A common myth in the business world suggests that once you have a great ida, you should create a business plan and immediately start raising capital. You can go that route but let me share why you should wait until you prove your concept and require capital. Let’s take Snap Fitness, for example. I could have pitched my idea to investors, but I had no proof of concept that the market actually wanted what I was building. I also didn’t want to dilute my company before I got it off the ground.
Instead, I decided to bootstrap the company with my own financing. I built three clubs in a ll different markets because I wanted to prove that this concept would workin any size community. Even after those 3 locations were successful, I still didn’t want to raise outside capital. i had proven my concept and knew it was working, so why would I want to give up equity in my company. I knew that if we could keep up that momentum we wouldn’t need outside capital, and again, I could maintain 100% control of my company.
As a rule of thumb, the less information or proof of validation you have for your business plan, the more equity you can plan to give up. Often the first capital you raise outside of friends and family will likely be the most expensive raise.
Angel round financing groups are typically very sophisticated in the buying process and generally conservative when it comes to evaluating a startup. The stronger your growth, trajectory, and profitability, the higher the valuation will be for your company.
Again, having strong financial, leadership, and fully scalable systems will all lead to higher valuations for your capital raise.
Another route for funding your startup is through traditional financing through a bank. In these cases, you don’t have to give up equity; however, most banks will require personal collateral matching your requested loan amount.
The option that I chose was to self-fund my company. i did this because I had the necessary capital in the bank and was not interested in dilution at this early stage of my company as I grew it. Often people seek outside funding because they’re conservative or risk-averse. Personally, if you have your own capital and believe in your product, I would wait until you grow your business to a meaningful size and then consider selling a portion to create liquidity for yourself.
Building your company the right way starts with setting expectation for how long this journey will take. Remember, I spent 20 years in the industry before starting Snap Fitness. The entrepreneurial myth sets a false expectation for how quickly we should grow, scale, and sell our business.
Many entrepreneurs don’t fully understand the hill they are about to climb or the commitment, discipline, and sacrifice that journey will require. That’s why I believe early on that steady, methodical growth is critical until you feel you have a full understanding of the competitive landscape and the opportunity in front of you. Once you realize that, then you can make a decision based on facts and competitors to determine if you should be raising capital.
I continue to share how long I was in the fitness industry before I started Snap Fitness because many business owners forget to master their category and understand the marketplace. When I sold my first health clubs, I had considered branching out into other categories. However, I was drawn back to focus on the industry in which I had become an expert. We often seek change for variety, but I knew where my expertise was, and I had the discipline to know that I didn’t want to start over. My passion was in the fitness and health industry.
When you make the decision to start a business, make sure you are educated and passionate about your category. People often decide to shift industries because they do not see the results as quickly as they would like. Think of these early days as an investment in learning your industry, competition, and pivoting directions as you grow. remember, success won’t happen overnight, and it won’t just happen because you raise capital. If you raise capital or scale too early, you can create more problems for yourself. It takes time to hire, train your staff, implement systems and processes to manage a strong growth trajectory.
Set the right expectations and a realistic timeline for how your business will grow. We become disenchaged when we lose tack of our progress – set milestones along the way that keep you engaged and help you maintain perspective on your grand vision.
Think long and hard if you’re considering shifting industries or deviating from your area of expertise. I’ve seen it so often where people shift occupations from observations, the’ve made from tother people who make success look easy. The factor they overlooked is the power of passion. Don’t shift occupations chasing money. money is too fast, and you’ll never catch it. Find something you a re passionate about, and the money will follow.
Dunning Kreuger Effect
I’m sure you’ve seen this story play out hundreds of times, perhaps in your own life.You find a great idea and get really excited about the pending opportunity. You share the idea with anyone who will listen, and you know this idea is going to change your life forever financially. Then the real work begins.
The lights turn off, and the celebration turns into overwhelm, exhaustion, and defeat. Think of this metaphor like looking at a mountain from a distance. A mile away, the mountain doesn’t look so big. It’s only once you reach the base, that you realize how difficult your climb will be.
Excitement and anticipation are great qualities because they get you started. But don’t make the mistake of early celebration without the perspective of what’s ahead of you in your entrepreneurial climb. You have created your vision, but you haven’t taken the time to create a plan or start on your progress. What are your goals in the short term and long term? Many of us want to go right into execution but haven’t yet created a path with milestones.Once we get started, it’s easy to lose momentum and enthusiasm because you didn’t know how you would get there in the first place. Thee was no perspective or plan on the length of time or direction to achieve your goals.
Think about your skills like the metaphor of climbing the mountain. Many of us ae attempting to clim that mountain without proper shoes, climbing gear, and water to survive. You underestimated what you were getting into and lacked the skills to make it to the otp of the hill. Our minds naturally want a quick fix solution, but that is simply our lack of perspective. We have watched other people climb the mountain and assume that means we know how to climb it. I see so many young entrepreneurs who think they understand business because they watched a few Shark Tank episodes.
The Dunning Kruger Effect is a psychological phenomenon in which people of the lowest ability in a subject matter and rate as highly most competent, compared to others. Ironically, people who lack the most knowledge on a topic cannot also recognize their own mistakes and errors, making them exceptionally confident and biased self-evaluators. They are also unable to judge other people’s performance fairly. Their pride and, at times, ego stands in the way. The best place to start is by acknowledging that you don’t know what you don’t know. Let go of your pride, ego, and invincibility and commit to learning the skills necessary to climb the hill.
Even if you have a great product with great timing that solves a significant problem, you are likely underestimating how quickly your competitors will shift to copy you. Every time I come into a new market, I evaluate the competition, and more importantly, I figure out how long it will take them to copy what I am doing. Acknowledge that this isn’t just about understanding your business. It’s also about understanding all of your competitors as well. This is business warfare.
After 20 years of battle, I call the learning and growth stages; I decided to enter the real war. I started Snap Fitness with $300,000, and what I thought was a great idea. Immediately, I needed social proof. I had to validate my idea in the market. I previously shared the early success story. I built the fist two clubs in a n urban and mid-size market. They were all-cash flowing within 90 days.
The final test was in a small market with 3500 people. I knew that if it worked thee, it would work anywhere. Sure, enough, the same results. The club didn’t have as many members as a large market, but cash flow was positive in 90 days. The unit-level economics and operating costs wee consistent relative to the market size. The real estate and marketing cost was cheaper in the smaller market, and there were fewer competitors. Remember, it’s not always best to focus on the revenue you take in the front door. Instead, focus on the profits you take out the back door. As I rolled out the Snap Fitness product, I could see it resonated with what the exercising population was looking for. The dogs wee eating the dog food.
At that point, if I wanted to raise capital, I certainly had the performance to do so. I had my systems and processes dialed in. I also had the people in place to handle the companies projected rapid growth. I understood the competitive landscape and knew I had the right product, entering the market at the right time. I had a product that resonated, and my time to market was perfect. There was no need for me to raise capital as I had plenty of interest in the franchise market space; the cash flow was coming in rapidly.
There’s a difference between raising capital and creating liquidity.
It was time to run with our concept before competitors had a chance to catch up. Once you validate your concept, it’s important to create test environments in diversified market types. Your test environments will provide you with analytics on which markets provide the largest opportunity. Thus, you know which markets are scaling quickest and which markets to enter first. It’s important to understand you have a window of opportunity to grab market share with limited competition. That luxury is short-lived, and it’s only a matter of time before competitors will try to replicate your model.
The first year I opened 12 locations. By the 5th year, I had invested in human capital, operational standardization, and efficiencies to open more than one location every day. Within seven years of my launch, I had over 1000 locations. Our business model was going up and the the right, and it looked like thee was no end in sight. Once you have success and have built momentum, it’s tempting to think that success will last forever. Unless you have proprietary technology or a medical product that can’t be copied, you will eventually be replicated in the marketplace. Thus, there’s a strong possibility your opportunity will be diluted.
At the time, there was another massively successful fitness franchise. I will avoid using the name, but it’s important to understand the lesson. In 2005, they had over 10,000 franchise locations. Just six yeas later, that same concept had less than 3500 locations. This particular franchise model was on fire in the wrong direction.
It is your responsibility to secure a future for your family. There are hundreds of entrepreneurs who have cerated a concept, grew it to its peak, and then rode it down the others ride, selling it for a fraction of its highest value.
Even after expanding to 1000 locations, I was confident that we would continue to grow. Still, I didn’t want to regret the possibility that my competitors would take some of our market share. It was time to take some chips off the table.
1. Taking Chips off the table: When you decide to sell a portion of your business, make sure it’s a significant amount of money and understand your competitive risks.
- What does the competitive landscape look like?
- How easy is my product to replicate?
I realized my company had a valuation of 100+ million dollars. I also knew I was in a very competitive environment. It was time to take some chips off the table without putting any debt against the company. remember Blockbuster? I didn’t want to end up in the wake of a tsunami I didn’t see coming. If your industry is very competitive, there will be dilution. instead of waiting for your competitors to take market share, reward yourself for all of your hard work, and secure your future. I decided to sell 40% of my stock for cash.
This was my life’s work, and I knew that if I was going to sell a percentage of the company, it had to be for a significant amount of money. I wanted to make sure that by selling a portion of my company, my trade-off for bringing on partners would be financial independence for the rest of my life.
2. Maintaining control of your company – Just because you’re selling a portion of your company doesn’t mean you must give up control. you can structure your transaction in a number of different ways to create liquidity for yourself while continuing to build, grow, and maintain control of your company. By binging on partners, though, you must realize you are no longer on your own. you have partners, and you need to be respectful to keep them abreast of any material changes that could affect the company’s performance, positive or negative.
3. Once you sell 51%, it’s no longer your company – In most cases, once your sell 51%, the company is no longer yours. After the second bite of the apple, I gave up control. In my case I sold 40% of my company for $47M and then five years later sold another 20% for approximately the same amount.
I will never forget the day I sold the first % of my company. I immediately thought back to that boy in the two-room school house and my father who moved us to small-town Willmar, Minnesota, because he wanted better for us. I was overcome with emotions because I had spent so many years and sacrificed so much for that moment. It is a moment that will change your life forever. I can’t wait to hear about your moment someday.
That’s the thing about impossible hills. Once you reach the top of one, you realize that no hill is impossible to climb. It’s important to take a moment to reflect on all the work, sacrifice, and lessons you’ve learned along the way. Once the dust settles, start to pivot towards your next impossible hill.
At this point, I had claimed what I thought was my Impossible Hill. There were no impossible hills because I had the confidence and vision to see it was possible. After a quick moment of reflection and celebration, I created a new North star and followed the hilltaker method again. My financial world would never be the same, but my North star was to build the largest collection of fitness franchises in the world.
I also had partners now that trusted in me. When someone best on me, I have an obligation to show up for them and perform. And I did. In 5 years, i grew that company 4X. It went from $5 million of annual EBITA (earnings before interest, taxes, and amortization) to 20 million. My investors got in when the company was worth $100 million, and now it was worth $200 million. They got their exit, and they were great partners as they trusted my vision to operate and grow the company.
There comes the point when you owe it to yourself to start a new journey. I had spent over 30 years in the fitness and wellness space. I didn’t quite know what I wanted to do with the rest of my life, but I owed it to myself to see what my next impossible hill would be.
When you decide to transition out of your company, I have seen founders make this mistake over and over again. If you are going to sell more than 50% of your company, sell at least 80% no matte what the investors tell you. They may say that you still have a voice in the company, but you are no longer in control. You will always be the company’s founder, but it’s no longer your company; you’re an employee.
It took me over 25 years to become an overnight success, and that is the truth about starting your own company. There is no such thing as an overnight success. Success is created by setting huge goals and having a perspective on how long it will take to reach those goals. By the time a company is mainstream we claim that the founder is an overnight success. However, we don’t fully comprehend the years of commitment, sacrifice, and discipline required to make the impossible possible.
Even Amazon, the startup blueprint, took years to fully get off the ground and nearly failed multiple times before it was a mainstream success. Amazon was founded in 1994, and by the time the company went public in 1997, they warned investors to expect “substantial operating losses for the foreseeable future.” They had a great idea but were terrified that competitors like Barnes & Noble were catching up.
They started selling clothes in 2002, launched Amazon Prime in 2005, and eally exploded by the end of 2009 after acquiring Audible and Zappos, which gave them the overnight shipping and free delivery model which they still have today.
It’s critical that you’re passionate about any business or occupation you intend to make a career in. It might take years to build a brand and a company that is cash-flow positive. You must be on fire about your vision every morning and commit to the long-term direction of that vision. For some, overnight success might mean a few years. For me, it was 25 years of laser focused effort. That is the hard truth that social media doesn’t want you to hear. Social media has created the myth that you can build a successful business with little effort, low risk and high returns. There is a myth of scale and a myth of raising capital that doesn’t exist in the real world of business.