Counterintutive Wisdom from LegalZoom's Founder

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1:33There's no safe like SimpliSafe. From Entrepreneur Media, this is Problem Solvers, a show in which entrepreneurs do what entrepreneurs do best, solve unexpected problems in their business. We were completely wrong. And I'm just like, it's not selling. It was like, we have to start from scratch. I'm Jason Pfeiffer, the editor-in-chief of Entrepreneur Magazine.

1:58Let me ask you a question. What is your legal Zoom and what is your proxy law? That question probably doesn't make any sense to you. It's going to in a minute, though, because it is an incredible metaphor for where you should be putting your time and your energy. What is the thing that works, that you know works, and what is the thing that is an opportunity that will just drain you? What is the thing that is shiny and exciting and seems like you should be doing it, but that will ultimately just drain you? What is your legal zoom and what is your proxy law? What does that mean? Okay, this is not the full point of this episode, but it is my absolute favorite story that came out of talking to my guest today, whose name is Brian Lee.

2:51Brian Lee is a serial entrepreneur who has started many companies that you've heard of. He was a co-founder of LegalZoom, of ShoeDazzle, of The Honest Company, and he's got some great new ventures today. And we're gonna be talking about his prescription, often very counterintuitive prescription, for how to build a great successful business. And before we get to any of that, you have to hear this story about LegalZoom and proxy law. I cannot wait any longer. You have to hear it. So here it is. We never raised outside capital to start LegalZoom, and we just grew it all for profits and bootstrapped along the way.

3:33But I remember about one and a half, two years into LegalZoom, we were a direct-to-consumer legal services company. So anyone who knows LegalZoom knows that. We formed corporations and et cetera, and we went directly to the consumer. However, there was one time where we noticed this gentleman in Florida was ordering a divorce package probably every week. Oh, no. Yeah, so after about 12 or 13 divorce orders from this gentleman, we're like, wow, this guy's getting married and divorced a lot. Yeah, a lot of bad life decisions happening down there in Florida. So I decided, you know what, I'm gonna reach out to this gentleman and just make sure he's okay.

4:12So I asked him, oh, so we got your last divorce package ready. We're gonna send it out. and just checking in. And he says, oh, that's wonderful. And then I found out that he was a family attorney, a family divorce attorney based in Florida. And he was just using us as almost a backend paralegal to create his documents that he would send to his clients. And of course, the light bulbs went off. We're like, oh my goodness, we're not just direct to consumer. We could be a B2B business too. And so we decided to make a more robust professional version of LegalZoom. and sell it to lawyers. Sounded like a great idea.

4:50And until we realized something, we took all of our best resources, our best designers, our best engineers, our best marketers, everyone, and put them onto a company called, we called it Proxy Law. So it was an offshoot of legal system called Proxy Law. And all of our focus was on it. And we realized something pretty quick is that Proxy Law was just a very different business, right? Because the sales channel was different. We'd have to knock on doors of small law firms and try to convince them to switch over to us and so forth, as opposed to just using Google to get business, right? And leads to the consumer.

5:24So anyway, what happened was that LegalZoom was profitable. It slowly became unprofitable. Proxy law never took off. And we were days away from bankruptcy. And so we had to shut off Proxy. So it was hard because we spent a year building this, but we shut down Proxy law and refocused our energy on LegalZoom, fixed it up and got it going again, luckily. But it was a scary moment because we were almost out of capital, very close to being out of capital because we spent so much resources on Proxelon. It's a lesson I've always taken was you got to focus. Part of the thing about being the CEO is that a lot of your responsibility is seeing you know.

6:03You have to say no to a lot of operators because every day you're seeing more opportunities. Oh, we could do this. We could do that. We could do all of it. Guess what? You can't do all of it. what you have to do is you have to build a very strong foundation first and make sure that you're as solid as you can be before you start extending. And it's just a lesson I've always taken with me. And now I just make sure like anything we do that's working, you go deep, deep, and you build base. You start with a position of strength before you extend. And now you can see why I loved that story so much. It reminds me of something that I heard recently.

6:38It's a quote that gets bandied about a lot. It is entrepreneurs don't die of starvation. They die of indigestion, which is to say that when you try to do too many things, when you chase too many opportunities, you can't focus on the ones that really matter. And that's what Brian is saying here. This is the question we all need to know. What is our legal zoom? What is the thing that is our main thing that is working that we need to focus on? And what is our proxy law? That exciting other opportunity that came along that, hey, maybe could work, maybe could work, but requires so much from us and will steal so much away from the thing that already works that it is simply not worth doing.

7:22All right, that is just a taste of the kinds of insights that Brian has. Brian, as I already told you, co-founder of LegalZoom, ShoeDazzle, Honest Company, now also BAM Ventures and Arena Club. Yeah, so Arena Club is a new company in the trading card space. We have a marketplace where you can buy, sell and trade, baseball, basketball cards, even Pokemon cards. And BAM Ventures is an early stage venture fund. We focus on the early stages of companies, typically entrepreneur with an idea, and we focus on consumer and consumer tech. And here is the question that I wanted to put to Brian. He has launched so many successful businesses.

8:07He is working on another startup now. He also invests in entrepreneurs. What does he think the pathway to success actually looks like? What is required? We got one answer already. It is focus, deep focus, understanding the difference between your legal zoom and your proxy law. But what else? His answers are really awesome and counterintuitive. We're gonna get into a little bit of everything from fundraising and finance management to whether or not remote work is actually good for startups and more. Brian Lee has so much to share and we're going to do it right after this break. If you own a business, then you need so many things.

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9:30You can bulk order your most needed essentials. You can even order supplies online with curbside pickup right from your favorite local store. So go take care of that customer. Walmart business has your back and your snacks and everything else. It's the Walmart you love now for your business. All right, we're back talking with Brian Lee about what the path to success for a founder looks like. And before we get into his advice for founders, let's talk a little bit about what he sees and how he thinks about his own venture. Brian has launched this new company called Arena Club in the trading card space.

10:14And that was really interesting to me because here's a guy who knows how to build incredible companies and he is entering a very crowded and scattershot marketplace. And I wonder, how does a guy who thinks really big think about what big in that space even looks like? The thing about the trading card industry is that the primary market is relatively small, call it a couple billion dollars. And that's dominated by two players, Topps and Panima, the primary makers of the cards, and Pokemon on the TCG side. But then the secondary market is like 20 billion plus, maybe even 25 billion. And that's all the secondary stuff when it comes to cards.

10:58So card shops, auction houses, grading companies, card shows, the lie breakers that are happening right now. Like all of that added up the equation of a much bigger business. But yet, the reason why I'm so excited is because that secondary market doesn't really have a brand name. So there's some very large players in the industry. But when it comes to a household name, none of them are household names. And so that's why I'm excited about growing this company, Arena Club, because I think we have a shot to make Arena Club a household name when it comes to this hobby. Oh, that is very interesting.

11:31And it's true. I just got a little window into this world because I took my nine-year-old into Pokemon and he wanted to go to a big Pokemon collector convention. So we went and I'm walking this trade show and I saw a couple, there are a couple of vendors that will grade the cards. Frankly, I was surprised by the price of grading a card. It's just surprisingly high. But none of it translates outside of this space. So what is the thinking that leads you to that observation? To say there are a lot of players in this space, but there's no household name. There's nobody that owns this secondary marketplace.

12:05And yet there are so many people who participate in the secondary marketplace. Like what's happening in your brain that drives you to be able to recognize that as the opportunity? For me, it's a$20 billion plus industry where some of my friends who aren't collectors, who aren't in the hobby, they've never heard of any of these companies because these companies, these brands, have stuck to the hobby. They're not necessarily helping grow the hobby. If you have a household name, that household name, that brand will grow the hobby. And so for me, I read this stat that said 60 % of men born in America have cards somewhere, either in a shoebox, under their bed, in their closet, in their attic, in their garage, or even at their mom's house or in their garage, in her garage or so forth.

12:53They have cards someplace. And really the dream for Arena Club is that we get everyone back involved. You reminisce in the days where you would ride your bike to the card shop and buy cards and wait for the latest drops or finding that Gem Mint 10 card in a dollar bin. We want that feeling to come back to invoke that feeling to every person who has collected cards in the past and bring them back into the hobby, into the fold, to bring that excitement back. And admission, I am definitely among the 60 % of men in America who have cards somewhere. So Arena Club, you just might be getting a call from me.

13:30All right, let's pivot into Brian's advice for entrepreneurs. Now that we've heard about how he sees a pathway to success for himself, how does he see the pathway to success for others? I'm going to take you back to that story that we started with. What is your legal Zoom? What is your proxy law? Brian said that's really a story about focus and about making sure that you're focusing on the main opportunity. So that's where we're going to start because it's one thing to say, focus on the main opportunity. Sounds obvious. Sometimes we don't know exactly what the right opportunity is. How do you ascertain whether or not this new opportunity that you saw is actually worth pursuing or not?

14:16Yeah, it all depends on what's working. We'll put it this way. If LegalZoom wasn't working that way, if we weren't profitable and we're reaching, absolutely, you should be trying almost everything. You should be innovating your way to success, right? But if you have something that is working, all I'm saying is that just make sure to go deep, build that foundation of strength before extending. And you'll know when it's time to extend, when you start seeing growth slow down or you start seeing things capping out and this and that, and then you can try something new. I would not say go all in on anything new.

14:48I say test your way there, right? Try some different things and don't throw too many resources at it. But if you see anything working, then yeah, go deep again. There's this line that I've heard from many people. I don't know who originally said it or if we have any idea who originally said it, which is that entrepreneurs don't die from starvation. They die from indigestion because they take on too many things. I'm curious if you see this manifest in lots of different ways with founders who are so excited by the many opportunities that they're unable to focus and what you are looking for in entrepreneurs that you are ready to support, to put money behind, that tells you these are very focused people who understand how to identify the right opportunities.

15:38What are you looking for? Yeah, really it's just smarts and dedication. That's really, it's as simple as that. We look for, when we, at BAM Ventures, we look for entrepreneurs that they have to make it work. They almost have no other choice but to make this work and they're all in. What we've seen that doesn't work, more times than not, like almost all the time it doesn't work, is side hustles. Side hustles never scale. They just don't. You're either all in or you might as well not do it. The whole side hustle thing, that's okay if you're just making a few bucks here and there. Honestly, I get it.

16:16But if you're going to really try to start a business, you got to be all in and your team has to be all in. And believe it or not, we actually prefer Tina to be together as well. And it's another thing that we're learning more and more. I have yet to see a company that starts with a fully dispersed team, with dispersed founders from all over the place, and they grow a multi-billion dollar business via Slack. It's hard. It becomes difficult to build. Sorry. I didn't realize my door wasn't closed to build a large business. And part of it, a lot of that has to do with just culture building as well.

16:54But this is what I tell entrepreneurs and folks is that offices have existed for centuries for a reason. Right, because people, when they work together, you iterate quicker, you run ideas by each other faster, you don't have to wait for Zooms or phone calls or text messaging, you just go talk. And it's also about building culture. It's, when you're a larger business and it's established, you already have set that culture and you already know the people. So it's a little easier to work from Zoom and so forth and work from home and work from other locations. But when you're a pure startup, you're building that foundation, that culture.

17:31And so I highly suggest that if you're going to start something with a team, try to be together. That's actually a really interesting and it almost feels counterintuitive insight because the thing that is often so celebrated about remote work culture right now is that you have access to the best people wherever they are. I don't have to be limited to my own market. I don't have to be limited to co-founding something with somebody because they live in my city. I met somebody and they're in Ohio and I'm in Colorado and we can work together because there's Zoom and Slack. So that feels, does that come across as surprising when you tell founders this?

18:14It almost feels antiquated in a way, I have to say. I know, doesn't it? But it works. There's something you said about, again, about camaraderie, about understanding each other, about knowing what the other person is already thinking and doing without even having to be there. It's hard to explain, but there's something. Because look, at Arena Club, we're together. It's my newest company. And it's working beautifully. It wasn't easy to find people that actually want to come into an office in this world. But we have that. And it's working really well. Now, our engineering team is in London, so that is dispersed, but that group of folks are together in London.

18:55And then we also have a group of people in Beaverton, Oregon, that run logistics and everything else for us. But again, you can take pods of different departments and have that separated and dispersed. But what I'm saying is, let's say you have 50 people and everyone is working at 50 different locations, that becomes real hard for a new startup. Yeah. So my goal coming into this conversation was to hear a couple things that you see that tell you, oh, this company is potentially in trouble. And then what the solution to that is. And so far, I feel like we've hit some really important ones here about clarity of purpose and not chasing too many opportunities, understanding what it is that actually works in your business.

19:40And then also making sure that at the very beginning, you're together because that's how you're going to develop not just a great product or service, but also a great team and culture together. I'm curious what other, and I know I'm just fishing in the ocean here, but I know I'll pull out some big fish. What other big red flags do you see or big challenges do you think entrepreneurs are not necessarily thinking about that when you're evaluating a company possibly for an investment, you say, oh, there's something I'm concerned about here. Yeah, part of it, at least for us, is really the ability for the entrepreneur to be efficient with their capital and to understand that the capital that they're receiving or raising, they have to treat it as if it's the last capital they're ever going to raise, right?

20:33And they have to understand the spigots and the levers that will get them to break even. because you see this time and time again as tides go up and down in funding. It's the entrepreneurs that are building their businesses with this constant need to raise the next round of capital. And once that dries up, they don't have a business anymore. And it becomes gnarly, honestly, because they're starting to lay people, they're starting to do rifts and laying people off. You're cutting this and you're cutting that. And you take massive down rounds and all this other stuff. Because, but if they, along the way, this is how I like to actually run companies is you want to build, you understand your bleeding capital, but you do understand what it takes to get to breakeven and what levers you can pull to get there before you start thinking I'm running out of capital.

21:29And if you don't have that type of business, you got to figure that out. You got to figure that out. Like you have to understand, okay, what is my breakeven point? Right? And how do I get there? And how do I manage that? What do you think is required to get there? It sounds like a dumb question, but I think some people are able to see that and some people aren't. And I'm curious what you've seen in patterns of businesses that are able to be really capital efficient and really understand their path to breakeven and profitability. Is it the way in which they've approached their growth strategy? Is it the way in which they've built their team?

22:10What does it take for someone to have the infrastructure around them where they're plotting their course in the most sustainable way? Yeah. And so, again, it's a combination of all of that. You have to just understand, just very simply, revenues and costs. That's what you have, revenues and expenses. You just have to have the basic understanding you need more revenues than you have expenses. Or you have to have a very strong understanding of if I turn this and this on, it leads to this type of revenue, which will cover those expenses. And I think a lot of folks have this misconception that, again, that capital is abundant, that they're going to go out and raise more capital.

22:59And again, those are the entrepreneurs that are just backwards when the funding dries up. And you just see it so many times. The most recent in the last two years, really, has been pretty dry when it comes to venture funding. And so if you don't have a strong business that can lead to real revenue right now, or you're not doing real revenue, it's difficult to raise. And so for me, at least, it's really, it's headcount, it's marketing, it's little things like not overpaying for opulent office space, just being smart with your capital and being a good shepherd of it. there was also I have a hypothesis that I'm going to run by you, which is that there were so many years of particularly tech companies, but probably others as well, who were able to grow on a let's just spend on user acquisition.

23:54There's always the next round that we can raise. We'll get as many people as possible, and then we'll figure out how to monetize this. And those businesses were celebrated for so long. And they were the culture drivers and they were the ones that everyone was pointing to and saying, this is what innovation looks like. And I think that taught a lot of people the wrong lesson, at least a lesson that doesn't apply when capital becomes less available. You think I'm right about that? Oh, 100 % Chase. And they were also, right? All these companies' acquisitions and everything else And again, most of them aren't around or most of them are really struck because they never figured out how to get to great profits and to have a real business.

24:41Do you think it's better? I don't even know what better means, but I'll just throw it at you. Do you think it's better for businesses that there's less capital available? Because I'll tell you a quick story which doesn't have anything to do with capital or companies, really. But it's a conversation that I had for the magazine many years ago with Ryan Reynolds, the actor who has gotten into business in many ways. And he was saying he really loves tight budgets. And the reason is because when you have a large budget, you start blowing it on special effects and like an alien invasion and whatever.

25:15And then as soon as you have a tight budget, you have to cut all that stuff. It forces people to think about the things that are actually meaningful in entertainment, character development, and dialogue. and the stuff that doesn't cost money, but that is actually important. And I wonder if you are seeing at a time, and it's funny because you are an investor, but maybe you're an investor who operates differently than many others or that investors did back in the time where there was just an easy flush of capital for everybody. Do you think it's better for entrepreneurs to just have access to less capital?

25:49That's a great question, Jason. And I actually want to say yes. I do. And it's really because like right now, if you're a venture fund investing, call it early stage companies, especially it's a great time if you have capital. Because only the strongest are going to survive at this point. Right. Only the strongest entrepreneurs are going to get any sort of funding because the money has dried up in a lot of ways. So now what you're doing is you're having less entrepreneurs raising capital. the ones that do are treating that capital like gold, right? And not frivolously overspending. And again, it's like the best of all places right now for venture capital is to invest because you've got all these layoffs happening, right?

26:41So talent has become more abundant. So you're taking the best talent when you start a company that are available. A lot of, well, not the very best, but you've got a lot of talent out there that you can choose from. And then also capital. If you're able to raise capital, you have a leg up over other competitors, potential competitors that might come in your space that can't raise capital. And then on top of that, everything else has become more efficient too. So advertising, marketing, everything else has become more office space, become more affordable. So a lot of things have become more affordable as well.

27:15That is a funny thing to hear someone say because I feel like the only message that you get these days is everything's more expensive. Materials are more expensive and travel is more expensive. But to hear about the things that are actually more available to you because it's a less noisy marketplace, it's actually, that's a pretty interesting thing to hear. Yeah, think about this. Everything has, in the grand scheme of things, has become almost incredibly affordable to start a company. I remember, again, when I started LegalZoom, I remember we had to save up so much money to buy our own web server.