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:

- 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

- What it takes to identify your most profitable 20% before scaling with outside capital

This episode is ideal for for Founders, Owners, and CEOs in stage 4 of The Founder's Evolution. Not sure which stage you're in? Find out for free in less than 10 minutes at https://www.scalearchitects.com/founders/quiz

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/

Mentioned in this episode:

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Founder's Quiz

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?

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.

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?

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,

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.

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?

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?

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.

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?

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.

Very good, very good. Well, Yarn, 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.

Thanks for having me, Scott. Bye.

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

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