Office Hours: The Business of Podcasting, Leaving Your Job To Start A Business, and the Pros and Cons of Stock Buybacks

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1:14Welcome to the PropG Pod's Office Hours. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehours at propgmedia.com. Again, that's officehours at propgmedia.com. First question. Hi, Scott. This is Ryan calling from sunny Madrid, escaping the abysmal London weather. I'm sure you can sympathize there. My question is that you recently joked on Pivot about making a shit ton in podcasting. If you're somebody that wants to enter this sort of space or newsletters, for instance, how on earth do you go about finding out whether it's worth your while, what sort of earnings potential there is, etc.

1:56In my own career, I've been fortunate enough to hire a career coach, which has been transformative for me, understanding what my options are and routes from there. But if you were to enter this sort of space, it's a lot more opaque trying to get the information. So how would you go about it if you were starting from scratch? Thanks for all the educating you do, particularly on sensible investing. It's been super helpful for me. I'll be very transparent about the business of podcasts. So first off, it's a pretty shitty business for 99.8 % of the people in podcasts. There are about 4 million podcasts in the world.

2:33Ad revenue in the U.S. is just shy of$2 billion. U.S. podcast ad revenues grew 26 % in 2020 year-on-year to$1.8 billion. So the good news is the industry off a small base is growing faster than almost any other media channel. So this is the bottom line about podcasts. It has very low barriers of entry. All you kind of need is two turntables and a microphone, so to speak. That's the good news. The bad news is there's no barriers to entry. So there are see above 4 million podcasts. I would bet that generously maybe the top 500 are profitable. It does require some money, not a lot, but to do it well.

3:10Here at PropG, we have a team of 12 people and probably three to four are mostly focused on our podcast. At Pivot, my other podcast, we have a producer and two associate producers and someone who does the sound engineering and then two co-hosts. So, you know, it's kind of a small village, if you will. And when we started the podcast, I think in the first year, we maybe did a million in revenue. Now, be clear. So the reason we were able to do that is because my co-host at Pivot has a big footprint. She's considered probably the iconic tech journalist of our generation. she was early to podcast so we kind of started with a lot of momentum i have a decent following through my newsletter no mercy no malice which now has almost a half a million subscribers and i'm a total media whore on tv a lot so we had we came out of the gates with a lot of you know we hit the starting line already at uh you know a gallop or a canter or a sprint whatever the term is.

4:10And Pivot is probably consistently a top 100 podcast. PropG is probably a top 200 podcast. But the reason why we make good money is because our CPMs are high because of our audience. Specifically, Pivot gets a kind of the, I don't know, the typical listener on Pivot is a high earning executive, oftentimes in the media world, oftentimes in the tech world, including a lot of tech CEOs. And if you're a brand trying to reach, sell into the enterprise, it's not easy to reach this type of decision maker. So we get very high CPMs. I would bet that we're one of the, I don't know, 20 or 30, or maybe sometimes one of the 10 largest top line revenue podcasts.

4:53And Pivot is about, I think it's about a seven to$10 million a year business. Started as one, it's growing really fast. And so that's a small business, seven to 10 million. I bet PropG is somewhere around a $5 million business,$5 million a year business. So these are small businesses. But the thing is, even with a team of four or five people on each podcast, as you can see, as you start to do the math, these things become very profitable very fast if you can make the jump to light speed. But here's the thing. You want to talk about income inequality. If there are two, 300, let's call it 400 podcasts that are kind of really profitable off of a base of 4 million, what is that?

5:32That's 0.0001 % maybe that actually make real money. That's not to say you shouldn't do it. It's interesting. It's fun. It's a way of expanding your reputation, your awareness, going deep in terms of domain expertise. Maybe you just enjoy it yourself. The majority of podcasts are either passion projects or people are putting out podcasts to try and drive awareness and business through something else they can monetize. So it's a very difficult business. I would not look at it realistically as something you are going to make money off of. In terms of broader thought leadership or getting into media, I think the specific crowds out the general, and that is you want to focus on a specific domain.

6:13I would just do one podcast a week initially to see if you like it, see if you get any sort of traction. But going into podcasting thinking you're going to make a lot of money, you're going to be very disappointed. disappointed. The vast majority of podcasts are money losing and effort losing. I know some fantastic podcasts and really interesting people that after a year or two years, they decided to discontinue because the juice just wasn't worth the squeeze, if you will. So look, do it for the right reasons. Think of it as consumption or expanding your footprint or increasing awareness. give it a shot.

6:48Get a good microphone, plug it into a computer. Another one I'm running on here, one of the other wonderful things about podcasting is that you can do it from anywhere. I have a tech person that follows me around, Drew, that kind of saves my bacon and ensures that we do a really good job of it. But when I'm traveling, he'll set up a remote kit for me. And it's kind of 90 % of what a good studio is. So I can do it from anywhere, which has been a huge boon or wildly accretive to my lifestyle because I can be wherever I want. I'm recording this from Aspen. Anyways, good luck. Thanks for the question.

7:19Question number two. Hey, Professor Galloway. This is Kurt from San Francisco. I want to talk about stock buybacks. What's your opinion on them and how do you get rid of them? Love the show and please keep it salty. Thanks. Thanks, Kurt from San Francisco. So first off, stock buyback. In simple terms, it's when a company uses its own money to buy back its own shares from its investors. This reduces the number of shares available for the public to buy and makes each remaining share more valuable. So companies use buybacks for many reasons, to consolidate ownership, right? You reduce, if you're the founder of the company and you own 20 % of the outstanding shares and you keep buying back shares over time, you're going to own more and more of the company.

8:04In addition, just through additional options, issuances or equity grants to new employees, you're kind of just keeping it at level set when you do modest share buybacks. So what are some of the benefits? Increased earnings per share, right? If you have 100 shares outstanding and you're doing$100 in earnings, that's$1 per share. If you buy back 20 % of the shares with the additional cashflow you're making, that's$1.25. Also, what it does is it's a very efficient way of returning capital to shareholders. Because say you're just aggregating a lot of capital on the balance sheet. At some point, shareholders own that money and they want it back.

8:43And you can do a dividend, but if you issue a dividend, they're paying taxes on it. And if it's short-term taxes, which I think dividends are, they may be taxed up to 37%. Whereas if you do share buyback and there's more earnings per share, theoretically, the share price should go up. And if you don't sell the shares, it grows tax deferred, if you will. So it's actually a very efficient way of returning capital to shareholders. Now, here's the downside, and that is every decision or 99 % of decisions made in corporate America revolve around one thing. What will move the share price up? The majority of the compensation registered by the people who get to make these decisions, whether it's the CEO, top management, or the board, is based on the price of the shares.

9:26So where everything they do is with a mind on increasing shares. Now, you'd like to think they might think, well, I want to do something. I really want to grow this company over the long term. I want to be good for the community. I want to be good for the Commonwealth. And I'm going to take some of our profits or a lot of our profits, and I'm going to reinvest it in growth. I'm going to open a new property. I'm going to pay my people more. I'm going to build a new factory. But when a share buyback is the clearest blue line path to increasing the share price, increasing the value of my options and getting me my Gulfstream 650 extended range, my home in the Hamptons, my go-to is probably going to be share buybacks or at least more than maybe is healthy for the economy.

10:05So the question is, how do we encourage companies to reinvest in the economy? And what we have done is that we have decided over a certain amount of share buybacks, we're going to tax them. And I think that there's a balance here. And that is, should share buybacks be discouraged or taxed such that we could take some of that revenue and redistribute it to infrastructure or make our own sorts of investment at a government level? Yeah. Should you do away with them? I don't think so. I still think it's an efficient way to return capital to shareholders, but there's no doubt about it. The amount of cash flow that's being spent on share buybacks is absolutely crazy.

10:40It probably has gotten out of control, though. The amount of share buybacks just increases every year. So there is something to kind of threading the needle here around taxing share buybacks or making them less appealing because companies are not investing in the future, investing in America, investing in new jobs at the same clip they probably should. I've been on a bunch of boards where we talk about share buybacks. And essentially what you're saying is that you can't come up with an idea that would show a greater return on investing capital than buying our sharebacks. The time to buy shares back is when you're profitable and the stock is depressed.

11:16That makes a lot of sense. But when the stock is trading at full value or kind of richly valued, I look at the PE of our peer group, the enterprise value to revenue multiple. And then if we're trading well above that, my attitude is not only should we not do share buybacks, but maybe we should issue more shares and use that capital to try and grow the business because we have access to cheap capital. There is no handbook here. These are supposed to be nuanced, thoughtful decisions. There's arguments on both sides of it, but that's why you have a board of directors. That's why you have a CFO. And that's hopefully why you have a CEO that is thinking more, hopefully, than just the short-term price or the short-term value of their options.

11:57Thanks so much for the question. We have one quick break before our final question. Stay with us.

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13:40Welcome back. Question number three. Hi, Scott. Hope all is well. I want to start off by saying that I'm a big fan of you, Section School, and your podcast. I hope you continue inspiring people around the world just like you always inspire me. I also quickly wanted to say I had a really good chuckle recently at some of your very relatable stories of caddying, having caddied myself in hot, humid Southern Ontario. Here's some background info of my situation to help you answer my questions. I'm turning 30 this year and have a very comfortable job at a small private equity firm in Toronto. I have a senior position, good hours, plenty of vacation time, mainly work remotely, and make very good compensation, especially for someone my age.

14:17That said, I've been at this company for almost nine years, and I think I've reached a plateau in terms of learning. I've always been entrepreneurial, so I'm planning on leaving to start my own small fund. It's also worth noting that I've been given the runaround at this company and empty promises regarding receiving equity for the past two years. And by the way, this fund has no carried interest plan. For my fund, I have people that are interested in backing me as investors, and I've had some great conversations with owners in my local area that are interested in selling their businesses to me.

14:46So with that, I'm confident I can get the fund off the ground relatively quickly. Here's where things become a bit challenging in my personal life. My wife just gave birth to our first child, and although she doesn't say it, I can tell she's nervous about my plans. My wife, that is. Our daughter can't speak yet. I'm also not getting a ton of support from my very conservative, risk-averse Italian immigrant parents who really can't fathom leaving such a comfortable job, let alone starting my own fund. My question for you is this. What should I be considering when it comes to timing my departure and starting my entrepreneurial endeavor?

15:18Am I crazy to be doing something like this with a newborn and hopefully more kids in the future? You've been extremely entrepreneurial while starting and growing your family, so I'd love to hear what you have to say. Thank you very much in advance. First off, thanks for the kind words. This is called a good problem. You have a great job, but you want to step out on your own. And I do believe, I'm a sexist here, I think that one of the more powerful chocolate and peanut butter combinations in many U.S. households is you typically have one person that's more conservative and thinking about the well-being of the family unit and wants to be risk conservative.

15:53And then you have one person that tends to be more risk aggressive. Now, in terms of your decision, the way I would couch it or frame it or think about it is how much money do you have in the bank? Because let's assume you think it's going to take you one year to get to profitability. Assume it'll take two or three years. Do you have two to three years of income saved up such that your family could live as they're living now without any financial stress? I think what your parents think, quite frankly, I think you listen, but you don't hear them. I think immigrant parents are just can't even imagine what you're doing.

16:26They think you've hit the jackpot. Sounds like you have a lovely wife, you have a kid, a good job. If your private equity fund is not giving you carried interest, then quite frankly, that's not a great tell. If you're fortunate enough to have the skills to be in private equity, quite frankly, my brother, you have an opportunity to be really wealthy. But the way you get wealthy is through carried interest. And if your firm isn't offering that, I would say that, yeah, maybe it is worthwhile to consider going out on your own. Going out on your own is very scary and very nervous. I would suggest a couple things.

16:54One, the key for a private equity firm out of the gates is AUM. It doesn't matter how good your performance is if you don't have the capital to buy companies. Two, I would think about finding someone, you sound very young, maybe someone a little bit older who has a stronger contact base that might have an easier time raising capital. But the best way to get another job is to already have one. And the way you get another job in private equity is you already have kind of the AUM. I don't want to say lockdown because you can't actually raise money while you're working for the other firm, but you're really confident you can raise that first$50 ,000,$200 million.

17:26dollars. When I started L2, I had exactly$700 ,000 to my name. And I'd started it in my 40s. And I thought I was going to have a lot of money at a very young age. And the dot-com or dot-bomb implosion and the great financial recession kind of nearly wiped me out. And when I started L2, I was losing about 100 grand a month. And that's what it means to be an entrepreneur. The difference between an entrepreneur and employee is very simple. Are you willing to sign the front of checks or the back of checks. 99 % of people are only willing to sign the backup checks. And that is the idea of going to work and working 60 to 80 hours a week, which you will have to do, my friend, if you start your own private equity firm.

18:06They're not comfortable with, at the end of the month, writing a check to the company. And I had to do that for a better part of the year. And I did have to go home and explain to my partner with two babies at home that, okay, I've been working my ass off. You you and the kids never see me, but I need$100 ,000 from our savings to put into the company. That is what it means to be an entrepreneur. It is stomach churning. It is upsetting. It is stressful. It is absolutely nerve wracking. And you're going to wake up sometimes in a cold sweat and think that you're letting your family down. Welcome to the romantic world of entrepreneurship.

18:37The upside is that if it works, there is no limit on the upside. Fast forward seven years later, I sold the company for$160 million. I was the largest shareholder. That's a game changer was when you work for someone else, unless there's specific carried interest, they're always going to sort of decide, oh, you're a young guy, we're going to pay you really well, but your compensation does have a ceiling on it. So the upside is enormous in entrepreneurship, and that gets a lot of publicity. The downside gets less coverage in that it is very stomach churning. It is a very nervous, precarious place to be.

19:11So in sum, in sum, I would suggest thinking about a partner. I would be very honest about the kind of capital you can raise right out of the gates, I would try and ensure that your spending level is such that you could have the savings and maintain the current lifestyle you have for two to three years. That way, if it doesn't work out, you can reenter the workforce without the type of strain that economics place on a family. Your partner, your wife, is who you have to come to an agreement with. And that is, this is what I'm thinking. Lay it out. Go through the numbers. Go through the money. This is why we'll be fine if it doesn't work out.

19:48I think that's what you have to tell her. This is why we'll be fine if it doesn't work out. But as an entrepreneur, I can tell you the highs are really high and the lows are really low. I've started a bunch of companies. I'd say, you know, I've had a few wins. Most have been just meh. Quite a few have failed. And it's the closest thing to having a kid without having a kid. You conceive of this thing. It looks, smells, and feels like you. It disappoints you, it delights you. Thanks so much. Best of luck to you.

20:20That's all for this episode. If you'd like to submit a question, please email a voice recording to officehours at prop2media.com. Again, that's officehours at prop2media.com.

20:38This episode was produced by Caroline Shagrin. Jennifer Sanchez is our associate producer and Drew Burrows is our technical director. Thank you for listening to the Prop G pod from the Vox Media Podcast Network. We will catch you on Saturday for No Mercy, No Malice, as read by George Hahn, and on Monday with our weekly market show.