are things you can do on the margin. And in some ways it's easier to play that game with private equity, because they're so metric driven, and you don't have the technology piece. The private equity people say what they're looking for, and the owners running the companies know what they're going to look for. There's this middle ground: "We know you're tuning the business."

Bruce EckfeldtKind of tuning the business. That's a game.

Walter PaulsenThere are all kinds of social games where both parties know what's going on, but they're willing to do it anyway. It's caveat emptor. I think it's pretty logical for companies looking to sell to another private owner or to private equity. The tech companies that have raised venture are a little different beast, because they typically don't have as much control. That's a huge difference. A typical SMB is primarily family or founder owned, so the owners have significant control. Whereas once you take the money...

Bruce EckfeldtYou're on a clock. Once you take external money, you're on a clock for returning money at some point.

Walter PaulsenYes, you're on a clock, and it can work out really well. It's probably not a polite thing to say, but with the venture folks, if you don't do the job the way they want you to do it, they're going to shoot you.

Bruce EckfeldtWell, you sign up for it. If you're going to get into that game, it's not a surprise. Or it shouldn't be.

Walter PaulsenRight. And they all say, "Oh, we're founder friendly, we're this, we're that." But they are working for their limited partners. They're looking for exits. And it creates weird distortions. The public markets, on the one hand, are hitting highs. I'm still a little confused by that. But there haven't really been the tech exits, and that's created an interesting funding environment where a lot of entrepreneurs feel like it's a terrible time. Unless you're right in the sweet spot of AI, and then it's the Wild West, with truly staggering amounts of capital.

And here's an interesting thing to me. ChatGPT came out, I think it was Christmas two years ago. Was it 2022 or 2023?

Bruce EckfeldtDecember of '23, I think.

Walter PaulsenIt's not that long ago, and boy, people are still figuring it out. There's an incredible amount of money being invested in it.

Bruce EckfeldtDo you think that's primarily because of the opportunity, or because investors don't have anywhere else to put their money? Is it supply driven or demand driven?

Walter PaulsenMoney seeks return wherever it can. And the scale of capital required to train the LLMs is pretty massive. It's funny, I'm reminded of the original telecom and internet build-out. All these companies were laying fiber, and it was overbuilt, and a lot of those companies lost their shirts. But the infrastructure turned out to be really robust for the internet doing lots of interesting and useful things.

Bruce EckfeldtFiber optic. It enabled a whole bunch of industries, a whole bunch of applications.

Walter PaulsenSo we're going to have all these incredible power-hungry data centers with fantastic intelligence, trying to get applied to a bunch of problems we were never able to apply this kind of intelligence to. At heart, I'm a rational optimist. I think it was the Anthropic CEO who said there's going to be blood on the streets for white-collar workers. He's a smart guy, and I think the technology is certainly useful. But the thing with people throughout history, going back to the Luddites, is that they can't predict or foresee the new jobs that don't exist yet, which are going to emerge and be valuable things for people to do.

Bruce EckfeldtI think we over-index on our ability to predict. It's going to be massive change, but probably not in the way we think. It's probably going to be quite different ultimately from the way we perceive it right now.

Walter PaulsenI joke, having been on the wrong side of it, that the creative destruction of capitalism always sounds better when it's happening to somebody else. I think it's just the law of averages. I've had some good wins, but most of the time I've been on the wrong side of it. Those couple of times I was on the right side of it, though, were pretty fun.

Bruce EckfeldtIt's a numbers game. The best batters hit .350. They strike out more than they hit.

Walter PaulsenRight. The best batters fail seven out of 10 times, and they're in the Hall of Fame. I think if you're selling new stuff, if you hit one out of 10, if you get nine no's for every yes, you're probably headed to the startup founder sales Hall of Fame.

Bruce EckfeldtLet's talk about mistakes you've seen founders make early that make exits more difficult, whether it's in the business and strategy or in internal operations. As you work with companies that are probably going to have some kind of transaction at some point, maybe not a unicorn exit, but they're going to scale a couple of times and then do a private equity or strategic sale, what trips them up in the selling process? What hurts valuation, makes the buying process more complicated, or causes them to run through more potential buyers, that they could have avoided by being a little smarter earlier? Top three.

Walter PaulsenGod, the list is so long. The number one thing, to be honest, is hubris. People start to think they've got all the answers, and they become too confident in their own infallibility. They need to have confidence, but not hubris, and there's a balance. So the number one thing is to have people you trust who will keep you honest. Sometimes that can be a board member, and a lot of times it can be a co-founder. There's great business for coaches, because it's nice to have an external person to keep you honest and keep you from sucking your own exhaust. That's my number one thing: don't suck your own exhaust.

Number two, and this is related, don't get carried away hiring as fast as you can. One of the things that can happen is people lower standards because they feel they've got to grow fast. A players like to be around A players. In any company, you should aspire to build a team of all-stars. It doesn't need to be a family, it needs to be a team of all-stars. We want A players here, and we want them to be the very best at what they do. I think people lose that focus in the pressure to grow, and then it creates bad cultural things, because you're just growing. So make sure you continue to hire A players and focus relentlessly on having a great culture, because those two reinforce each other.

The third is to avoid the shiny penny. This was one of the most useful things I did at Blackhawk. I was fortunate to be running with this gift card thing that was like a house on fire. The founder of Blackhawk is a really gifted entrepreneur named Don Kingsborough. Hi, Don, if you see this. Don had this mad creative genius where he could see opportunities. He'd say, "Thomas Edison had a lot of ideas, and almost all of them were bad, but there were enough good ones."

There's a point when you're just trying stuff and throwing things against the wall, and that works. But there's also a period where you have to be disciplined about your execution and not spread yourself too thin. I think a lot of founders get pulled into this, because when they start to have a hot hand, other opportunities come in. You can do this acquisition. You can go into this new market. So don't be so dazzled by your success.

You've got your really good product that's growing, and you need to keep your foot on the gas. That doesn't mean you take on all the different ancillary things people are trying to talk you into. I'm forever dealing with entrepreneurs who are smart and also clever dealmakers: "We're going to do this deal, and they're going to pay us this much money, and we don't have to do that much." Yeah, but you're distracting your effort from the core. That's what I mean by avoiding the shiny penny. I would argue there's usually more to be gained by building out the good foundational idea than by trying new, tangentially related things. Those would be my three. Was that three?

Bruce EckfeldtI like them. That was great. The last question I have: what challenges have you seen post-exit? After a deal, whether it's entrepreneurs you've seen or your own experiences, what personal and professional challenges have you seen people go through?

Walter PaulsenI'll just say some of the most unhappy people I know are exited founders with more money than they can spend. There are a couple of reasons. One, they lose their purpose. It's enormously empowering to have this purpose and drive and a team all working together. Then, whether it's $10 million or $20 million or $100 million, whatever the number is, they get it, and they're sitting in their nice house in Atherton or wherever, thinking, "What do I do with myself?" And a lot of them behave like destructive puppies. They have affairs, they crash cars, they do too many drugs.

The other one I think is challenging, and I apologize in advance to all the golfers out there, is the ones who join the club and go to the club and play golf four or five days a week, and they get too much sun and put on 30 pounds, and it's just a velvet coffin. So I think the biggest challenge is not having thought through what they want to do, and mistakenly thinking that if they have no financial worries, they'll be happy all the time. Because happiness is just a byproduct of living a purposeful life, and a lot of people with money really struggle to do that.

Bruce EckfeldtExactly. It's pretty orthogonal to finances. With that, Walter, it's been a pleasure. This has been a really great conversation. I appreciate it. If people want more information on you and what you're doing, what's the best way to get that?

Walter PaulsenYou can find me on LinkedIn, or you can email me at walter.paulsen@vistagechair.com. Do we have show notes? Great, so we'll put my contact information in the show notes. If you're a CEO who wants help being your best self, and particularly if you want to accelerate sales growth, I love helping CEOs thrive and succeed.

Bruce EckfeldtI'll make sure all the links are there, and I would encourage anyone listening to contact Walter and learn more. Walter, it's been a pleasure. Thank you.

Walter PaulsenAll right. Thank you.