Building A $30M Business Without Debt (The Lean Approach)

Prioritize a low debt business model to keep your life calm and your company in your control. Most entrepreneurs feel pressured to take on massive leverage, but the Nextiva founder argues that staying lean offers a strategic advantage. We discuss why choosing self-funded growth allows you to make decisions based on long-term sustainability rather than lender requirements. Choosing the right business tools, such as reliable phone service, is critical for operational efficiency. By selecting cost-effective solutions, you can maintain healthy profit margins without compromising on quality or service reliability. From Marketing School with Neil Patel and Eric Siu.

• 0:00Speaker 00

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• 0:34Speaker 01

  I'm gonna actually share a piece of advice for any self-funded entrepreneur. I got it from a mutual friend of Eric's and mine. His name is Yaniv. He runs a company called Nextiva, which is a really good phone service company. So if you have a sales organization.

• 0:48Speaker 00

  We both use them. We both use them.

• 0:50Speaker 01

  Yeah. And yeah, we've been using it for a long time. I, I, I use them not because it's Yaniv. I use them because their pricing is good. That sounds bad.

• 1:00Speaker 00

  Which is, which is because of Yaniv, so.

• 1:03Speaker 01

  Yeah, well, no, the company overall just has good pricing, right? It's not because of our relationship. It's just their pricing is good.

• 1:08Speaker 00

  I know, yeah, exactly. But it's because they, they care about their people, but continue.

• 1:13Speaker 01

  Yeah, so, um, you know, Eric's a self-funded entrepreneur. I'm a self-funded entrepreneur. A lot of you guys listening are self-funded entrepreneurs.

• 1:24Speaker 01

  And as a business, as you grow, debt is a good thing. You know, you can use it to spend more money on marketing quicker if you know your profitability is there, but it takes you six months to get. That allows you to float some of the things like that, right? Especially if you know your numbers. And my debt ratio is extremely low. Whatever my yearly profit is, our debt balance is much lower than that. And we have more cash in the bank account and I can pay it all off tomorrow, right? With ease, I wouldn't have to worry about it. I wouldn't have to start shifting money around from bank accounts. You know, just to give you a perspective, it's very little debt. And Yaniv has been an entrepreneur for a long time.

• 2:06Speaker 01

  I believe their previous business was Endurance International, which was publicly traded and then got taken private, made a killing from that. They owned, I think they owned SiteLock back in the day, right? Like the SSL certificate before SSLs were required and GoDaddy or all the big hosting providers were selling their SSL certificates. So they, these guys made a killing. They're serial entrepreneurs. Nextiva is massive.

• 2:31Speaker 01

  I believe it's, it's public. They ended up raising money from, uh, was it Goldman or someone like that? Right? And they, they raised money a few hundred million bucks, if I'm not mistaken, and it was public. I think it was, uh, somewhere at a multiple billion dollar valuation.

• 2:47Speaker 00

  Here, I'll give it to you right now. It's Nextiva raised 200 million in its first external funding round from Goldman Sachs Asset Management in September 2021, achieving a $2.7 billion valuation.

• 2:58Speaker 01

  There you go. So really successful. Think about it. Grew a company to being worth this, and this wasn't his first company, but his current company, Nextiva, to 2.7 billion in value. Before taking outside funding and this was their first check. Now, this company has been around for a while now. I know it's more than 15 years old, if I'm not mistaken. It's getting close to 20, right, Eric? And he's nodding yes. The feedback Yaniv gave me, which I thought was some of the best feedback. He's like, dude, you can take on more debt if you want, three, four, five, six times. He's like, but your business is big enough, right? He's like, yeah. I'm like, yeah. He's like, is your life good? I'm like, yeah. He's like, do you really have much stress when the economy goes down or up?

• 3:43Speaker 01

  I'm like, I stress out that we're not doing as good as we can, but I don't really stress out like for money or worrying about bills or anything like that. Like, life is pretty chill. And he's like, if your stock portfolio goes down a lot in a, in a day or a month or a year, do you worry? He's like, no, life is pretty much chill. He's like, then why take on 5X or too much debt, so 5X profit? And have to worry about payments and have to worry about changing your life and figuring things out when times could potentially get really bad and dark. So he's just like, it's better to just live a chill life because you don't have investors. And he's like, that's a better way to operate than pushing for, you know,

• 4:26Speaker 01

  doing 5X leverage and trying to create this multi-multi-billion dollar company that could go public. And he's like, look, if my company, you know, going public is a pain, he's dealt with it. And he's like, if your company gets to be worth a lot on its own, great. Maybe you get to billions of valuation without ever having to deal with people and it just takes a little bit longer. Or maybe you're big enough right now and you don't have to worry and life is just chill and that's okay too. He's like, you have optionality. But the moment you take on too much leverage and your entrepreneur being like, I'm gonna acquire three businesses this year and you're pushing yourself to do it. It adds a lot of unnecessary stress and pressure and if something goes wrong, you can pretty much lose it all.

• 5:06Speaker 01

  And most entrepreneurs are optimistic and you have to be a little bit delusional and optimistic. Whether it's with your marketing or how fast you can grow. But the moment you start missing numbers and you spent too much and you're over-leveraged, you're now beholden to someone else who can decide the fate of your company.

• 5:23Speaker 00

  Yep. So here, here's what I'll say too. Let's just think about it from simple, let's think about your stock market portfolio, okay? So if you take five turns of leverage on that, okay, so 5X leverage, right? What, if your stock market goes down 20% or so, or your stock portfolio goes down 20%, remember, that's multiplied by five, right? So you have to grow by a hundred percent, right? So just keep that and like, it's very hard to do, okay? And that's why when you think about situational awareness, that's how they kind of got in trouble, right? They took, took on too many turns of leverage. I think it was like four or five X, maybe even more than that. But not only that, right, Neil, like I have, um, so that happened with Yaniv, yes, but I, I think, um, or Yaniv gave us that advice rather, not, it didn't happen to Yaniv. But when I think about, you know, when I think about what I did in 2021, very similar situation, right?

• 6:07Speaker 00

  It was taking on too much debt. It was being unnecessary. And it puts you into a world of, into a world of hurt, right? So we're not saying don't take risk. We're saying you want to be calculated with your risks. And like, sure, it's easy to look at someone else growing much faster than you, but you don't know what they're going through or how much pain they have to go through at times, right? So just keep that in mind. You know, it's, it's, it's not worth sacrificing, you know, the, the, what you need, um, you know, the entire village for, for, you know, what you want, so.

• 6:37Speaker 01

  Yeah, Eric, do you want to go into detail on what happened to you? Was it 2021 or 2022 or whatever the year was when you did the deals? Cause I'm thinking that's what you're alluding to.

• 6:47Speaker 00

  Yeah, yeah, 2021, we, we, I'll, I'll, I'll give, I'll, I'll give what I'm, I'm willing to share. But 2021, we, we did, uh, you know, a couple of deals on the, on the agency side. We took on debt to do these deals. So this is a, you can call it revenue-based financing, right? And, you know, the thinking here is that, okay, we can combine these, these two companies into ours. And, you know, combine the revenues and grow a lot faster, right? Now, what didn't happen is, um, you know, we, we didn't execute well, right? And what ended up happening was that, well, well, the bill came due, right? It doesn't matter. They don't care if, you know, the lender doesn't care if you're not executing well. The lender just cares if they're getting their money ultimately. And in 2021, it was at the height of all this mania, right? And so it's, it's, it was very easy to get this revenue-based financing.

• 7:32Speaker 00

  And you have, you know, companies out there, um, that were, you know, raising all this money, doing this revenue-based finance. And guess what? The lender that I worked with, they no longer even have that product, Neil. That, that product was, performed so poorly for them that it's no longer even there. And so anyway, all that to say is like, for me, when I was waking up every day, and Neil actually called me at the time. This is when I shared the story before. Neil's like, I think he's just bankrupted, right? And, and so like I said, guys, like it was very logical and Neil was coming from a, from a place of like a caring friend, right? But all I would say is like, every day I was waking up, it was very stressful to go through that. And we navigated our way out of it. I'll just leave it at that. But, and that, that, that allowed us to survive. But that was unnecessary pain, unnecessary stress. And there's a lot of other personal stuff going on at that time too.

• 8:18Speaker 00

  So thankfully it all worked out, but it was very unnecessary. Frictionless Growth Marketing hosted by Sonya Thompson is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. Frictionless Growth Marketing hosted by Sonya Thompson shows how modern brands grow by removing the friction in their marketing and customer experience that pushes customers away every single day, often without leaders even realizing it. Each episode delivers practical insights, real brand examples and conversations with marketing leaders, showing brands how to win with the new rules of growth, identity-driven marketing, cultural relevance and frictionless customer experiences. Listen to Frictionless Growth Marketing wherever you get your podcasts. So. All right. So I wanted to take a moment to tell you about my podcast co-host Neil's agency called NP Digital.

• 9:03Speaker 00

  And they work with a whole host of global companies or a global organization. Also Neil has SEO tools such as UberSuggest and Answer to Public. All you have to do is go to npdigital.com to learn more and we'll see you on the other side.

• 9:16Speaker 01

  Yeah, and, and this is also why revenue-based financing or lenders charge interest. When they charge interest, they understand that there could be some failure.

• 9:28Speaker 01

  Interesting story, when we took, when we refinanced our debt, we went from CIBC to Wells Fargo. CIBC is a Canadian bank, but they also have a US branch, things like a hundred billion dollar bank. Wells Fargo, they're also publicly traded. I don't know what their size is. Call it maybe a, uh, 300-ish million dollar, uh, bank, right? Something like that. Wells Fargo's stock, what's their market cap? 262 billion dollars in value. And I met up with their team. They told me something interesting. So with the revenue-based financing, with the car laws and all that, they typically should will charge higher interest rates because there's a higher failure rate. Wells Fargo, my rate is really low.

• 10:13Speaker 01

  Do you want to know how many businesses can fail?

• 10:18Speaker 01

  Out of, let's say they do a hundred, or what percentage of the deals can fail? Uh, or, or can they fail, or what percentage of the deals are allowed to fail for them to, uh, lose money? Like what percentage have to pay back or however you want to slice and dice it? I'm a little bit wordy there, but I think you know what I mean.

• 10:39Speaker 00

  No idea. You tell me.

• 10:43Speaker 01

  One out of four hundred. If more than one out of four hundred doesn't pay back all their debt, they lose money.

• 10:49Speaker 00

  Wow.

• 10:52Speaker 01

  So you're getting a cheap rate, but at that point, they're really doing diligence to make sure they're not losing a single dollar, right?

• 11:04Speaker 01

  So it's just like you can get places that'll charge you more, but they're willing to have a higher acceptance rate. Like I was just doing dinner with someone, I was in Mexico City yesterday. And they just charge a fee. So it's not necessarily an interest rate, call it their fee is forty, fifty percent. So if you borrow a hundred thousand, you pay back a hundred and forty thousand dollars, right? And that could be within six months. So you can calculate whatever interest rate you want at that point, or maybe you pay back in a year. But the failure rate is extremely high where they have no choice but to charge those kind of rates. If you're going to a bank that is not looking for any failure, yeah, your rates are going to be really cheap.

• 11:46Speaker 01

  But you know, it's you're not going to get crazy amount of leverage where someone's going to be like, sure, we'll let you go to five, six X. Uh, your profit.

• 11:56Speaker 00

  So something else I want to share, I mean, because we're kind of talking about, you know, lending, like we might as well also move to private equity as well. Because I talked to some of these agency owners here, right? And some of them took on money from private equity to, you know, build a platform, which is to go out there and be the company that's acquiring other agencies and gobble them up, right? That's, you know, kind of been the, the, the strategy. And, you know, one of the guys I talked to, he just seemed like he wasn't into it anymore, right? So he did the deal and he wasn't interested anymore. I'm like, so, so how's it going? He's like, you know, well, you know, it's, it's, it's been a couple of years now, you know, it's, um, you know, the, um, you know, the timetable is coming up, which means, you know, they're gonna, they're gonna sell the, the agency to somebody else, like another private equity firm, right? That's how it typically works.

• 12:37Speaker 00

  Like you might go for, you know, a period of like five to seven years or so, um, you know, when you sell to try to sell to somebody else. Um, so I was like, so what's going to happen next? He's like, well, you know, they're trying to keep me on, but like, I don't, I don't think I want to stay on. And he's like, they're probably going to offer me more money. I'm like, so what are you going to do? He's like, I don't think I want to do it. I'm like, why? It's like, because I can't do the things that I want to do ultimately. Um, so it kind of, it's, it's kind of similar in a way where you're, you're not behaving naturally anymore. You're not allowed to be yourself anymore. And, you know, when I think about Neil's day, where I think about my day, it's like, it's not like we're perfect, but at least we get to do what we want to do ultimately. And I think you can't put a price on that.

• 13:17Speaker 00

  If you can't give you a trillion dollars, I would do it.

• 13:20Speaker 01

  Yeah, well, I don't need a trillion dollars to do it, but I would do it for much less than that, but yes. Um, I, I remember I was thinking about raising money from a group of celebrities because I'm like, oh, maybe they'll make my company more sexy. Help me with, you know, generating more business and buzz and differentiating ourselves. And I remember Eric telling me, don't do it. And I was like, why? He's just like, you don't want to deal with other people. He's like, you don't work well with people telling you how to do stuff, even if they own a very tiny percentage of your company. I'm like, I could just buy them out, they'd be putting small amounts. He's like, but do you want to answer to anyone in their emails? I was like, no. And I'm like, good point. I'm like, thank you, Eric. It was good advice.

• 13:59Speaker 00

  I, I met a guy here, okay, so, so, um, I don't know why this triggered her memory. Oh, okay, I, I know why now, I see the connection. So anyway, there's this guy, uh, based in Saudi here, right? So he's in energy. They build data centers. And so this is alpha, I wouldn't get anywhere else, right? Because you would assume, Neil, that data centers are, you hear being talked about in the, in the media all the time. That it's a, it's like, and you and I, I mean, to be clear, like we believe in AI, we believe that, you know, data centers are, are good for AI. But he's an energy, he gets it. He sells these data centers all over Europe, right? And he's like, just a word of advice to you, and this guy was totally coked out, by the way. Just a bit of advice to you, do not recommend getting into data centers, right? He's like, it is not going to work out for the long term, but hey, I sell them, so haha.

• 14:43Speaker 00

  So, so anyway, I, I, I thought that was, I thought that was pretty funny. Um, but.

• 14:47Speaker 01

  And when Eric says a guy's coked out, he's using expression, not the guy's actually on drugs.

• 14:51Speaker 00

  No, no, he's not, he's not, he's not.

• 14:53Speaker 01

  Like energy.

• 14:55Speaker 00

  Yeah, I get that a lot. I talk really fast, so people think I'm coked out, so.

• 14:59Speaker 01

  Yes, that is true. Um, but Eric doesn't do drugs, so he is not. Um, but, um, but yeah, dude, I, I didn't realize that data centers wouldn't be a good investment. I thought they would all say, do tons of data centers. Did he say why not to do data centers?

• 15:15Speaker 00

  He, he thinks the numbers don't work out and he thinks because token costs are going to come down, which like I should have pushed him on, on this a little more. I'm like, okay, if token costs come down, that means usage is going to go up. So like, it's still going to kind of net out to the same type of usage, right? With the data, you're still going to max out on usage. So I don't understand his argument, but I didn't want to push him on it because, you know, we're in the middle of a conversation with multiple people, so.

• 15:39Speaker 01

  Yeah, I, I agree with that. Like if you look at like the core weaves of the world, this is a financial advice, but their stock, you know, at least in the last few days, because in the United States, um, there was midterm elections and most states are making it harder to just create data centers whenever you want, because a lot of citizens don't want data centers everywhere and it's causing power to go up or down. I'm not saying that's a good decision or bad decision, I'm just telling you reality. It caused like Micron and all the software, I mean, all the memory chip companies to go down. Um, it caused CoreWeave to just, you know, just get hammered. Uh, and if you look at the last five days, CoreWeave is down twenty eight percent.

• 16:20Speaker 01

  And if you look at pre-market, literally this morning before the market opens, as we're, um, doing this, this is November fifth, early in the morning. Uh, it's down another four point one three percent pre-market. It's just like, this is expensive.

• 16:35Speaker 00

  First of all, Neil, it's four, four thirty nine PM. It's the evening for me. But anyway, I, the, the, I'm just joking around, but, um, what time is it over there for you? Six AM?

• 16:47Speaker 01

  Uh, no, eight forty, I'm in Bogota, so I'm three hours ahead. So normally, uh, five forty, but I wake up at four AM. So this is, when, when you ever, when you're international and you schedule stuff for a five AM for me, it's so easy because I'm already up. Because I, I trade stocks, so I'm up before the market. And then I sleep around eight PM, so it's hard for me to sleep past four PM.

• 17:10Speaker 00

  All right, catch you guys later.