As the CEO of Sparktoro, author of “Lost and Founder”, and former CEO of Moz, Rand Fishkin talks about the economic and power structure that comes with financing a business, and discovering a solid understanding of yourself: what you like to do, what you don’t like to do, and how you want to (or don’t want to) contribute to the world in the long run.
Every few weeks as part of The Heartbeat, I ask one question to a founder, CEO, or business owner I respect about their biggest leadership lesson learned. This week, I interview Rand Fishkin, the CEO of SparkToro, Author of “Lost and Founder: A Painfully Honest Field Guide to the Startup World”, and Former CEO of Moz.
CLAIRE: Hi everyone, I’m Claire Lew and I’m the CEO of Know Your Team and today, I’m thrilled to have with me, Rand Fishkin who is the former founder of Moz, this amazing SEO software company that’s been around for 17-some years and Rand now runs SparkToro, his new startup and recently, published a book called ‘Lost and Founder’ about his trials and tribulations as an entrepreneur. Rand is someone who I definitely looks up to as a leader, someone who’s always honest and very open with the world and I’m excited to have you here today, to ask you this one question about leadership.
RAND: Yeah, Claire. It’s my pleasure to be here. Thank you for having me.
CLAIRE: You bet. Okay, Rand. This is the question that I’ve been asking leaders who I admire and it’s, “What’s one thing you wish you would have learned earlier as a leader?”
RAND: I think one of the biggest things that I failed to understand, it’s two things. I think one of them is the economic and power structure that comes with financing of different kinds for a business. Initially, I raised some debt with Moz and then, some venture capital and then a whole lot more venture capital and I could carry it for some extraordinary, truly wonderful people, some of the best people in that field. I don’t think I have a good understanding of just how that structure works and who it’s empowering, and who is helping, and how they contributes to the world.
I think the second thing is and I think this is probably true for a lot of people who like me, started a business in their early 20s, which is that I don’t think I had a strong understanding — a solid understanding — of myself and what I love and what I like to do and how I want to contribute to the world and how I really didn’t. The mash up of those two things created a lot of the strife and stress and when those things were most aligned or when I was most ignorant of them and paying no attention to them — things went very well. That’s a challenge I think that a lot of founders, especially over the last 20 years or so, as venture capitalist had been put forward as not just the best, but almost the only way to build a company in the tech world. Either you are raising or you want to raise or you’re trying to do something that you think will interest investors so that you can raise and the number of companies and entrepreneurs who think, “I like to do this in a different way. I want to raise money in this other way. I’d like to think about alternatives,” is infinitesimally small and that’s frustrating.
I think that even venture capitalists, at least all the ones that I’ve ever talked to would say that VC is wrong for 99% of companies but 99% of tech companies are chasing it, so we’ve created something of a monster there that I don’t think is quite right and I wish that more people are looking to alternatives and I’m happy to discuss these in more detail.
CLAIRE: Oh, my God. I am so interested dig in. It’s fascinating to hear, actually. I have to date, Rand, interviewed maybe close to 40 or some CEO and founders in this series and you were actually the first person to talk about the real challenge a leader faces and thinking about financing their business and how that’s something that you wish you would have learned earlier. I think it’s implicit in a lot of people’s lessons and stories but really, it’s just quite refreshing just to hear. You know, I felt ignorant about what the options were.
I want to sort of rewind here and it’s also, by the way, as sort of a footnote, fascinating for me as the CEO and founder of a non-venture-backed company, too, and it’s something that’s been a company that we’ve been funded by customer profits since day one, since almost five years ago — but an unconventional path, right?
RAND: That’s amazing to hear. Congratulations.
CLAIRE: Thank you but an unconventional path as a software company… I don’t know, maybe we’ll raise money? I’m not dogmatic about it but I’m so curious to rewind and feel like to jump in that time machine and go back to a younger Rand, where you felt like you were in the dark. Tell me like what do you feel like you either weren’t exposed to, whether it was information, or the things influencing you at the time that perhaps you wish you would have been more aware of? Like if you could go back and talk to that younger Rand, what would you be telling him around getting more informed or maybe less imformed I’m not sure. I’m just curious to know what you would say to that younger Rand.
RAND: I think a few things that I would say. One is I had this weird sort of experience. After my last year at Moz, I worked on this book, (The Lost and Founder) and I did some research for it about venture capital. Because I’m writing, I want to be accurate, I want to say things correctly and I realize there’s lots of things that I don’t know about this topic and I raised $28 million from venture firms so it seems weird that I don’t know this.
One of the things that was surprising to me to learn is that venture basically became big in the 70s and 80s when the capital gains tax-worth in the United States went way down. Capital gain sets the one where you hold stock or you own that company or something, then you sell it, you’re only taxed with 15% and 20% today but historically, that was 50% or even 70%, the same as very high tax rates for the earnings and when that was successfully lobbied and came down, then you got the venture capital.
If you think about what is venture capital, it’s essentially a tax-dodge vehicle. It’s a way for people to save money on their taxes. Generally speaking, that is mostly pension funds, endowment funds and billionaires and some people with only hundreds of millions of dollars. They are the LPs behind venture firms, they put money into them and so, when you have a tremendously wonderful outcome, a very, very successful outcome, which is extraordinarily rare in the venture investing world because that’s what we’ll talk about in a sec, most of that money goes back to those groups and one of the weird things that is also interesting to realize is that because of the fact that those folks already have tons and tons of money already, it tends to just sit in there because of money.
If you think about Scrooge McDuck with his tower filled with gold coins and you add $10,000 more gold coins, I guess he can swim a little more for money but that money is not going back out into the economy. Scrooge McDuck is famously frugal and it turns out, that’s true for people with hundreds and millions and millions of dollars. Unless you are plain Brewster’s Millions, you just can’t throw it all away very quickly. Whereas, somebody like you or I, or somebody who is living paycheck to paycheck, that’s another thousand dollars. That money immediately get set goes back into the economy in sort of helps everything grow, helps company get bigger and people be more successful and entrepreneurs have more opportunity.
At the macro level, I think that was my ‘aha’ moments. “Oh, my God. Wait! Who am I helping in the world when I take this money and do an amazing job of returning 10x in capital?” And also, who do I want to help? If I’m going to have another career like Moz that I have to do with SparkToro that’s going to last a decade or more, how do I want to contribute to the world? Where do I want my efforts to be equipped? Frankly, I don’t have anything against billionaires and endowment funds but I’m also not passionate about committing my life to making them more money. It doesn’t excite me. It doesn’t get me out of the bed in morning. It doesn’t make me get, “Yes! Oh, my God. That billionaire needs more.” You know, it’s not that it’s not that interesting but on the other hand, entrepreneurship is very exciting to me. I’m still a capitalist. I’d like a lot of the things that capitalism can provide. I think there’s plenty of problems and I hope those can be more solved but I’m not ready to tear down the infrastructure yet and so, I think that is a big part of why I choose not to raise venture.
Moz was not a home run, to use venture terms but it went from zero to $30 million and now it was around $50 million a year and I think I can reasonably go out and raise venture capital. I could have if I didn’t say the things that I’m saying to you now and talk about this sort of a topic right here —
RAND: — before I reach out and say like, “You’re crazy. Why are you talking about this stuff? You will never get funded again!”
CLAIRE: Maybe, that’s the point. I was so fascinated by this, Rand, and so encourage because one, what I love about what you’re sharing is just, first of all, this desire to know the truth and to know more and to understand what are the options, who am I helping and then, this is related to the second lesson that you talked about, being most important which is: do I know myself or what I actually like and what my preferences are and what I care about? It sounds like you took that second question really very much to heart in starting SparkToro. Can you tell me a little bit about that self-reflection process? What did you do, to even answer those questions as you are about to start SparkToro and thinking about what is this next company I want to build?
RAND: Yeah. A big part of it was saying, “I want to do something that other people are not doing,” so I’ll solve an unsolved problem rather than sort of compete with several companies that were already solving a problem. That was definitely something very interesting to me. That gets me passionate and excited. I like new things. Moz is like this where I sort of said, “There’s no software in the SEO world that can help all these SEO professionals do these things,” and at the time, it was of one-twentieth the size of the industry than it is today but I really wanted to build that and I think that Moz was an early leader and sort of helped inspire a lot more software companies and now there are lots of tools that the industry can use and makes lives a lot easier, makes optimization a lot easier, makes Google a lot more transparent, even if they wish that wasn’t the case.
In SparkToro, the same sort of inspiration where I thought that it was ridiculous that in order to figure out that if you and I start a company together and let’s say we are targeting interior designers. We designed a new set of lighting and we want to approach commercial and high-end residential interior designers and interior decorators and they are the ones who are going to be buying our lights from. I don’t know about you, but, I don’t have a single, lone interior designer in my network. I don’t anybody in that world, so I have no idea how to do go about marketing that. I don’t know what podcast should we go advertise on or try to be a guest on or what YouTube channels they watch? Or what Instagram accounts they pay attention to? Who do they follow on Twitter and Facebook or LinkedIn? What sites do they visit? What magazines do they read? What events do they go to?
All of those things are things that we will have to spend an inordinate amount time in researching or if we’ll pay a PR firm for $20,000 to $50,000 for a large survey of interior designers across whatever markets we want and come back to us with some of those answers and then if we want to update it, we have to pay again.
What I hope to solve was this problem, this problem of either new company or I’m a company that’s been around for targeting new audience, how do I go reach out? Where are they spending time and where could I market to them effectively. My co-founder, Casey and I had this idea that there are sort of enough public web and social data that you can kind of what they do as polling but not actively, sort of behind the scenes where enough people are publicly saying both, “I’m an interior designer,” and, “Here’s all the things that I read and pay attention to and share and talk about on the internet,” and if you get a few thousand of those people, you have a reasonable sample set that you can then say, “Twenty percent of interior designers listen to this podcast, go to this design festival, visit this website,” those kind of things. That was the inspiration for building…
One of the other things, I know that I wanted low risk. I know entrepreneurs are supposed to take risk. I was not really willing to be a high risk. I think the riskiest thing that I want to do is build something new, that doesn’t exist. And that’s all the risk I’m willing to take and so, yeah, we raised some money, but it was a very unique structure. You can read more about it on the SparkToro website. I wrote about our very unusual funding rounds. Basically, we raised money from 35 individuals: angel investors with strange terms, at least in the venture world where in LLC, we pay dividends on our profits. We have our salaries capped until we’ve paid our investors back 1x their investment, and then we all sort of share prorated and profits within the company. If the company’s sold, our investors get money just like normal prorated with their percentage of ownership but they raised a fairly substantive amount for two people working on this project and we haven’t hire anyone. We don’t have any plan to hire anyone until we’ve got some money coming in. We’ve raised $1.3 million in May of last year and so far, we’ve only spent not even a fifth of that.
CLAIRE: What I’m so curious to understand here, Rand, is if you compare and contrast the paths of about $28 million, we now raised $1.3 million and have barely used a fifth of that is in that time, it sounds like, like I was saying, you’ve undergone some big questions, answer them for yourselves and I guess what I’m curious to know is what advice do you have for founders and leaders who know they want to make a shift? That maybe want to change the way they’ve been leading or running their company or running their team. What do you do to sort of figure out who you are and what you care about as a leader? That’s what I would love to know.
RAND: Oh, man. Gaining self-knowledge, you spend a lot of time with yourself, over your life and yet, there are a lot of people who don’t know themselves well enough to make good decisions for themselves, and that is a hard thing. I honestly don’t know how to tell someone to approve their self-reflection process. I think, it’s obviously intentional effort is one part and then deep desire to do so: a desire to I want to make my life better by understanding myself more and making decisions that are in line with who I am and what I want in the world, rather than following a path because it’s there or because it’s a thing that media and popular culture are suggesting is the best way…
One of the biggest reasons I took venture capital, in fact, the biggest reason, for sure that I took it is because I thought I would never get respected as a CEO, as an entrepreneur unless I raised. I thought people in the world would not value what I had to say and everyone will be always like, “You got a nice little lifestyle business,” that’s a common majority that sort of value the culture that uses to describe that had not raised, that they are trying to be Facebook and Google and pardon my language, I think that’s bullshit and I think it’s harmful bullshit. I think it’s bullshit that biases a lot of us to make non-ideal decisions to chase after this golden calf that we are sort of told by all people around us and all the media around us is the best thing in the world.
It sucks frankly that media and blogs and Twitter and startup world doesn’t cover like, “Claire Lew’s Know Your Team made a million dollars in profit this year.” They never see that headline. But if you raise a million dollars, which you now be able to make $100 million, by the way, but if you raise a million, you will be on every headline. You will get all the emails and the LinkedIn connections and people reaching out and congratulating you, and you’ll get invited to all the events and you have this new network of powerful, rich people who think you’re “hot” in startup terms and then your company is interesting. Your life certainly changes overnight in all these seemingly positive — not in a certain a long term positive but seemingly positive, affirmative wins and that was true for me.
For the first company in our space to raise venture capital, my profiles skyrocketed. The company’s profile skyrocketed, people in Seattle took us more seriously. These are the kind of things that went along with that. There are fancy dinner invitations and all kind of stuff.
CLAIRE: It’s so natural for us humans to crave the external validation on the surface and I think there’s a short cut to that there but what I love about your insight, though here is that the anecdote is actually internal and it’s the self-knowledge that sort of shields you or opens the door and says, “You know what? Maybe I do like the external validation and that is what I care about life,” and that’s great, and you pursue that. You so often search for the answers to questions outside ourselves and thinking, if I read this blog post or if I talk to this person/mentor, then I’m going to really understanding the path to take. I just really so appreciate the affirmation that for you making this decision, to start SparkToro in a certain way very much started with this foundation of self-knowledge. I think that’s such an important piece of wisdom there.
RAND: It could be the case that the answers aren’t necessary inside of us but I think the questions are. I think that if we did dig in, and we get to know ourselves, we will know these questions to ask and then we can judge for ourselves where are the answer fit with, what we want and how it contribute in what really matters to us in the short and the long run. For me, one of the things that I’ll say but I think is embarrassing but also true is that I think if I hadn’t been able to raise venture capital, I would have always thought of myself as not good enough.
I’m actually really glad that for Moz, I raised it because I know how I am. I know that I would never be able to successfully convince myself like, “Hey! It’s okay, Rand. That path isn’t a great one any way. It’s not something you would have loved.” That would have not work on me. I will always been chasing it and that’s not a good reason. That’s a bad reason to chase something. That’s an emotionally immature reason to chase something, but at the same time, when you notice you’re stuck, you’re like, “Hey. If I didn’t get this shot, I’ll never forgive myself. Okay. Do it. You got to do it.”
CLAIRE: Right?! The self-knowledge is there and as you said, perhaps the answer is within yourself or even the right answer objectively but the question is there. I think it always starts with like you were saying, asking that question for yourself. Thank you so much for that reminder, Rand, and as always, being so transparent in the choices that you’ve made.
RAND: One more thing I wanted to add, especially for your audience, because a natural question that comes up is, “How did you raise this alternative round? And if I don’t take venture, how can I get my business funded?” The only thing I would say on that front is it’s a very exciting time to not be only interested in venture. There are dozens of new funds popping up that are not the classic venture model. NAVC is one of the best-known ones but there are a bunch more. In fact, my wife and I are being able to help making an investment in one of our couple of these. There are new opportunities and angels are more flexible than ever, even the ones who are on Angelist in a classic world.
I pitched 39 people and four said no and only 35 said yes to this very alternative structure. I think there’s a lot of appetite for people to want to invest in and funds. Different kinds of businesses in different ways. Don’t count yourself out of the game. It’s not impossible to raise money. You don’t have to work two jobs at the same time and try to make your startup your side project and that kind of thing. You can if you want, but you don’t have to do that. There are other ways.
CLAIRE: Thank you so much for sharing that. I know folks who are listening to this, I’m sure taking notes and as always, Rand just appreciate you having such a strong and open voice on the road that you’ve taken. It’s amazing. Thank you, again. We appreciate it at all.
RAND: Yeah. I really appreciated that. Thank you so much for having me.