Michael Hyatt, Founder of BlueCat | How to Survive Down Cycles and Get to Product Market Fit

Pablo 0:00 So this episode with Michael Hyatt was a bit different honestly than all the others. Let me know what you think. We didn't do like the normal kind of storyline that we usually do. Michael is a super seasoned founder. He's been in the game since like the late '90s, started a couple of companies. His latest one, BlueCat, recently was sold for like $700 million. So really, really accomplished founder, now turned investor. And we talk a bit about that journey, but we actually spent a lot more time talking about his perspective. Because now he's an investor and so he's got a perspective of the Dotcom crash, the financial crash in 2008. And now the recession we're facing. We talk a lot about what it's like to be a wartime CEO. We talk about comparing the internet boom to like the AI boom today. And at the end he ends with his like number one piece of advice for founders, which honestly is pretty different than what I would've expected. Welcome to the product Market Fit show, brought to you by Mistral, a seat stage firm based in Canada. I'm Pablo. I'm a founder turned VC. My goal is to help early stage founders like you find product market fit. Michael 1:12 So the start was actually, we started back in the '90s. My brother and I when I went to – I graduated from university in a recession. And we actually started our first software company. It was not BlueCat. It was an engineering software company. We started with my dad and my brother, and actually, my mom back in the '90s. And it was a very different time. It's kind of hard to explain what it's like in the '90s to have a software company. Because, you know, the internet wasn't really around. So what you would do, and this sounds really kind of crazy, but you would write software. You'd save it to a disk. And you'd take that disk and go to a post office, which I'm not sure people know what that is either. And you would mail the disk to somebody. And then you'd call them a couple of days later and ask them to put the disk in the disk drive and that you'd be coaching them to install the software. Then you try to do a walk-through over the phone of what your product does. I know that sounds a bit nuts, but it worked. And we actually built a very successful engineering software company. And the world went crazy as the internet was coming in. Prospectively, what's interesting about that time, there was really only 80 million broadband subscribers on the whole planet. Now there's 3, 4 billion. It’s actually far more than that, probably. But then, there wasn't actually that many people on the internet at fast speeds to do anything. And there was a crash, a pretty bad one, around 2001. And after that crash, we decided that the internet was probably here to stay. And if we wanted to lose either our telephone or our email, and we decided, well, we'd probably always lose our phone, but always wanted to keep our email. And we thought that infrastructure would keep going. And so we built BlueCat around needing to build a DNS server for ourselves. And we built it. Instead of spending 20 or $30,000, we built our own, used our own software. And we got to configure it and set up that device so quickly, we thought we could start selling them. Because the data center, they had fired so many people out of the data center because there was so much unemployment in 2001 in the tech space. We thought if we started selling these, set it and forget it DNS servers, it would actually save time and money and people would just really enjoy them. And that's what happened. So BlueCat started. It's not like there wasn't any venture capital. Like now, in 2008, it's just this dearth where you really couldn't get it. So we really didn't start off with any money. I mean, prospectively, we didn't actually raise money until we had revenues of about $5 million. So if you think about that for a second, that's why Richard and I owned the majority of the company. And that's kind of a key learning early, is that if you can sell early and have a high gross margin early enough, which is the key number I think in your, in your P&L and you can carry that out – because a high gross margin means you finally get to a net margin. We were profitable very, very early and we were able to build or VC our own company, if you will. Pablo 3:57 And walk me through – because your first company, it was called Dya – what was it called? Michael 4:03 Dyadem, it was called Dyadem. Yeah. Pablo 4:05 Dyadem, you left that – like you were CEO of that company, right? And 2001, that's when you left over to BlueCat. Who takes over that company at that time? Or how do you do that transition? Your Gross Margin is the key Michael 4:15 Oh, so I was CEO of both companies and I – so an engineering software company and a network compliance company. And then what happened after a while is that they were both really growing. And I couldn't do both. So we promoted a guy named Kevin North, who's spectacular. You can find him on LinkedIn. And he's a great CEO now, as well and a founder. But we promoted him. Basically, Kevin was a childhood friend of ours, literally from age 13. And he kind of built Dyadem with us. And he became the CEO, did a great job. And I stayed on the board. We stayed the majority shareholders all the way through selling that company in 2011. But that was a great exit for us. And that was a really, really nice exit. And then we sold BlueCat eventually in 2017 the first time for 400 million. And then we sold it a second time as a minority shareholder. Typically, our minority holdings was even greater than most founders’ final holdings. Anyways, we sold it again for 700 million, so kind of collectively well over a billion for both companies. And it was very nice because it was all, you know, cap table management. If you think about BlueCat, you know, I find it funny how much money people raised today. Because to get those exits, we raised a total net amount of $27 million, so – to get those kind of exits. So I would say that we did really, really well. We were very capital efficient. But Blue Cat today, you know, it's well over a hundred million in revenue. It has a huge gross margin. It has a huge net margin. It prints a lot of cash and does very well. You can read about it [unclear] acquisitions. And why is that? It's because it's that kind of nice sticky niche business that has a very high gross margin. And I think a lot of companies are just so focused on the top line and getting any kind of growth and sacrificing that gross margin. So if you don't have a big gross margin, you'll never have a net margin. And I keep saying that because I see companies that have huge revenue growth and negative gross margins. And I sit there and I think to myself, well mathematically, they can never be a company. But people don't want to hear that. They want to hear, oh, we're growing. And they just throw up the top line ARR number to you all the time. Pablo 6:19 How does that happen? Like we'll go back and we’ll just jump around here. But like how does that happen, right? Like we've all heard those stories and high level. It's like, yeah, like, you know, VCs get excited. Everybody wants just straight growth. But when I saw that some of these companies that are now, you know, effectively bankrupt like Unicorn, to bankrupt overnight, you know, we're operating a negative contribution margin. Like forget, you know, being profitable. Forget even having [unclear] that's profitable. I mean, you're losing dollars on every single order. You know, you have a vantage point on this as well. How do you think that even – how does a founder allow that to happen? I mean, to your own business, to basically sell a dollar for 90 cents? Michael 6:55 When I see a company go through a massive downturn or go under, I ask one question, where was the board? Because the board is meant to help, you know, brinkmanship, those kind of things. And this is not going to be a great answer. And you probably don't want to hear this answer. But you know, sitting here with interest rates have gone up 19 times or some crazy time, you know, effectively back when all those money – all those companies got funded in 2018, 19, 20, 21, on this frenzy, money was effectively zero. So money is effectively priced zero. So the risk of money – so what happened is that every endowment fund, every software fund, everybody pushed money into private equity and venture capital. Venture capital is typically more risky than private equity. So you push more and more money into it. And if I talk to the average venture capital company in 2019 or 2020, regardless of the pandemic, they were like, “We could raise whatever money we want right now.” Why? Because effectively, interest rates are zero. The price of money was effectively zero. Okay, so what does that mean? That means that if the tap is always on – and no one could even imagine inflation. I mean, we haven't seen inflation since 1981. So no one you know has actually worked in a world with inflation. And no one could imagine inflation. And I'm going to say something – probably I'm not going to be welcome to too many VC parties. But listen, the VCs are guilty. And the boards are guilty in this, too. Because what happens is that they go back and they say, “Look, we just did another up round. Look at the revenue raise on this company.” And then they'll do a multiple of that revenue. They'll do another raise. And then they'll write an IRR. And they'll write an MOIC number to it. And they'll tell everybody. And they'll raise another fund. See, I see a little bit of a conspiracy going on where I think that a lot of the VCs probably know that they probably have to fix the economics, but I think they think that eventually that'll fix itself. And you just keep growing and you do so much land grab and – by growing revenue. And you buy that land grab with a negative gross margin or no gross margin that eventually maybe [unclear] strategy that it actually comes out. In that meantime, they show these multiples and these massive multiple jumps and people will fund their next fund. And they do it through a kind of a – they're under a game of applying these assets. And I think they're thinking that they can always raise money for these companies that are going from 25 to 50 to 75 million in revenue. Why not? You know, what could go wrong? But if you run into a world where money now is expensive and you know, you have all these interest rate rises – and by the way, the FED, as we're having this podcast, says they may raise rates two more times this year. That now makes it so that money is in competition with equities and in competition with everything. And it's very expensive to fund a VC right now, or fund a private equity deal, or get debt, or get leverage or get anything. So unit economics now count more than anything. And I think that there seems to be an understanding, I think, across the industry where, you know, unit economics really do count. And it really does matter what you sell that widget for. I mean, I sit down at pitches still that talk about doing something for free and grabbing landmass and having eyeballs. I've actually seen those pitches as late as last week. And I think these people just don't understand that those aren't businesses. Pablo 10:21 Well, that's the question, right? Because like, you know, bringing it back to the founder, I mean, I can understand how everybody gets ahead of the game. And frankly, like the whole system – you know, at the end of the day, the LPs, you know, in some cases, are managing somebody else's money. So like they're happy with markups because it makes them look better. The VCs are happy with markups. It makes them look better. It all kind of – so I buy into that. The thing is, you know, so you're a founder. So I was talking to this founder. And I won't name the company. There's just no point. But it’s one of these kind of close to 100 ARR, you know, one to zero type companies. And they were like, look, we had two KPIs. One was top line growth, which we crushed by the way. And the other one was customer satisfaction, which we also crushed, right? And that was the thing. And all of a sudden, the world changed and you know, everybody cared about like gross margin all of a sudden, right? They cared about contribution margin all of a sudden. And we just couldn't make the shifts fast enough. And they're the ones that bear most of the burn, right? Like yeah, some VC’s portfolio is going to be impacted. Some firms are going to go out of business. But many of them will probably weather the storm and find a way and whatever. Like as a founder, how do you resist that urge, that temptation when – like today, it's easy because nobody's going to fund that anyways, right? But like when the things get hawed – because you've been there in 2000. You've been there in 2007. You've seen it now again, like – Michael 11:36 Well look, Watch out for dilution Michael 11:37 we, we were driven by not raising more capital to not dilute, to have an ownership share. So what people don't get about my brother and I is that, you know, people say, oh, you had a 400 million exit and a 700 and this and that. And those are big exits, right? But that's not the question. The question is, how much of that company did you own? I can show you people with a $2 billion exit that made less money than me. In fact, most of them do. The average founder exits with 3 to 7% of their company. You know, so we understood that math very early and we understood a second piece of math, which is it's way, way harder to sell your company for over a billion than 40 million, you know? And if you look at just a normalized distribution of sales of companies, most companies sell between 50 and probably 300 million. I don't know. I'm just making that up, but I guarantee I'm – Pablo 12:22 It's true. I think it's 90% of companies sell for under 100 million, so definitely. Michael 12:26 Yeah, I'm probably being gracious in my numbers. But if you take a look at the tech companies that are VC-funded, a lot of – there's a great saying in real estate. And I'm going to put it over to tech, is you make your money on the buy, not the sell. Meaning that you make your money when you – on the entry price, not the sell price. And there's a lot of times when I partner with VCs that have actually chosen the right founders and the right companies at the wrong price. And they'll get a return, just not what they think. So at the end of the day, we were very dilution sensitive. So we were the governor. And we would argue with the board all the time. We were pushed all the time to take more money on and grow fast. But we didn't think we had a better use of that capital to grow faster and just dilute for nothing. So we never did it. We actually got so profitable at BlueCat early that we actually ended up buying out shareholders and actually making – owning more of the company. I own more of the company at certain years than I did before. My ownership went up, which is extraordinarily rare. Pablo 13:21 And what's your thinking on – because like there's two ways to play this, right? And I've seen both go wrong. One is like not taking the money when it's available, you know, leaving money on the table sort of thing, only to then realize you needed it in the worst of times, right? And then the flip side of it, though, is raising money just because it's there. All you've really done is – and especially big money, right? Like 10 million plus, 20 million plus, adding to the prep stack and having no clear way to spend it. And so you've just become a bloated company that isn't growing any faster than before. And you know, if you were to sell for 20, 30 million, you might make zero as a founder, right? Like how do you think through that? Be honest with yourself Michael 14:02 When I say never, pretty much never heard a founder say, “I raised too much money.” And that's because I think what happens, they raise that money, then they find a home for it, which is probably the mistake. And I think that like people have to be much more honest with their company. Will this company ever create a net margin? And I think that's, you know, that's incumbent upon us all. Like can you go out there and lend money at a loss, and eventually get there to profitability? I don't think so. And I see a lot of like startups doing these kind of micro banking lending money. And I'm just like, the reason the banks don't do it is they were taking a 60% loss. And that's why they don't touch it. I mean, there's a lot of those kind of things. There's reasons why companies don't do certain things and the big companies don't do them. But what I would say is that you should have a – like if you raised $10 million and you have a way to accelerate your revenue from 50 to 80 million at a better gross margin, then it's very cheap money. If you are going to accelerate your revenue at a falling gross margin, you've probably bought that revenue, which is probably not going to work. I think, the kind of rule is, when you hit about 70 million as a software company, you're completely of scale. At 70 million, almost every private equity company will look at you to maybe acquire you. So here's an interesting conversation that a lot of people don't have. At 70 million, you would probably say most companies are trying to do rounds at a billion, some kind of huge number. But remember, if I put it, go at a billion, I have to get at it 3 billion. I just want to ask you to do the math on how many companies exit at 3 billion anywhere in North America. It's so small, you can't even find them. Now, after a billion dollars to exit in North America or anywhere, really, you have to really either get acquired by Thoma Bravo, Vista Equity Partners, one of the big private equity firms. And the reason they acquire you is that you're 70 million going to 90 million or 100 and you have 20, 30 million on the bottom. And they find a way to expand that bottom line. They put an equity check in. They put debt in. And they pay the debt with your [unclear]. And there's a rule by the management. Those are the three components. Any company that gets bought by those companies for a billion has positive cash flow by 70 million, okay? I mean, they may have zero cashflow, but they're growing at such a fast rate. They're taking off, whatever. But you're talking like you got to be going from 70 million to 120 or something, if you have no cashflow. But most companies, any company that doesn't get acquired by that – and a very, very few proportion will get acquired by the big, you know, Ciscos and Googles and stuff like that over a very strategic reason where the revenue never mattered anyway. Like they'll buy you for some number because that's what it’s worth. Like WhatsApp got bought by Facebook for 19 billion because that's what it was worth to them. It's a very rare case scenario. And for everybody else, for you to get over a billion for your company, you’ve got to go to Wall Street. Now, here's the rob. When you take your company to Wall Street, and we saw it classically with WeWork. You know, they thought it was worth 45 billion. It was worth 4.5 billion on Wall Street. And actually, now it's worth, I think, like 500 million or something. But they moved the decimal. Because the people on Wall Street, these guys and girls, they don't have the rose-colored glasses of Silicon Valley. They have, hey what are you doing? You're leasing out some space and you're hedging the two leases? You're not a revolution. You're [unclear], right? Okay, we have one of those over here. And New York Stock Exchange, they're worth 3 billion or 4 billion. You know, that was literally the conversation. So whatever you think of your company, when you go and do a raise of 300 million in valuation, you have to like – to get 3x, you somehow [unclear] close to a billion. And that's a very hard number to achieve. And I don't think people appreciate that. It's far easier to have a lower valuation with a lower revenue with a profitability, and escape with a higher amount of money for your investors and you. Pablo 18:14 So let's bring this back down to like the pre-product market fit founder, who – here's a classic scenario, right? What I was alluding to, which is you're – I mean, everything you're talking to, just remove a zero sort of thing, right? So you're pre-product market fit. You don't yet have, you know, figured out, this is the thing that's going to – like this is the pedal I can press on to grow faster. You don't know that yet. And this happened all the time. Now it's not happening as much. But it certainly happened in the last two, three years. You feel like you can raise 10 million bucks, or people are knocking on your door trying to put 10 million bucks. Do you take it or not? Like what's your thinking on – because here's a reality, right? Like you can put it in the bank, but you won't – you're going to spend it, right? The beauty of land and expand Michael 18:55 Well, look, I've actually seen founders take the money and not spend it. And I think that if someone offers you [unclear] like that. If someone offers you 10 million out of pre-money of 40 or 50 million and you have no product released yet, I mean, those guys who just – at Mistral or something AI had just raised a hundred and something million with like no DAC and no employees, good on them. Now, there are other utter geniuses who are going to understand how to just take a pause and figure out the company without hiring like drunken sailors and spending that 10 million a month or whatever. And if they do that, they're going to do really well. They just happen to be in a space that moves very quickly. So they don't really have the time. But if anybody offers you that kind of money, you should take it. But that shouldn't have any application to how you spend it. Because what you should be doing is figuring out, do I have a product? And like the decider of any company isn't the founder and isn't the VCs. The decider of any company is the client. If a client buys your product and there's a land and expand, you probably have a company. Like when we go and sell to a big Telco or a big blue chip company, whatever it is, those companies are very competitive in the sense that there's a million people trying to sell to them. If they buy your product, there's something. But if they buy your product, and then next quarter buy some more of your product, you probably have a company. That's the biggest indication you have a company, land and expand. For instance, one famous land and expand story in tech is probably Oracle. Oracle basically licenses their software somewhere in a company. And then they just watch it get littered throughout the company. And then they build them more money. It's incredible. That's how Larry Ellison did it. It's brilliant. But that's one of the best land and expands you've ever seen. And that is the key thing. Are the dogs eating dog food, or are the people drinking the champagne? That's what matters. What doesn't matter, and this is something I'll bring up for you [unclear], I see a lot of founders on LinkedIn going to all – they essentially travel North America going to these founder events and this stars investing and the – Pablo 20:50 Conferences, man. Michael 20:50 Man, we party here and conferences, and they're on stage. And they take a photo of so-and-so on stage. And they're at this. And they're meeting. And they're networking. I think 90% of that, 99% of that is a waste of time. I think you should work on your product and sell your product to a company, [unclear] and expand. Every meeting, every marketing, I mean, every rooftop party you're going to is just – just count it as a vacation. It doesn't matter. You know, people are doing, you know, like, you know, victory circles when they get funded. You know, when my brother and I would get funded, we – you know, people have these big parties when they get funded. I'm like, I feel almost a little bit of shame. Now I have to perform. I'm on the clock. I don't have time to like have a party about it. A party will be when I land a great C-suite person or a big client, mainly a big client or distributor or whatever. Like sales is what you should party about. So I see a lot of people probably doing the wrong things. And all that matters is your product, product in company and doesn't land and expand. Nothing else really matters. Nothing else matters. Pablo 21:52 I think that's right. The other thing that we were talking about was, you know, because you went through two companies, the founder during Dotcom, during the financial recession and then now kind of on the other side, what are you seeing found – like, you know, the founders that are – you can't control macro. Whatever happens, happens. So the founders that are reacting appropriately to the changing climate, what are they doing and what are the other ones not doing? I'm sure you have both in your portfolio. Michael 22:19 The ones that are getting funded versus not? Pablo 22:21 Well, the ones that are properly reacting to the changing climate. I mean, what actions are we taking versus the ones that are, you know, still acting like it's 2021? Hope is not a Strategy Michael 22:30 Well, okay, so the biggest thing I see is – I feel bad because I always feel like the guy on the board or the guy – people call me for advice. And I give it to them, and I feel bad. Like Michael, like just shut up and don't say anything, just – like a lot of people just say, “Oh, you're awesome, man.” Maybe try some things and have a coffee and they leave, right? And I can't help myself. I'm just kind of barfing up what I really think. And I think that most people have hope as the strategy. And the strategy is look where this, they've been told for a while. And they've raised all this money. They've got these great investors. But things aren't going that well because of this and that, but hope that they're going to, hope they're going to – and I'm like, “Listen, the reality is, you're going to be out of money in this amount of time and you probably – you know, there may be no rescue party.” And the truth is that if you – I think we said this last year. If you couldn't get to kind of cash positive by end of 2023, you might be very challenged. As we're having this podcast right now in June of 2023, the price of money is going up, not down. I mean, inflation is cooling. But the FED, to make sure that inflation gets to 2% – you know, we started at eight or nine. And now we're down to four or five. They're going to stamp this thing out to 2%. So how do they do that? They raise the price of money. And they raise interest rates until they strangle everybody. And here's what people don't want to hear, is that they don't want you to go on vacation. They don't want you to buy a car. They don't want you to buy a house. They don't want you to overspend. They want to cool the economy. And that means cooling your company, cooling people buying stuff from your company. And when, in the top of the food chain, the money supply starts to slow, it slows to the sovereign funds. It slows to the private equity. It slows to the VCs. VCs can't raise funds. It all slows down. And that's what the FED wants. And what the US FED wanteth, it'll happen. And that's what's happening in this situation. So the hope that suddenly they're going to start cutting rates in September and everybody's going, yeah, let's just – everybody spend again and revenue's all that matters. I don't think so. I think that party will happen because Wall Street has a very short term memory, 2025, 2026, right? But they're going to cool. Like believe Jerome Powell, the head of the FED, that says, “I'm going to cool this thing.” People say, “Ah, that doesn't really matter. That's the FED. I'm running a company.” I'm like, it matters because that's – you are not going to get more money easily. What do I see right now? I see people getting money at 3x liquidation prefs with 30% cap discounts. I see this, this, this. I see money getting like punishingly difficult, structured products. I don't see many people just putting in money to a company. They're going to structure the product. They're going to take the press stack. And what does that mean to you as a founder? Your little common shares are so low down on that stack that, if you don't sell for that big number, those common shares are worthless. They're utterly worthless. And they will get eviscerated fast, like that. So you should always be mindful of what you sell your widget for. But I'm telling you, there is no cavalry coming right now. Because even though inflation is cooling, FED, for the next, I'd say, one more year from today is going to stamp out inflation, which means that they're not rolling over bonds. They're doing quantitative tightening. They're not making this thing happen. Canada just woke up and realized maybe we’ve got to start raising interest rates even faster again. And I think there's a lot of noise right now about our banks and the housing. And they're going to start raising it faster. So we could see a five and a half in the US or higher, and same thing in Canada. And that's going to cause some massive shocks in the system on purpose to cool the economy. And that's going to cool your company. So if you can't get to cashflow positive, you're going to have to do some very fancy things in your company to raise any kind of capital. And it's not just you. It's all of us. It's your VC. It's, you know, everybody you can imagine in this ecosystem. But hope should not be your strategy. And you know, if you have a high burn right now, I mean, I don't know what to say to you. Because you've been warned all of 2023, you know. Pablo 26:24 On that, do you think founders that you're seeing – like do you think founders in general are cutting hard enough, fast enough? Michael 26:31 Yeah, so the short answer is, I think on average, no. I think what I'm seeing is that – what I hear, and this is another mistake I think founders make. What I hear is this. You know, if I cut too hard, it'll change the feng shui of my company and the vibe. Pablo 26:45 The culture, man, it’s – Michael 26:46 The culture, man. Pablo 26:47 Oh, don't get me started on that. You know what it is – you know what it is, Michael? I think founders, especially first time founders, think culture means happiness. Are my employees happy? Like is my survey score 99? That's not culture. I mean, pay everybody 2x, everybody's going to be happy. But what have you done, right? Nothing. It's Not About Who Goes but Who Stays Michael 27:06 Well, it's a little more than that, though. It’s this. Let me just make it, again, abundantly clear. It's not about who goes. It's about who stays. And let me tell you something. Your culture is really going to suck when you have to like fire 75% of your staff and cut the rest of them 10 to 20% in salary. Because every quarter that goes along, your cut's going to have to be deeper. But you know, everybody who's made a big cut, I hear the same thing. They have a big cut. They get everybody together and say, “Okay, bring everybody into that hug and let's get there together.” They say everything [unclear] fine and they probably should have cut earlier. What I do hear is they get worried about culture and upsetting their friends and stuff like that. But you're going to have no company left. There's a lot of bodies on this road right now of people that – if I ask the companies that have gone under now, “What would you have done differently?” Like ones that have filed for bankruptcy, they would've said, “18 months ago, I would've done massive cuts.” They would've done the hard things that they were worried about how they would look, or what The Globe might write, or [unclear] might write or whatever. And these things don't matter. What matters is you protect the mothership. And if you don't protect it by making the cuts, I would say – I'll give you an indication of how far you have to cut for a lot of people. When the secondary market to buy shares from companies right now is averaging [unclear] secondary deals all the way from 40 to 60%. Let's call it 50. That means that people are buying shares at 50% of the last NAV all the time in secondary offerings. Now, you’ve got to think about what that means for that share price and where you really should be, right? If I was sitting there and I was burning cash, I would say the calvary's not coming for at least 12 more months, maybe 18 months. So you’ve got to get to cash positive. And that might mean that – let's say you're a $10 million company losing 3 million a year. I would rather be a $7 million company making $1 to survive this desert, this apocalypse, than be a $12 million company and go wonder. Pablo 29:01 That's right. Michael 29:02 Right? That's it. That's right. You've got to survive the desert. Survive the desert, protect the mothership and the culture you'll be known for is – by the way, it's very easy when things are easy, you're raising money, to get high fives, and leadership and go on all these retreats. But when things get really tough like now, this is where leaders are made. And leaders are people that are – they bring their staff in. They're honest with them. They're upfront. And they just say, “Look – like treat your staff like an adult and tell them where you're really at. Ask for their help. Lean in. Bring them into the problem. And they'll go, “I get it, man. I get it.” And by the way, they're not your friends, right? These people have husbands, wives, kids, mortgages, minivans. Like they depend on you. So don't lie to them. Don't hide things from them. Bring them in. Be truthful. Be honest. Be upfront. Be transparent. And I think that they deserve that. When you get the bad reputation and should be called out for is when you lie and you move around. Don't tell them everything, and then suddenly you shut the company down on a Tuesday and you lock everybody up, you know? And that's going to happen to some people. Pablo 30:06 And I don't -- Michael 30:06 I don’t think they're serious enough. Pablo 30:08 I've gone through like – I was on the other side, obviously before, as a first time founder. It's just so hard to do this because you spend so much time hiring these people in the first place. Last thing you want to do is fire them. But I'm telling you, I mean, I did – we did like this kind of death by a thousand cuts, right? It's like, okay, let's just do 10%. I know it's not enough, a month later, right? And every time you're telling them, “Oh, it's just one time.” And then now it's the second time. And then it's the third. Now nobody believes you, right? Versus just saying, “Okay, what's going to be the one thing I can do, one action that after I do it, I'm very confident, gives me a runway to either cash flow positive or at least like a seriously long runway to kind of get there?” And just do that. Michael 30:49 I remember in 2008 – and people don't realize – a lot of young founders don't know this because they weren't really founders then. But that's when literally it was very frightening because we actually thought money was going to stop out of the bank telling [unclear] – it was that close, right, to shutting down, AIG. Like it was an utter catastrophe. But they cut rates to zero and pumped liquidity to the market and saved everybody. But when that happened, in that six month period where we realized there was no cavalry, I remember I cut BlueCat from 120 to 80 people overnight. And people called me extreme and all the rest of it. And I remember that this new CEO that I brought in, this guy Jack, real nice guy, older guy, to help me out. He said, “Wow – this is like a couple of quarters later. And he’s like, “If you didn't do that back two quarters ago. Wow, you saved the company.” I'm like, “Yeah.” Pablo 31:37 That's the difference that I'm seeing between the founders that are acting – like even before the board meeting where I was probably going to be like, hey, they just already did it, right? And it was big. And it was just like, okay, I – this person's just on it and this person understands that – and it's not like they enjoy doing it. Everybody hates doing it. It's just like there is no other way. And the risk of the company's too big. And the best people will get it. As long as you are upfront about it, you do it the right way and you do it early enough, by the way, to have a clear story where you can go to the best people that are left over and say, “Look, now we've got 24 month’s runway. Now we've got, you know, path to break even so you don't have to worry anymore.” Like okay, that's compelling. Michael 32:21 Yeah, we got profitable fast. And then we got really profitable later on. Because BlueCat was a slower grower. But my God, did it print out a lot of cash, and wow. And all that cash is doing now, it's buying companies for cash. So it's actually growing inorganically by using its own cash flow, which is the biggest compliment in the world, by the way. I'm very proud of that team. But you know, always remember that, if you want to know what you should have done, go talk to the founders that lost their company. And they'll tell you what you should have done two years ago and they wish they had. And they will all say, I thought my investors were going to be there for me. I'm like, you know what? I think that's very cocky. Because investors are not there to put in more money because it's you, right? Money is competitive. They've got to put it into certain companies or a lot of places they can put it. And they can't just say to their LPs, “Well, we just gave them more money.” And they have to put that money responsibly into places that they think they're going to get a return, right? They just can't be there for you. That's not the way it works. That's very naive. Pablo 33:25 I agree with that. Let me touch on one final segment maybe just for a little bit. And especially because you went through Dotcom as a founder. You had a company. You started another one kind of in the tail end of that. But you know, now we're going through this AI thing, right? And just like, in my opinion, like the internet, like there's real promise here. There's real stuff that's going to add serious value. There's also tons of hype, and interestingly enough, tons of money. There's no money for anybody else. There's a lot of money for AI. You know, drawing back on your experience, going through, you know, the birth of the internet, any thoughts on that? Like the sort of things that are worth going after, the ones that aren't, you know, lessons learned? AI is Big and Profound but it's Not There Yet Michael 34:03 Listen, there are going to be 1 million AI companies. And there are going to be very few that make it. And the ones that do are going to be very profound. The next Facebook will be an AI company. I guess that's Open AI. I don't know. Like when I say that – and that big quantum, big company. But let's go back to basic principles. You have a widget. And if somebody buys it, and they land and expand and want to use it, right? Most of the AI stuff I'm seeing, okay, grant it, it's early, isn't really that useful. It's kind of like a cool party trick. Someone shows you a little magic trick at the show. Like, ah, it's kind of cool. Like they all look like party tricks to me. Like they make a, you know, an Avatar talk to you or. Or they show you how to write something, whatever. I think all that is table stakes. I'm talking about going back to Peter Thiel's book, which I think is one of the best ones for founders, Zero to One, and say, okay, you're making a claim that you're 100% better, not good enough. It has to be 10x. It has to be 10 times better. Because at 100%, you can quickly get to like 10% after, you know, it chums down. What do you do? What secret do you know that other people don't? And does your product make something 10 times better? Why has crypto fundamentally – people are going to get mad at me for this, really kind of failed? Why has it failed? Because it didn't squash Visa, MasterCard. I remember all that stuff, it's going to ruin Visa. Like Visa is much bigger. Like it's going to come in and change the dynamic of how we trade money. It's so small. Crypto is so small, it doesn't matter all. But Bitcoin and BlackRock is coming in. Yeah, okay, at the end of the day, what it didn't do, is crypto didn't come in and say, “I am going to fundamentally change something by a factor of 10x.” You could make the argument that rare countries like, you know, Venezuela and hyperinflation, it's good for them. Fine, but that's not where we live, right? You haven't given me a case study where me, you and everybody you know in Canada can just do something on the blockchain that is 10 times better and so much cheaper. Like now I'm going to start taking UberX over a cab because it's easier and cheaper. Like you didn't show me that, right? So AI, show me something, show me AI that comes into my life and I'm just like, I don't need to do that anymore. I mean, obviously, you don't have a clock radio by your bed because you have one of these, okay. You know, you can use a level if you want. You can use a flashlight if you want. Look at all the things. Yeah, I pay a lot of money for this. But it has a lot of things in it. There's a lot of – clock radio, there's a lot of things in this, right? So I'm just asking you, when you think about AI, show me something it can do. And I'll give you a couple of examples. In the world of medicine, it's going to read radiology charts better than a radiologist and a million times faster, and for 1 cent. That's a winner. That's a winner. How about in legal? You need to write up a factum, or a lawsuit or resolution. It writes it for you. It's not perfect. But then I give that to a lawyer. And instead of 50 hours, it's going to take three hours. That's a winner, okay? Like accounting, same thing. Like show me something it does that's 10 times better. And then I'll show you, okay, that's a company, right? Like you know, you look at these companies like that can come in and do customer service through AI and chatbots like [unclear] in Toronto. Like can they come in and really take out the customer service and all the people and then make it 10 times better and faster? And I think they're on that path. And I think, well, if that's the case, then that's a winner, right? It'll dramatically change – I can do something different. So the promise of AI is only worth it if it changes the paradigm and changes the cost center by a factor 10. It has to break the center. Uber broke the taxi dispatcher. That's what it broke. So you’ve got to break something. And saying all that, I believe that the large language modules that you're seeing are running on, you know, supervised learning and all that kind of stuff. And I think that there's a lot of stuff coming from reinforced learning that's going to even better. I still think, and I just went to the Creative Destruction Lab last week, the super session. And I'll give you the – they had the world leading experts on AI. And I'm going to give you the summary, their summary, on AI today. The summary is this. It's big. It's profound. It's going to change everything. But we're not there yet. And I think that's the truest thing I've seen. I mean, you have to get to like Chat GPT six or seven to make it that awe, inspiring version. We're still mucking around with the yearly iPhone and the yearly iPod and the wheel. But it's going to get there. But we need one or two more years to really have that germination. And that's what I think – that's what we're looking at right now. So remember the 10 x concept. And remember AI will change everything. We're not good at – as Ray Kurzweil says at Google, we're not good at seeing things exponentially forward. But we're not there yet. We will get there. It will change everything. And I do believe AI is going to dramatically assist us as humans in getting a lot of things done in medicine, and law and in cybersecurity. Everything we can imagine is going to change. And it's going to take time. And there's going to be some winners, mostly losers, that just try to kind of, you know, [unclear] something together from Chat GPT, you know. When I hear like, you know, we're the Uber of, or we're the Chat GPT of, then I already know that maybe we're in trouble in that conversation. Yeah, I mean, like look at blockchain like. Like blockchain, for example, is really useful. But that should be like using Excel. It should be just something you're using to get somewhere. Like AI is really useful. But that should just be part of the story to get there. Pablo 39:31 That makes total sense. I what I will say, maybe just ending on this note, like we've talked a lot about how times are tough, and all the sort of like it's kind of wartime right now, and all the tough actions you have to take. I will say, on the positive front, we are in a unique time. It comes every 15 years, right? You could look at mobile, the internet. What's happening with AI and what's going to happen with mixed reality inevitably. We can talk about timelines. But it's going to happen because Apple is getting in the game, is a huge opportunity for the founders that are active today and can play a role in truly game changing companies versus incremental ones, right? Which I think, you're – you know, you're inventing in 2015, 2016, you can't ride any massive waves. Whereas you can right now. You could have in '08 and you could have in the – you know, in the '90s sort of thing. So anyways, it's been great. Great having you, Michael. Michael 40:21 I think you're exactly right. I think this is another quantum shift moment. And quantum, by the way, is going to be very big. Just not yet, but it's coming. But it's a very, very exciting time. And I'm a super optimist. I think the world is getting dramatically better. When you step back and you stop looking at four-year electoral cycles but look at it as a decade, you know, everything's going up to the right. The world is getting dramatically better. I mean, would you like medicine from today or would you like medicine from 2040 when you go to the hospital? Of course, everybody listening to this says 2040, but why do you say 2040? Because you know the world is getting better. So the world is getting better. So be an optimist about that. From the tough time in this market, things will regulate. And I think we're going to great create some great founders and great businesses. Because the ones that make it through this time, the profitable businesses, I think will be superstars in the later '20s. Pablo 41:12 Let me ask one last question because I forgot – almost forgot to ask it. If you could go back to your early days as a founder, Dyadem days, maybe early BlueCat days, with one lesson, what might that be? Don't Confuse Building a Company and Having a Life Michael 41:26 Don't confuse building a company and having a life. I was very blessed in my life, late in life, to have three beautiful daughters. But I had them late. And I was always so like, when I get to here – okay, here's a really critical lesson. There was this really famous author that went – this is back in the 18 hundreds, went to one of the richest man's homes. And somebody said, “Oh, look over there. There's the richest man in the world.” And his comment was, “But I have something he doesn't.” And he said, “What's that?” He says, “Enough.” And the interesting thing about this conversation is that what we do as founders, you say, when I get my first this amount of money, when I get to this hill, I'm going to stop and then have a life. No, then you get to the top of that hill. And then you say, “Oh, look at that hill.” You go to that hill. And then you get to the top of that hill. And there's less people at this hill. And they're like, well, I should – oh, then you see another hill. And you keep going. And time flies. And you conflate two things, which is building and making money, and having a life. The best founders, I think, can balance those two things. Having children is not for everybody. I was very blessed to have three children. I had twins like late in life. And the universe just allowed this to happen. And it's the biggest blessing of my life. And it’s intense amount of happiness in my life. But I was always very worried about, you know – back before the pandemic and stuff, our badge of honor is how many air miles do you have? Like, what's your grade on the air mile? Do you have the elite, super elite? What's your badge of honor? You know, it's stupid. And it never really mattered. And we had the wrong priorities. Remember to live a little. Remember we're not here for long. I'll give you one last lesson, which is – I think is important, I'll part for everybody, very personal to me. My father passed away this year. And he was in palliative. And when you go to a hospital where they allow you to die over there, your last weeks, what you'll see is 20 different rooms and 20 people dying. And they all have the same mattresses, same bed sheets, same everything. And the wealth of a man, of a person, is purely measured by who's visiting. That's it. My father was an extremely wealthy man because he had so many people coming to visit, these three sons and all these grandkids, all coming in. They had to kick us out, give us a private room because we were so annoying. My God, he was the wealthiest man on that floor. That's how you got – you entered naked. You're going to go naked. And you have the same bed sheets as the next guy, and the next. You couldn't tell who had a dollar, who had a whatever, you know. And prospectively, on life, you know, your wealth will be measured by the relationships you make and the happiness you create out of that. You're going to make money. That's one thing. But don't conflate, you know, those two things. Don't wait to have a life as a founder because you kind of do that too often. That's my biggest piece of advice.