#81 - Blake Johnson: Entrepreneurship, Bootstrapping, Resilience

0:05Welcome to the Insightful Investor Podcast, a weekly series that seeks to share industry investment and market insights. We define insights as concepts that are counterintuitive, widely misunderstood, or underappreciated. In other words, unique ideas that you probably won't hear elsewhere. I'm Alex Shahidi, the host of the podcast and co-CIO of Evoke Advisors, a leading investment advisory firm. Learn more about our show at insightfulinvestor.org.

0:38Today's guest is Blake Johnson. Blake is a serial entrepreneur, an investor, and a philanthropist known for founding and scaling companies such as Byte, Currency Capital, and his latest venture, Alter. He has successfully built and sold multiple businesses with combined valuations exceeding $1.1 billion. Blake, thank you for joining us today. Thank you, Alex. Let's begin with your origin story. Are there any early experiences or influences that sparked your passion for entrepreneurship? Yes, absolutely. I grew up in a really small farming town in Southeast California, right on the border, about two hours east of San Diego called El Centro, California.

1:20I think by its nature, being so close to the border and growing up in that environment in the 80s, everything seemed to be entrepreneurial down there. It was common in everyday occurrence, you were dealing with some type of financial transaction or negotiation or somebody trying to hustle something or other, sell you something or buy something for cheap. I remember at a pretty early age, it just kind of became a second nature to grow up and kind of get reared in that environment. And is there anything specific that helped shape your drive and approach the business? Growing up down there, at the time, I was desperate to get out of there.

2:03But looking back now, it was a really critical cornerstone to my development. El Centro, statistically, in the U.S., has the highest unemployment rate. Very poor community. We had brief glimpses of the outside world. We'd go to San Diego or get exposed to something on TV. I remember Sundays in my house, it was tradition. My dad would always barbecue carne asada. we'd watch 60 Minutes. And after that, during that time period, Lifestyles of the Rich and Famous came on with Robin Leach, always enamored with this other life outside of the dirt roads and canal water that I was experiencing every day.

2:41There was definitely at an early age, and I don't remember when, but very young, I got this idea in my head that that really looked appealing. And I was very curious as to what that really entailed. So you're acquiring some of the insights into building a business just from your upbringing. Would you say there were any major turning points in your entrepreneurial journey as you grew up? My mom, when I was about in first grade, encouraged me to start a business and I did. And I've actually never publicly talked about this. This is a first and somewhat internally blushing as I'm about to tell you this, but she had it in her mind that a good business when I was, I don't know, seven or so was going to be selling these cinnamon spice things you could put in your house to make your home smell better.

3:34She helped me start my first business early on. The name of the corporation was Puppy Dog Tails. I went out to neighbors. I to solicit them purchasing these packages of these potpourri scents. She probably was now, in retrospect, fulfilling something that she wanted to do. But I got my first taste of that pretty early on. That later then compounded into a whole different assortment of things, from raising pigs and selling them at 4-H to buying suckers and lollipops in Mexicali for cheap and then selling them at school for a profit. But it was pretty common. It wasn't necessarily unique to me. That was very much a cultural thing down in that part of Mexico and California.

4:24You start acquiring some of these skills, even in first grade, which is pretty remarkable. I've had many guests on the podcast. I've talked about building a business. And the earliest that I heard was sometime in high school. First grade is you get a very early start. So when you kind of look back on that journey and you think about the skills that are required to be a great leader and build a business. How much of it do you think is IQ and how much of it do you think is EQ in that decision-making process? Today, I think it is 80 % EQ and 20 % IQ. I've always kind of often observed that the first 22 years of a person's life, the schooling system really rewards you for IQ.

5:07How well you can read a page, regurgitate a concept or an equation or a passage on a piece of paper, and then quickly forget about that. The rules of the game drastically change once you get out of school. The world ships. Business and leadership and really building things of value much more heavily depend on EQ at the later stages of the game. It's been an interesting thing for me to observe over the years, but having that EQ embedded culturally and also combined with work ethic. I filed my first tax return when I was 14 with working through cattle at a feedlot. You start to kind of get these building blocks along the way.

5:52I've been able to look back now and very clearly understand how certain components early on in my childhood were embedded. To no credit of my own, it was just a place and time I grew up with. I woke up this morning thinking how lucky I was to be born in the 70s and come up during the 80s and being born in the US, kind of winning that genetic lottery, even though I was a self-made guy and built all that myself, I was able to obtain these right elements through growing up in a time period in the United States, later really promoted some great accomplishments. That EQ, IQ distinction that you described is really fascinating.

6:35I think you're right. When you talk about people going to school and learning and you're taught the facts and the way things work, and then you have to regurgitate it. And the better you do, the better your grades and better schools you go to. One thing that I learned is as you go through that process, it curtails some of the independent thinking that I think is required to really launch and build a business. Being independent minded and forging your own path. How do you think about that side of it? I think a lot about that. And I look as I'm going through life for people with that skill set. It's absolutely critical to build up certain elements ingrained in leadership.

7:12That ability to fail and get back up. The confidence you can have, or not necessarily the confidence, but the faith that you're going to be able to figure out a solution as it goes along. There's certain things on the leadership side that are ingrained. I believe starting young within grade school and certain situations that kids are placed in that get them comfortable with dealing with other people and leading other people, whether it be on the athletic field or in Boy Scouts or in school, whatever that is, that comfort that's instilled early with communicating with other human beings, with having the thicker skin to not get too disheartened when you're knocked down the environment that encourages you to get back up and keep persisting.

8:08And really, and I speak with my kids a lot about this, getting highly, highly comfortable with failing. All these things are kind of the basis of what's needed to go on further achieve these things that society will deem as valuable. Is that related to this notion of focusing on what the destination is, knowing the path to get there is going to be challenging? And don't be discouraged when you face those challenges, because in some ways you should almost expect them. Absolutely. If you're not failing, you're doing something absolutely wrong. And if you're not comfortable in failing, you don't have it.

8:46I always preach that there's one destination, Let's say it's to get to the top of the mountain. But there's many paths up the mountain that one can take. And one's not better than the next. You have to be open to the various paths. And inherent in any path, there's going to be obstacles that come in your way. It is part of the game. They're not fun. They're frustrating as all hell sometimes. And you have to be persistent and nimble to get around those. and I'm always constantly preaching about, I don't care what path I have to take to get up the mountain. I'm open to all of them and let's find the best one.

9:26So that gives you the foresight and the ability to kind of scan the environment and not get so pigeonholed on one that this is the one, this has to work. Because if you're so focused and myopically focused on one path, you might be missing the right path that's right beside you. That may give you a shortcut up the mountain or maybe promote an easier journey to get up to the top. In some ways, you have to be humble about your ability to foresee the right path up front. Meaning what you just described sounds intuitive, but I could see a lot of people, the way they think about it is they see the top of the mountain and they strategize, here's the path to get there.

10:07And then once they hit an obstacle, they get discouraged. What you're describing is focus on the destination. I don't really care what path I have to take to get there. And I'm going to be adaptable to going up that mountain. And even if I have to take a step back, I just know that I'm heading in the right direction. It's a very different approach, but it's so relevant in building business. Absolutely. Then the one thing I constantly remind people, especially when we're starting new businesses or new endeavors, that whatever we think is the right path today, that's the only guaranteed thing that is wrong.

10:38And if you approach that with that attitude of here's our thesis today, and we're going to start out like that, but we're going to evolve along the way and the evolution needs to come. And we can only evolve by starting to walk down the road and seeing what opportunities are presented, seeing what obstacles are presented, and then being nimble and adapting along the way. That is the recipe that everyone needs to take. And you hear these great accomplishments in any kind of thing, whether it be athletics or building businesses or building institutions or leading people. Each story always has the part that things got really ugly and really difficult.

11:25Most of the people get wiped out by those and you never hear those stories. They just stop. the great ones persist past that they're okay with the failure they understand it's part of the equation in order to get to the top of the mountain and they adapt and they keep understanding and keep their perspectives broad and keep looking for the opportunities that most other people overlook along the way so it sounds like part of the mindset of facing resilience and setbacks as you're climbing up the mountain is a realization that those are going to come. And if you just think about it from a probability standpoint, when you're at the bottom of the mountain and there's a thousand paths to the top, what are the odds that you're going to pick the right one without really knowing what the journey is going to be like?

12:12The odds are almost zero, like you said. You know that's the wrong path. And if you assume it's the right path, you're probably going to face challenges that feel insurmountable. If you approach it from the other perspective, then you can just bounce along the way. and find the right path. Exactly. I have seen people and business owners and entrepreneurs get it right on the first time and it's a smooth sailing journey and they incur relatively little to no problems and they get these big outcomes. It is once in a blue moon and God forbid you are one of those people. You are cursed for the rest of your life.

12:50I've seen a few, a handful throughout my years where those people can never perform later. They never incurred anything. Everything was smooth. And so the next thing that they do in life, and there will be a next thing, there are the inevitable bumps. And they don't know how to deal with those bumps. And they don't know how to get through them. And they peak early at a very young age. I always, again, preach to my kids, let's never peak. NFP, never effing peaking. We talk about this regularly in our family. We always kind of will look out and get that person peak. When are they going to peak? Trying to predict it.

13:29But in order to go the distance, you need to be pretty durable with thick skin and a pretty strong fortitude to face problems. Without that, you will peak early. You've successfully built and sold multiple businesses. Let's talk through some of those. And just to set the stage, most billion-dollar startups raise multiple rounds of funding and undergo significant dilution on their way to unicorn status. Byte, one of your companies, took a very different path, reaching a billion-dollar valuation in just a few years without raising outside capital. Would you walk us through Byte's story and how you approach scaling the company so quickly?

14:12And all my companies, and Byte was the fifth one, started from scratch in my head. I was employee zero, self-funded all of them and sold. People marveled at how you sold it for over a billion dollars in cash without any external capital in less than four years. While that is all very true, Byte still, in my mind, was a 15-year-old startup, meaning I had four other businesses prior and currency number four, the one prior to Byte, We exited for$100 million, big number, in about the same time period. Currency still was a 10-year-old startup, and so forth and so on. My point of that is that I've made tens of thousands of right decisions, but I've made hundreds of thousands of wrong decisions.

15:05And with each iteration of a business, and in my mind, the DNA of any business out there, any business at all, the DNA is 98 % the same. The fundamentals are the same. So when you start to focus on the fundamentals and all the lanes of a business that you have to get right, you quickly see that they're not too dissimilar in any industry. The things you have to get right, and more importantly, the things you have to avoid getting wrong are almost identical. I can go really into any industry and quickly assess the business and people will think, my God, have you spent years in our industry? It's not the case.

15:48It's just that the fundamentals are the same. With each business, with each iteration, you're learning along the way of what to do and what not to do. When I decided to start Byte, I was on a plane from Los Angeles to Toronto. And I made that decision that day after thinking about it for the month prior about doing it that I was going to start it. But going into it, I had a pretty clear thesis of the fundamentals and knowing what we needed to do to avoid problems and to scale very quickly. At the root of everything is really focusing on unit economics and then getting into, which I deemed we were accurate with, and it turns out we were, is getting into a very scalable, very big addressable market.

16:40When you can offer a product into a big addressable market, and when you can focus on the unit economics, meaning each additional unit that you sell, you make more profit. And that's a lot easier said than done. When you align all that and you can line up all the green lights through the intersections, you can start to run really fast and accelerate and hit that hockey stick curve and unicorn status that everybody talks about. For those not familiar with Byte, would you just give a quick background on the company? I decided to do Byte December 7th, 2015 and ended up launching it about 13 months later.

17:21And it was a direct-to-consumer orthodontic company. We were, at the time, a competitor to Invisalign and SmileDirect, offering orthodontic treatments direct to consumers without the need for the patient to ever visit a dental office. We did that through clear aligners that would sequentially move your teeth into place, giving you a great, beautiful smile. What were some of the biggest challenges and advantages of bootstrapping by it compared to raising venture capital? I never raise capital, mostly because there's a very big disconnect in my mind from the boardroom to the street level. The operators, the entrepreneurs are operating on the street.

18:07And oftentimes I've seen they have a very clear understanding of the business that gets disjointed as you move away from the day-to-day activities and you're then managed by a group of investors or a board that are kind of looking from a boardroom down and don't really understand the inner workings of the business as well as the operators. I've seen many VCs and private equity groups dramatically steer a business off course to no fault of their own. They just weren't there living the day-to-day and therefore had the wrong data points to make the decisions. That's always scared me. I've never want to be beholden to having to answer to somebody that is less informed than I have.

18:53And so I haven't. With Byte, there were some advantages and disadvantages to that business model being self-funded. But at the end of the day, it obviously worked out and worked out tremendously well. The ability for us to make decisions in a real-time basis based on market conditions and what we not only were seeing today, but what we were anticipating that was going to happen in the next week, in the next month, in the next quarter, in the next year, I think really well positioned us to hit that dramatic growth cycle. But doesn't that also go back to the unit economics that you described earlier?

19:31You need something that is profitable early on in its life cycle. Otherwise, it's difficult to not take outside capital. Very true. And I often give an analogy, entrepreneurs are like trapeze artists and go out and perform every day. the ones that raise outside capital and have a big balance sheet, perform with a net. So if they miss the bar, they can fall safely into a net. And there's certainly a lack or a diminished day-to-day pressure that's applied as if you are performing without a net, otherwise known as self-funding. If you're self-funding the business, you don't have a net. You miss the bar, you're going to fall to the ground and it's going to hurt or kill you.

20:20It's very binary. You succeed or you fail. Your success or failure is dependent upon your revenues exceeding expenses. It's impossible to get to profitability immediately. But in modeling out businesses, and we still do this today, we have a very specific understanding and thesis around how quickly you're going to get to profitability. And when you're doing it yourself and operating the business every day and playing with your own money, it creates an acute awareness of each move. If you're missing that bar, sometimes you're only missing it by an inch, whether you grab it or you miss it are the smallest of margins.

21:05And so when you are from a desperation standpoint, having to grab that bar, because if you don't every day, you're going to fail and it's going to hurt and set you back tremendously, then your actions, I believe, are that much more in tune and focused on what you need to execute in order to get to profitability. And I suppose a profitable business can also be a more resilient business when you go through the trough and the economic cycle. Absolutely. And I certainly have had businesses that haven't been as resilient as I needed to. I almost went bankrupt very close to it. I got down to my last$7 ,000 to my name in 2009, post the recession.

21:52I had an equipment leasing company. Talk about sobering and talk about never wanting to be in that position again. I always equate that business. It was a company called Capnet. And two years prior, it was lauded in the papers as being one of the fastest growing companies in Los Angeles. And it looked all the part. I always give the analogy that that was looked like a beautiful Ferrari on the outside. And you open up the engine compartment and there was two sick hamsters in a wheel trying to make it go. Resilience is something that we are very focused on anticipating where businesses can go wrong and understanding how good business can go bad.

22:33You see it all the time and you can do a kind of a postmortem analysis on the businesses most of the time and see that there was these glaring inherent problems that were always there, customer concentration sometimes, regulatory concerns, concerns with the certain demographic of your customers, et cetera, et cetera, that you realize that you need the breeze blowing the right way at all times to be in business. When it fails to go that way, then the breeze changes and economic shifts happen or regulatory procedures mature or whatever it is, the business gets knocked out. COVID and other things, the business gets knocked out and knocked out quickly.

23:19One potential advantage of taking outside capital is it allows you to scale and market your company. How did you differentiate Byte and compete with established industry giants like Invisalign, just doing it on your own. You hit that on the head. When I think about a business, our businesses or others, I typically break it down into four categories. Out of a dollar of revenue that comes in the business, you typically, in my mind, want to have a 20 % net profit. So that gives you 80%, 80 cents on the dollar to operate the business on. Of that 80, cost of goods is typically 25 % or so. The SG &A, the overhead and paying rent and employees is typically 35 % at scale.

24:04And then your marketing expense is typically around 20 to 25%. That is that last segment, the marketing expense is the most difficult to get right. It is a very, very finicky and difficult equation to operate at scale. Meaning there's like less science with it? There is a lot of science. There is a lot of blocking and tackling, but it can greatly reward you when you get it right and greatly punish you when you get it wrong. It's extremely finicky. And the markets shift a lot. The markets are very fluid when it comes to the avenues that one can take. to advertise or solicit business to gain customer acquisition.

24:51And it very much is a science in my perspective. But when you're getting into these businesses, we always actually look, we want to fall behind some very well-funded, very well-established competitors. We've also had the ability to create brands that can draft right behind these bigger organizations that spend hundreds of millions of dollars in marketing, creating the category awareness. When we think about the marketing funnel, we don't want to spend our dollars creating awareness of the category. We want to spend our dollars creating awareness of the actual brand and compete against these bigger, oftentimes slower, bigger moving ships that may be less in tune with what the target audience is buying and come in and really compete on a brand level.

25:50You're like the speedboat following the cruise ship. We like the cruise ship to take out all the choppy water and just kind of sail in the wake. Love it. So you talked about Byte and the direct-to-consumer industry. How do you anticipate direct-to-consumer evolving for consumer health and technology? We're at a very interesting time in history. Extremely interesting. I probably spend 25 % of my day thinking about AI, looking at the shifts that are occurring on a daily basis. Oftentimes, I feel like the frog is a human species, the frog sitting in the pot of water that's slowly starting to boil and not realizing it.

26:31We're starting to see this drastically in some of the companies that we have right now, the marketing metrics changing. The advancements in technology that we see on a monthly basis are almost hard to comprehend. And where it's heading will inevitably, like with most things, create a lot of opportunity and also a lot of threat to us as a society. In certain respects, there's a narrative that we're going to have a much better consumer experience delivered amongst various industries. and in turn, the data will support and promote a better process, a better outcome. On the flip side of that, the data will be consolidated and ultimately used by very few companies to provide services and goods to people.

27:23The vast majority of people in the world and Americans will ultimately find their skill sets are a commodity that are not valued ultimately. And so when we look at the business side of marketing, I've been saying recently, we're in the Model T era of this, and I expect some very rapid advancements in the years to come. And how that will impact a lot of the subjects that we're talking about will remain to be seen, But directionally, there'll be both a lot of good and a lot of bad and a lot of challenges that are incurred for society as a whole on a number of different levels. It's certainly a very fascinating time.

28:10Byte is just one of the companies that you've built. Can you share more about your other ventures and what you learned from those experiences? The most impactful business I think I had where I learned the most was my very first one. I became an accidental entrepreneur in 2005. To no real credit of our own, we had wild success. It was a gale force wind at our back. We thought we were doing all the right things and thought we were cool and had the beautiful company and the beautiful people working at the company. And really, it was a poorly run company. It took 2008 and subsequently 2009 and 10 to really expose who was who.

28:48I think Warren Buffett had some quote and I'm going to butcher it, but the tide goes out, you see who's wearing pants. The tide went out and we were naked. It was a tough time for me. I lost my business partner. He didn't have the stomach to get through it. He decided he wanted to move to Santa Barbara and check out, do something else. And I stuck with it and grinded it out. I didn't take a day off of work for three and a half years. It was Memorial Day 2012 that I I finally took a vacation with my wife to New York over Memorial Day. That three and a half years really was my education. I was faced with doing a workout on my own businesses.