In this insightful episode, Yarin Gaon, Founder of Fractional Partners, shares why outside capital often destroys more value than it creates for stage 4 founders. If you’re generating more revenue but watching profits shrink, feeling overwhelmed by complexity, and tempted to raise money to fix it, you won’t want to miss it.
You will discover:
– What it takes to identify your most profitable 20% before scaling with outside capital
– Why giving capital to an unclear business model is more likely to destroy value than create it
– How to shift from growth by addition to growth by subtraction to tighten your core engine
Episode Transcript
Scott Ritzheimer
Hello, hello, and welcome, welcome once again to the Start, Scale, and Succeed podcast, the only podcast that grows with you through all seven levels of your journey as a founder. I’m your host, Scott Retzheimer, and today we’re going to talk about a challenge that I have for you. You see, just about every single one of you that are sitting there in level four, you know, those disillusioned leaders that are just in the belly of this journey as a founder. One of the things that’s keeping you there is this almost universally accepted belief that if you could just have more money, you’d be okay. If you could just get more cash, it would be fine, and especially if that cash comes in the form of outside capital, whether it be debt or equity or some type of fundraising for nonprofits, our guest today has the argument that it may actually kill your business more often than grow it, and so if more capital isn’t the answer, well, what is? Fortunately, he’s not here to just show us the problem, but to show us a way forward with us today, we have Yarn Gaon. I think I said that right on personal part here, but he is awesome, excellent.
He is here to show us the way. Yarn is the, as an entrepreneur turned investor with a proven track record of founding, scaling, and exiting companies. He launched his first company at age 14 and went on to build Israel’s largest e-commerce platform for military goods, which he later sold before relocating to the US. Welcome to the US of A. He served as an entrepreneur in residence at a venture capital firm, where he specialized in turning around distressed startups with an MBA from Tel Aviv School, sorry, Tel Aviv University, and time spent at Kellogg School of Management. Yarn now helps growing companies mature into strong cash flowing assets. Yarn has mentored over 400 businesses through SCORE, and the University of Chicago’s Polsky Center is here with us today. Yarn, welcome to the show. I want to start off with this, this line that jumped off me. You have this – I don’t know if you would call it an online book. I don’t really know where Notion fits in the world of things these days. It just kind of does everything, but it’s really, really cool, interactive resource. And as I was going through it, this line just jumped out off the screen at me, and it says, giving capital to an unclear business is more likely to destroy value than create it. Now that’s a pretty contrarian take for business and nonprofit worlds. Quite interestingly, where founders think that they know what to do, they just need more money to break through. Why is that not true?
Yarin Gaon
Ooh, for many reasons. So, it’s, it’s not true for a very specific type of companies, a very specific stage of their lifestyle life cycle. So, let’s talk a little bit about companies and stages and different needs for different stages. So, as companies grow, you start with what I call the hustle stage, right? It’s all about zero to one, zero to $2 million in sales. It’s all about saying yes to stuff, yes to more customers, yes to more channels, to more revenue streams. It’s just about yes, you’re trying to find what works, right? So you’re really opportunistic about it, and that’s a method, or a growth method, method that I call growth by addition, right? The idea is, what else can I add, and how can I generate more revenue? What happens is, as companies grow and find some success, or some traction, or some product market fit, what happens is they try to emulate that mindset as they grow, so they try to grow by addition, so they try to add more customers, and more type of customers, more type of products, more type of channels, and what happens is it becomes extremely complex to manage, and they basically end up building a very, very wide business model that is very hard to manage and very expensive to scale.
So, if you take capital, if you take money or an investment, either it’s equity or debt, and you say to a $5 million company that serves multiple different types of customers with multiple different types of product, and say, “Here, here is $5 million go scale this. What usually happens is they burn that on, they lit this on fire, because it’s an extremely hard business model to scale. So, a different version of doing this is instead of growing by addition is to transition to what I call growth by subtraction, and growth by subtraction is a model, not forever, but until you get to every company is, if let’s say $20 million in sales, when the idea here is let’s find the 20% that produces really 80% of profit, not revenue. Let’s find the core engine of this business, the stuff that we do extremely well, the type of customer that we know how to serve extremely well, and tighten the business, tighten the business model. And once you have a super tight business model, then cash becomes accelerant, right. It’s the idea, let’s build the machine, and then put the gas inside the machine to make it go faster, but if your machine is not tight enough and you bring gas, you just lit up on fire. I hope that analogy made a little sense.
Scott Ritzheimer
Yeah, it’s great. I think what makes this so hard is, is the timing piece of this that you opened up with, because maybe you don’t agree with this, but I think you can do that too early, before you really know who the right customer is, or what the most profitable revenue stream is, and so you know two groups of people will hear this, there’ll be the folks who apply it too soon, and then there’s the folks, the folks who haven’t applied it yet, and should have, and so first, do you agree with that? Is there a time for that hustle stage? Is that actually appropriate for the early parts, and if so, at what point does that scale tip? How do you know that it’s time to change tack?
Yarin Gaon
So let’s start by saying there’s definitely a room for the hustle, right? That is how you get a business off the ground. That’s the zero to one, zero to two. It’s how you validate that there’s demand for your product and services. The interesting question is about the tipping point, right? I said zero to one, I said zero to two, but it really comes down to where you feel you have some version of a product market fit or traction, so let’s talk about what that looks like. Usually, what it looks like is there is a one side of the business that we know is predictable and generating cash flow consistently, or there is a type of client that we see that we are able to attract, and when consistency come into place, right, when there’s some side of the business that is clearly working, the inclination of founders is to say, okay, something is working great, what else can I do? So they abandoned the core, and they ask, okay, so this is working great, what else can I do what other customers can I do, or can I serve?
That is the trap, right? Instead of saying, okay, I’m a $2 million company, I’m a $1 million company, I’m still in my infancy, really, especially if you service, you’re serving customers in the US, you’re so small, you haven’t really captured any market share, that is the point where you make or break, so you either say, “Okay, I’m just going to kind of say yes to everything and be opportunistic, or “I’m going to treat this as, okay, I found something that works, that would be my version one, or my first version of my business. Now, if I really want to grow profitably, I need to make a shift, so I need to design the version two, and the key here, if you get anything, version one of your business is not necessarily the version that is worth scaling. Not everything that you’ve built so far is worth scaling. There is a pause moment that, if you have it, allows you to really scale the most profitable parts, and if we talk about this, this is important, because there is a difference between scaling revenue and scaling profit, and a lot of people get this confused, right? Scaling revenue is all about saying yes to sales, right, but you know better than I do, Scott, that not all sales are created equal, and profit is the average of all of your activities, right? Some bring a lot of profit, some take away from profit. So, if you change your mindset from I want to grow to be a $10 million company, which is a vanity metric, because it’s based on revenue, versus I want to be a $2 million net profit company, start making different decisions,
Scott Ritzheimer
Yeah, yeah. One of the other aspects of this that I find challenging, and, and some of our more astute listeners may, may be connecting the same dots, but we’ve had several folks who’ve come on who’ve talked about addressable market, and, and, and for some types of businesses, one to $2 million may be market saturation for things that are brick and mortar, very localized, if you’re a hair salon or something like that, and you’ve got a single location, and and so how is it that you go about continuing to grow when you are bumping into either a perceived or a real barrier on your existing market.
Yarin Gaon
Okay, let’s take an example of this salon. Let’s just take that as an example. So, there is a geographical saturation at some point for a brick and mortar business, but even then I would challenge this. So, the question is, like, how much can you actually get from a single location? So, I’ll give you an example of a different company that I work with. I work with a company that does valet. They have, they have a valet service and. They basically provide valets for events and for restaurants and all these, but what happens is they try, so as they went through and they grew, the first inclination was to expand geography, right, to expand to different territories or to different markets, but if you haven’t gone through a tightening process of your business and you expand to a different geography, what happens is you lose control of your core business, so it’s a risk of expanding too early, especially if you are. So, here’s the thing, you expand into it, so let’s reverse the question.
It comes as a loan comes to me and say, “Okay, Yarn, when should I expand? When should I expand geographically? When should I start a new location? And my answer would be, when you have a super tight model, when you know exactly what you need to do, and your entire model is super tight, and you know exactly how you acquire customers, convert them, produce an amazing experience, and make sure they come back when your business is tight. Take that model, copy, paste it to a different geography, but what happens is nine times out of 10 those models are not baked, so they see revenue, but the model itself is not baked. Maybe they’re not retaining enough clients, maybe their acquisition method is still not really tight, and when they try to copy paste this, they just create complexity in a market that they are not in. Did I resonate?
Scott Ritzheimer
Yeah, yeah. No, it’s, it’s really good. It’s, it’s the, the, the opposite of that. What I see most folks do is we need more revenue next year to keep growing, so how do we get more revenue? Well, let’s go add another location, and I love this, this somewhat – it’s not, it’s not myopic, but this somewhat inward-looking approach of saying, hey, what is the model that we’re trying to reproduce, not just how do we create more revenue. That’s such a brilliant insight, Yarn. There’s this question that I have that I saw all my guests. I’m interested to see what you have to say to this, but the question is this: What is the biggest secret you wish wasn’t a secret at all? What’s that one thing you wish every founder watching or listening today knew?
Yarin Gaon
Yeah, profitable growth is not magic, and profitable growth, it’s not, is a result of making better profitable decisions. So that is why I built what you call the Notion. It’s basically it’s a system, right? It’s called the Growth Clarity.. I’m sorry, the Growth Decision Canvas iterations throughout time, Growth Decision Canvas, and what this says, it’s basically all of your growth decisions on one page, and I built this because I wish I had it when I ran my companies. So it’s basically it’s the version, it’s helping you design the version two of your business that is worth scaling. So a business is basically a mind game, it’s a game of the mind plus people. If you’re able to make smarter decisions, it allows you to start saying no to stuff when you focus on your core and what you do extremely well. Profit would follow, and to just to touch on what you said a moment ago, revenue doesn’t fund growth, profit does. You cannot pay anybody with revenue, you have to pay them with profit. So the shift is from a revenue mindset into a profit mindset. It’s a harder mindset. It’s harder to find that profit, but once you do, that is what funds your growth as you move forward.
Scott Ritzheimer
Yeah, yeah, that is so good. That is so good. Such a big shift, but an important one for folks to make your own. I know there’s folks listening, is like this is just changing their world and their mindset. They’d love to hear more, get access to some of the resources we’ve even talked about today. Where can folks connect with you and find out more about you and the work that you do?
Yarin Gaon
Yeah, you go to Canvas at that Canvas dot fraction of that partners. The Canvas and the tools are publicly open, so it’s a DIY system. You can do it yourself, you don’t even need me. I help companies that want help going through the process, but take that, take the first step is to identify what your growth bottleneck is and what decisions you haven’t made explicit. If you’re able to identify that, and we can solve for that, so we can start tightening the business. Right, where have you not focused? Are you serving too many clients? Are you doing too many products? Are you trying too many campaigns? Where exactly is the leakage happen? And then he walks you through a process, how to focus, and focus is profit.
Scott Ritzheimer
Very good, very good. Well, Yarin, that was absolute privilege having you on today. Fascinating conversation. I know you got some folks thinking, I know you did for me. So, thanks for being here. We really appreciate your time. For those of you watching and listening, you know that your time and attention mean the world to us. I hope you got as much out of this conversation as I know I did, and I cannot wait to see you next time.
Yarin Gaon
Thanks for having me, Scott. Bye.
Scott Ritzheimer
Hey everyone, Scotty Timer here. Thank you so much for listening to the Start Scale and Succeed podcast. I hope this episode gave you exactly what you need for the level you’re in right now. If you want to discover what level you’re in, take our 10 question founders evolution quiz for [email protected] That’s foundersquiz.com it’ll pinpoint exactly where you are and give you tailored tips to move forward and reach that next level in your journey as a founder. If you got something out of today’s episode, don’t forget to subscribe, rate, or review. It helps us reach more founders like you. And let’s be honest, it means a ton to me, my team, and all our incredible guests, so keep starting, scaling, and succeeding, and I’ll see you in the next episode.
Contact Yarin Gaon
Yarin Gaon is an entrepreneur-turned-investor with a proven track record of founding, scaling, and exiting companies. He launched his first company at age 14 and went on to build Israel’s largest e-commerce platform for military goods, which he later sold before relocating to the U.S. He also served as an Entrepreneur-in-Residence at a venture capital firm, where he specialized in turning around distressed startups. With an MBA from Tel Aviv University (and time spent at Kellogg School of Management), Yarin now helps growing companies mature into strong, cash-flowing assets. Yarin has mentored over 400 businesses through SCORE and the University of Chicago’s Polsky Center.
Want to learn more about Yarin Gaon’s work at Fractional Partners? Check out his website at https://www.fractional.partners/
Connect with Yarin through his LinkedIn at https://www.linkedin.com/in/yaringaon/