Intro to Guest Patrick McQuown1 – 2x founder and now running Towson U’s StarTUp Incubator and Accelerator
Marcus Schafer (00:05)
Hey everyone, thanks for joining us for the latest edition of GreenStream. This is with myself and Pat Collins, Greenspring’s CEO. Just a quick reminder, our goal is to look at the research and the considerations that we’re thinking through every time we’re providing advice to individuals and businesses so that you can make great choices to best live your ideal life. Today…
It is going to be really, really fun because we’re joined by Patrick McQuown as our first guest on the the Padcast. And what Patrick is fantastic about is he’s a real life entrepreneur and we’re going to be talking about exiting an entrepreneurial venture. So let me quick jump into Patrick’s background and hopefully I don’t butcher it and I get it right in 60 seconds or less. But Patrick has founded
two different startups. One he kind of bootstrapped with starting with a thousand dollars. The second one ended up raising over $50 million of funding. And after those two entrepreneurial ventures, he kind of switched into being an entrepreneur in residence at Yale at Brown. He led up JMU’s accelerator incubator for new startups. And now he’s at Towson University. So let me pause. Patrick, I summarize that well?
Patrick McQuown (01:29)
Yeah, you did pretty good. Yeah, I would say you hit it. Yep.
Marcus Schafer (01:32)
Wonderful.
Patrick Collins (01:34)
Great. Well, I’m super excited that Patrick’s joining us today. In addition to just getting to know him over the last year or so, he’s got a great background. So I thought maybe Patrick, you could just tell us a little bit more about your background, how you led to, you know, what led you to the Towson startup.
And then also maybe if you can just tell us a little bit about what’s going on there because I think the community, Baltimore community at least really needs to know what’s happening if they haven’t, if they don’t already.
Unlike Any Building in the World2 – how the StarTUp is breaking the mold to support innovation in the Maryland way
Patrick McQuown (02:03)
Yeah, absolutely. Thanks. Thanks again for having me. So, yeah, as Marcus said, I’m a two time founder and my first company, I was a student entrepreneur. I was a student at George Washington in DC. I was a forensic science major, never took a business course in my life and started a company and had to learn on the job. We raised no money. You know, we were in business for almost nine years. I like to say we were an
eight year overnight success, you know, because it started on texting in 1996. And then obviously with with American Idol and all that texting became red hot. So we were kind of trained going downhill at that point. And yeah, what really kind of led me to here was I didn’t plan post exit on either of my companies. You know, after my first company, I went to go adjunct at Georgetown.
You know, I was like, well, this academic thing is fun. Then I did my second company where we raised a lot of money and exit. said, well, what am going to do now? I don’t want to be a venture capitalist. And so I went to go teach at Yale. And then that’s when I found what was called the Yale Entrepreneur Student. I said, this is what I want to do. So I’m here at Towson and we have this building, is unlike anything in the world. Poets and Quants is a publication for colleges of business. And they literally said that about us.
They wrote an article entitled unlike any building anywhere in the world and wrote all about us. And so what we have is three kind of main things. The first one is free co-working space. No membership, no fee, no affiliation with the university. And it’s free open five days a week, 8 30 to 5 30. Just come on in, use the free wifi, use lockers, use the LCDs, use the 500 power outlets. And it’s just a great, great space. And then we have six conference rooms that are complimentary.
for any organization to reserve, five or more. They hold anywhere from 25 to 85 people. They all have 100-inch smart screens and mics in the ceilings and speakers in the ceilings. And then upstairs, we have 10,000 square feet for ventures that go through our accelerator and complete our accelerator. So that’s open to anybody in the state. And if they get in, it’s eight weeks, June and July. We give them $10,000 equity free, put them through a whole bunch of founder-specific programming.
And then they can move into our building and have 24 hour access to the building and access to me and the staff afterwards.
Get Your Finances Tight and Right – the importance of getting your house to make sure you don’t end up like FanDuel’s founders who got none of their $450M sale
Patrick Collins (04:19)
That’s really cool. think one of things I’m excited to talk about is not just, you obviously have some personal experience exiting business, but now you’ve been working with these companies that go through the accelerator program and you’ve seen what’s worked, what hasn’t. We have at Greenspring, probably over 200 clients that own or run businesses. And at some point we’ll probably be thinking about an exit. So I think hopefully this will be a great resource for them. But maybe we could start.
with this just this idea of exiting and you’ve probably seen exits go well in some cases and maybe some not go so well. So curious from your perspective of where you’ve seen exit planning fail, where it hasn’t worked.
Patrick McQuown (05:00)
Yeah. So, so the biggest thing is founders treating it like a last minute decision versus a long-term strategy, because it should be part of your long-term strategy. Right. So, um, they go through an acquisition and they realize that their finances aren’t tight and right. As I like to say, their cap tables a mess, or they don’t understand the tax liabilities. Uh, so they ended up leaving money on the table. You know, we talk about in programming how FanDuel sold for $450 million, right? Almost half a billion dollars.
The founders made zero cents. Both of them did not make a, make a penny. Right. And so, you know, you really got to understand your cap table. you might sell for a big number only to realize that the deal wasn’t structured the way you want it. And it crushes you with taxes or leaves you tied to the company longer than you wanted. And then there’s a team. If they don’t prepare their leadership for life after the exit, whether that’s employees or cultural shifts, then it can lead to chaos post-sale. So the best exits, right? You know, they’re planned, they’re intentional.
and they’re thinking years ahead and they’re surrounding themselves with advisors and structuring the deal so they get the most out of it.
Marcus Schafer (06:03)
Yeah, Pat, I’d love to hear from you as well. mean, these are things that we’re going to build off of everything that was just mentioned, but Pat, where have you seen exit planning fail as well?
Patrick Collins (06:15)
Yeah, it’s a great question. It’s probably very similar to Patrick. think also, and I know this is something we’re going to talk about a little bit, is whether or not your business is actually saleable. Sometimes people think that there’s value there, but they’re really maybe just a consultant and the business just revolves around them. And when they’re no longer there, it doesn’t exist anymore. So I think that’s an area we’ve seen a fail. Certainly when there’s
Lots of parties that own the business. We’ve seen some issues with that too, that there can be just disagreements within a partnership or some sort of a group of investors and that can cause a splinter and the firm can split up in different ways. So there’s definitely an alignment on like leadership and ownership that needs to happen, I think for a successful exit. But then also just making sure you’re building something that somebody is gonna want to buy at some point. And that maybe is…
Exiting to an Institutional Investor – every word of a 90-page sale document is a right you had and right you lost
a good lead in, I Patrick’s got some thoughts on this, to kind of get into what does that really look like as far as what are the types of businesses out there that you’ve seen maybe that are more lifestyle focused versus actually more investable by others kind of from a focus standpoint.
Patrick McQuown (07:22)
Yeah, yeah. that’s, that’s, that’s this, you know, term, this new term lifestyle business, I find almost offensive, right? Like, you know, let me get this straight. You have a business that generates profits and has been in existence for 10, 20, 30 years, and never took any any investments for equity. And they’re calling that a lifestyle business. That to me is a successful business, right? So you know, the ones that are
investable, we’re talking venture capital, professional investors, you got to know what you’re stepping yourself into. And most founders do not. And that’s a lot of what we concentrate on in the accelerator. You know, they’re going to give you a million dollars, but they have preferred shares, you have no control anymore. I like to say that that, you know, 90 page document they’re going to give you, you have every single word in that 90 page document is a right you had and is now a right you lost.
You know, and so you can’t sell the company without their okay. And, you know, pay yourself and a whole bunch of other things. And so, yeah, I’ve seen deals that I’ve seen a $360 million acquisition deal that that I was a part of where we had merged with another company and the $5 million investor from a venture capital firm said, we’re not taking this deal and fired this deal and got rid of it. So, you know, just know that if you’re taking a venture capital deal,
You better be a billion dollar company in about five to 10 years. Otherwise, that’s it. It’s a billion or bust, basically.
Builder vs. Seller Mentality – don’t take it personally but can this thing print money Now, without You?
Marcus Schafer (08:47)
Yeah. When you think about venture capitalists, know, what they’re looking for, they’re institutional investors looking for institutional type returns. And you just really have to understand what type of buyer they are. Before we jump into some of the different categories of buyers, maybe I’d love just to talk about this builder versus seller mentality. And you were talking about, have to plan ahead of time for a sale, but that’s a little bit.
Patrick McQuown (08:55)
Mm-hmm.
Marcus Schafer (09:12)
different from a lot of people are thinking, hey, I just want to be focused on building my company. So what’s that builder for seller mentality shift that kind of occurs?
Patrick McQuown (09:19)
Yeah,
yeah. So with the caveat that you can’t take it personally, right? Cause the biggest shift is you come to the realization that what made you a great founder is exactly what’s going to annoy them. Right? Cause as a founder, right? You know, you’re all about vision. You’re about growth. You’re about making decisions that that might pay off in five years, but the buyer, they care about one thing. Can this thing print money now without you? And so, yeah, you know, I treated my companies like they were my first born child, right?
Marcus Schafer (09:23)
Thanks
Patrick McQuown (09:48)
The buyers come in and they’re buying a used car. They’re kicking the tires, they’re checking in on their hood. They’re trying to figure out if they’re getting a lemon. Your job is to make sure, yeah, you got a clean tile, you got a fresh wax job, and that definitely doesn’t require you to be in the driver’s seat for it to run. And that’s just a shift paradigm for everybody.
Patrick Collins (10:06)
You know, it’s interesting leading up to part of the impetus for this podcast was Patrick had asked me to come into the accelerator program and speak to a lot of the founders there about their potential exit and what they should be thinking about. And one of my initial things that I told them was the more you can get to a point where you are no longer required to be in the business to run it, the better and more valuable it becomes.
And that really was a head scratcher for a lot of the founders. Cause they said, you know, we’ve been taught that our business is an extension of us and we should be the ones really kind of out there promoting it. And I said, I think, I think that’s right, especially in the beginning, but as you grow it, if the business is entirely dependent on you being there every day to manage it, it’s less valuable to, because it’s just too much risk there for outside capital to come and say, well, if this person steps away,
this business goes to zero. So I think for a lot of our founders and entrepreneurs and clients, I’m sure one of the things to be thinking about is how, you know, as hard as it is, because I, Patrick, I’m a founder as well, just like you are, and it is, it is like my baby. It’s hard as it is to step away, the more valuable it becomes when you can, when you can actually do that. So.
Patrick McQuown (11:20)
Mm-hmm.
Marcus Schafer (11:21)
Yeah. And we talk a lot about that. I don’t know where I got this from, but crowning the company, not yourself, right? So you got to take the crown off yourself at some point in time and put it on the company and that becomes everything that you’re celebrating everything.
Different Types of Buyers – strategic, private, venture, time wasters, and internal: what do they want?
I’d love to maybe just understand, know, venture capital is one way, but who are some of the different buyers out there? And what are the different types of buyers that individuals might be exploring selling to?
Patrick McQuown (11:48)
Yeah. Yeah. So like, you know, buyers aren’t all the same, right? It’s not monolithic, right? They’re like first dates, right? Some bring flowers, some bring red flags, and some are there just to waste your time, right? So for example, like a strategic buyer, right? This is somebody that’s looking to swallow you whole, right? They want your product, they want your customers, or maybe they don’t want you competing with them, right? They’ll pay more, but
The problem is you’re going to be absorbed into the mothership and your brand might not survive the process. And, you know, welcome to corporate bureaucracy, right? You know, then you got PE buyers, right? Private equity buyers. They don’t love you. They just want your cashflow. And if you’re profitable, they’ll buy you up, right? And optimize you and flip you like a house on HGTV, right? You know, that’s, that’s what they’re going to do, right? Whereas venture backed buyers, right? And I had
a ton of offers from venture backed buyers. You know, they just raised, you know, war chest of money and they want to synergize or whatever that means. And we’ll talk about innovation and culture fit. But really what they need is your tech or your customers before they burn through their money. And it’s going to be completely uncertain because there’s a good chance that it’s just not going to go anywhere. Every single org that I said no to on an equity buyout, I am glad I did because they all went, they all went nowhere.
And so, yeah, you got time wasters. They’re the ones that come in and say, oh, we love what you build, but they’re really just there fishing for Intel and they want data and then they’ll ghost you harder than a Tinder date when it’s all said and done. So, you your job, right, is to have a higher price and a long-term fit. I always like to say cash always wins every time and then see if there’s an earn out or if you want to stick around or vanish into the sunset.
Marcus Schafer (13:17)
you
Patrick McQuown (13:28)
You know, but the key is knowing what you want because the wrong, the wrong buyer can, can just screw everything up. it’ll be a slow motion train wreck.
Patrick Collins (13:37)
Yeah, I have maybe a cautionary story there of a client that ultimately sold to private equity. And obviously, there’s a lot of dollars at stake. But the private equity firm was going to use this business as a platform, essentially, to go out and acquire lots and lots of other businesses just like them to build it into this much, much larger organization, which they did. My client remained on as the CEO, but just this
challenge of going from kind of making these decisions, being in charge to all of a sudden being dictated to, to a large degree and losing this thing that had been part of your life for your entire life. You built it. It was a child that you kind of had raised and all of sudden it was gone. And he really, really struggled with it. And it took about a year. went through this really, really hard depression. And he ultimately, was a horrible, horrible story. He ultimately committed suicide. And I look back on that.
And he was just an amazing person. But I just look back on that. I think that there was probably some other things at play, but that was that was a major factor. And it was just this feeling of loss that he had after he sold the business. And so I think if you’re building something, you know, I think just preparing yourself mentally and psychologically for losing it if you’re planning on selling it, if that’s really what your end game is, because Patrick mentioned before this idea of like a lifestyle practice.
or lifestyle business as almost like a dirty word, like, that’s not investable or whatnot. Some of the most successful people have those types of businesses and they can just maintain them and generate really great profits and they can bootstrap and they don’t need to bring in outside capital. So I think it’s just something really interesting to think about as a, an owner is it doesn’t have to be the end game is to sell to some big aggregator or private equity firm or other strategic buyer. You can maintain your business.
and have internal succession as well. That’s another opportunity to do exit planning.
Get Your House in Order – look like a dream acquisition, not a fixer upper AND still prepare for buyer shenanigans
Marcus Schafer (15:30)
Yeah, what a terrible story. I just think about how every time when somebody’s going through this process, it’s all about the business, it’s all about the business, it’s all about the business. But what really matters is also what do you plan on doing next? How do you want to stay involved? How do you want to maybe not stay involved? So maybe I would just love to hear about
how you incorporate your own personal kind of financial picture or your own personal game plan into some of these decisions because at the end of the day, when you do a transaction, something’s gonna change. And so how do you prepare yourself for whatever that change is?
Patrick McQuown (16:14)
Yeah, yeah. So this is this is like the stuff we refer to in the Accelerator as you know, you got to get tight and right. Right. Your financials have got to be in order, right? Nobody wants a mystery novel, right? They want a clean spreadsheet, a clean cap table. You know, that’s not what they want. Right? No. Well, we’re creative bookkeeping or we’ll explain it later. That does not that does not work. Right. As Pat said, and I will double down on you have to remove yourself from the equation. Right.
and make yourself replaceable as much as that’s going to hurt your ego. your cap table has to be, has to be absolutely, tight and right. No buyer wants to negotiate with your buddy from college that owns 2 % just because right. you got to check your contracts, right? You’re to set up a war room. You’re going to go all through all that stuff. And so if you got handshake deals, that’s not going to do anything. and nothing kills a deal quicker than, than due diligence nightmares.
Right. Got to make sure you have no skeletons in the closet, right. IP disputes or ex-employees lurking in the shadows with bad, you know, stuff about you handle it before because they will find out. And then lastly, you know, it’s all in the story, right. And ask you why you’re selling your answers. I don’t know. It seemed like a good idea. That’s a red flag, right? Have a clear, compelling reason growth, timing, market trends. Don’t just say you’re tired of running the business and want a nap.
Right. And so, and the last thing is be prepared for buyer shenanigans, right? They’re going to low ball you. They’re going to dig through everything and act like your life’s work is barely worth their lunch money, but stay cool and don’t take the bait. So you want it to look like a dream acquisition, right? Not a fixer upper. And so that’s, that’s really it.
Patrick Collins (17:54)
One of the other areas, think these are great points. I think the theme there is like, get your house in order. Just make sure everything is really, really tightened up. And one of the things I’ve seen, talked about where things fail, but if you have a business that is highly dependent on key people, know, we have a great executive team we have, you and that’s what they’re kind of investing into some degree is like the people are going to be around. Make sure you have good agreement, employment agreements with the people that you have. they,
A buyer is going to want to see that stuff. Can they walk out the door day one and go start another competitive business against you? Can they take your clients from you because your key people don’t have employment contracts with you? just making sure, and some of that happens, that’s just a lot of things that build value in businesses are just good, common sense ways. Even if you’re not going to sell your business, anything you can do to increase the value is probably going to be really positive for your overall success as a company.
but those are things that you probably don’t want to wait until two months before you’re looking to go to, you know, talk to an investment banker, for example, to say, my gosh, we need employment contracts from everybody at the firm. Well, good luck on that one because people are not going to want to sign that and lock themselves up without knowing what’s going on. So I would just encourage people, you know, build the business as if you were going to sell it, even if you have no plan to sell it. So make sure everything’s tightened up right from the, from the get go.
Building a Support Team for Exits – why one of Patrick’s best decisions was to bring an adult into the room who never counted his money, just what’s best for the business
Marcus Schafer (19:16)
Yeah. And you’re mentioning, you know, where to turn to for advice, right? Things like investment bankers. So as you’re thinking about building a team of advisors to help you navigate this stuff, what should entrepreneurs be considering as they look to add people like investment bankers who typically are incentivized to do one very specific thing? So how do you find somebody that you can trust and how do you build some support?
around you that might not be expertise at your company.
Patrick McQuown (19:45)
Yeah, that’s a great question. And it’s probably one of the hardest decisions you got to make, right? So what I did, especially my first company, because we were all young, right? We were all young. We were all inexperienced, which there’s pros and cons to that. So I just said, we need an adult in the room. And so what happened was we hired a guy, he was in his late 30s, early 40s, Jay Young.
he went to Princeton undergrad. went, he has a JD, he has an MBA and he was at, he was an exec at remember MCI, you know, that long distance carrier back in the day. So he was there and, know, effectively made him COO. the biggest asset about Jay that I can say is that he never counted my money. He just counted what was best, you know, for the, for the organization. And so you really got to find that person. That’s right. And he would also tell me stuff, you know, like
There was acquisitions where I was going into them and I was like, well, I don’t like these guys. And Jay’s like, well, why do you care? They’re going to pay you cash. Like, why do you care? So you need somebody that, like I said, isn’t counting your money, is doing what’s best for everybody. And then also is going to give you that frank advice that you probably need.
Patrick Collins (21:00)
One other thing I’d mentioned on that, obviously just for our listeners, investment bankers, Marcus mentioned they have one job and that’s basically to sell your business and hopefully get the highest price possible with the best fit and the best deal structure basically. But one thing I’ve noticed I’d say, gosh, probably over the last five years now that’s been more more prevalent is specialization in that area. Meaning that if you own an engineering firm, which is now being
purchased by private equity firms. There are investment bankers, that’s all they do, is they just sell engineering firms. And there’s some level of comfort that comes with them knowing all the major players, all the different PE backs, sponsors that are out there that wanna buy an engineering firm. And I think engaging with them, if you’re a founder, engaging with those people, even well before you’re thinking about selling to, get to know them.
start to look at the deals that they’re doing, see if, talk to people they’ve done deals with to make sure that they’re trustworthy. But to me, that can add a lot of value is having some specialization versus just a of a normal old like business broker, investment banker that’s one day sells a trucking company and the next day they’re selling a medical practice and the next day they’re selling a restaurant. Those are a little bit more challenging. I just think that the network of people that you can kind of
if you have specialization really helps.
Understanding Deal Structures – you tell me the price and I’ll tell you the terms
Marcus Schafer (22:22)
Yeah, you alluded to deal terms earlier. We were also discussing how is it possible that two founding entrepreneurs can sell their business for a half a billion dollars and walk away with nothing? One of the things I’m always shocked about is the more in depth into finance you get, the less it’s about building a great business and the more it’s about really understanding legal terms, liquidity, provisions, preferreds.
So let’s maybe just talk about how can you make sure that you’re protecting yourself? How can you understand implications on your cap table today into the future? What does that look like?
Patrick McQuown (23:02)
Yeah, so the first thing is, especially for venture backed companies, you got to remember that your goal is the complete inverse of their goal, right? Your goal is to give away as little of your company for as much money as possible. And their goal is to get as much of your company for as little as possible, right? And like I said, you’re going to have this 90 page document. For example, there’s ratchet and then there’s full ratchet, right?
Marcus Schafer (23:27)
Yeah.
Patrick McQuown (23:28)
And in the accelerator, we do scenarios where look at the distinction between just having that one word full ratchet in there compared to ratchet makes I’ve never met a founder that knows that stuff because the lawyers aren’t explaining it to them properly. And then you don’t want to pay a lawyer who’s again got the inverse of you, which is you want to learn as much as possible, as concretely as possible without it being obtuse and as quickly as possible where they want to be somewhat obtuse and giving it just enough that you’re coming back for more and all that type of stuff. And so
There’s a saying that that founders don’t understand their cap table their first time around. They have an exit. Then they understand it for the second time around. We work in the accelerator and making sure they really, really, really understand their cap table. And the reason those founders didn’t make a cent was because they did not have the right person on the outside to go and tell them if this happens, then you will make this. And, you know, last thing I’ll say is, you know, employees get, they get
They get options, right? I did a deal with one of the companies that I helped where they acquired a company and the two founders were UPenn, they went through Y Combinator. One of them, their father was a Manhattan district attorney, right? They signed this paperwork and then they didn’t realize that they were gonna have to come up with $400,000 each, you know, to acquire their shares. And it’s just amazing to me that people sign options paperwork and don’t understand how it works.
Patrick Collins (24:52)
Yeah, someone told me and I think this is true is that, know, tip you only sell your business once, but the people that you’re negotiating with do this every single day. That’s their job. And so if you think you can negotiate with them and you have some sort of edge or you have something that you know that they don’t, you don’t like you need somebody who also does this every single day for their job, whether it be a corporate lawyer, you know, a really good investment banker that you trust, but getting the right people.
is so important. you know, I think the other part around structure and deals is something that I see a decent amount is cash versus equity versus debt. I mean, there’s all sorts of different ways that can structure these things. It’s the old term, the old adage in business. It’s very famous is that you tell me the price you want. I’ll tell you the structure that I’m going to put on it basically, meaning that
you know, yeah, you want a high price, great, but we’re going to put all this different terms in there. That’s going to make it really difficult for you to hit that price. Or if you do, it’s going to be really good for us too, basically, because you’ve grown so much through that stretch. I think understanding, I mean, the way I usually try to explain it to people is cash upfront, the more cash upfront, the less risk you’re taking. If you have to take anything that’s going to give you cash later, like they want you to hold a seller note.
They want you to hold equity in this new entity that you’re basically merging with or buying. That’s just risk because you have lost control to a degree of your business and now you are hoping that on the backside there will be something there. And sometimes it’s good risk. I’ve had clients that have made out way better by getting equity in the new business than by taking cash.
but they also recognize the risk. had enough capital for themselves personally to be able to say, I can take that risk versus not taking enough off the table and then saying, I hope this works out because ultimately everyone who started a business knows how hard it is. It’s really hard to do that multiple times.
Patrick McQuown (26:46)
Yeah, let me just give you a quick story that I won’t, I won’t mention names, but it’s very kind of apropos to, to what you’re talking about. So I had a friend that I mentored and in 2017, he had his company was the number one app on the iOS store, the, the Apple, the Apple iPhone store. was the number one company and they raised no money. The number two company had raised $220 million. So clearly you want to be in his seat where he’s raised no money. And he got purchased by Barry Diller’s company.
Marcus Schafer (26:46)
Yeah.
Patrick McQuown (27:14)
And he called me and I said, leave now. I said, leave now. Now like the cash you have is the cash you’re going to get. These guys are professionals. You’re not going to hit those goals. And right now you are the shiny object. You’re the guy that says, I got the number one app on the iOS store, you know, and I raised no money doing it. Your stock is at an all time high. And what ended up happening? He ended up hanging around for five years. They ended up going to court with them and only recovering like
10 % of what was potentially promised to them and his is his he’s not the shiny thing anymore. And so yeah, it’s it’s it’s to what you said. These guys do it every single day and know exactly how to structure this thing. You know that if it does work out for you, it’s gonna be such a growth trajectory. It’s not gonna be funny, but odds are it’s not gonna work out for you.
Telling Your Team – avoid the extremes: you aren’t the town crier, but this isn’t also witness protection
Marcus Schafer (28:06)
Yeah, which I think goes back to, you know, find your personal why, why do you want to do or not do something? What’s your game plan for staying in or getting out? And then make sure you find a buyer that aligns most with what you want, but don’t think you’re going to stay in a business with a buyer that really doesn’t want you in that business, right? They’re going to win out more times than not. one of the things that we kind of briefly referenced earlier that I
thought would be really relevant to this is also how do you think about the right time to inform the rest of the team and maybe different layers of the team about, we’re thinking about a change in the strategic ownership of this venture. So how do you think about informing the team and kind of lifting the veil of secrecy?
Patrick McQuown (28:55)
Yeah, so, you know, the, the, well, first off, you just don’t want to be broadcasting that you’re selling to everyone, right? You’re not, you’re not the town crier, right? At the same time, though, you’re not in witness protection. So the early stage, you know, that that should be between you, your lawyer, your your trusted advisors. But anybody that’s that’s not critical of the deal, you just got to zip it around them, right?
When you’re actually talking to the buyers, you know, that’s when you really start to disclose everything to your advisors, but you’re not, you’re not throwing confetti everywhere. It’s not done till the deal is done. Right. This isn’t the time to make, you know, a company wide announcement. That’s, that’s not the time. Right. Then when the deal is almost done, that’s when you can start to loop in key key team members. And, and most of the ones that are going to have equity in there and they’re going to be, they’re now going to have like a, like a capital event. Right.
But you gotta keep it under wraps till the inks drive because there’s nothing worse than a leaky exit. so, yeah, just don’t do what every reality shows contestants guys until everyone too early are gonna get blindsided by spoilers.
Patrick Collins (29:58)
It’s fun, I’ve gotten this question a few times and my comment is typically, you don’t wanna be at the extreme. So you think about the one extreme telling everybody really early, well, I don’t know what the probability of these deals happening are when you’re first starting to talk to a buyer, but can you imagine being an employee at an organization where every three months or six months the owner’s like, hey, by the way, I think we’re selling, we got this great buyer and then it falls through.
I mean, to try to keep good employees through that, I mean, it’s just such a, it’s such a dangerous way to kind of run it. The other side of it is obviously you don’t want to probably wait till the last day and be like, Hey, by the way, and people have done this, but tomorrow we’re selling to so-and-so, you know, either, Hey, you’ve got a job or you don’t or whatnot, and no runway at all for people. So I always tell people, think it’s, there’s a, there’s a cultural issue to this, which is, you, you the type of organization that tends to be very inclusive?
and you like to involve people in the kind of discussions and get opinions, then you probably want to be a little bit on the earlier side to talk to them. And if you’re more of a kind of top-down organization where you are making a lot of the decisions or there’s a small little group that makes a lot of the decisions at the firm, then you probably want to be buttoned up till kind of a much later in the process. I think anything at the extremes is really, really challenging, you know, from that standpoint. One last thing I just mentioned, because Patrick brought up
earlier, like, you know, make sure you involve your lawyer. And we were kind of talking about the just going back a couple questions. We were talking about the investment bankers as part of the team. I do think the lawyer part as part of the transaction is really important. And this is one where I’ve seen get messed up sometimes too, is, the guy who did my will is my lawyer, he’s going to review the documents that the purchase agreement. And he’s done three deals in the last five years, he’s looked at some purchase agreements.
Again, he is you need to find a lawyer in my opinion that is a transactional type attorney that knows buying and selling Businesses if you don’t they’re gonna miss stuff and they’re gonna the stuff’s gonna fall through the cracks there I’m gonna know what to look for half the time So I think that’s just really important I kind of come back to the same thing I mentioned with investment bankers find specialists that can help you because these is what they’re doing every single day
Managing the Wealth from Your Exit – prepare for the surprise tax bill and Patrick’s wish he 179’d his way to a private jet
Marcus Schafer (32:10)
That’s great. it’s all this effort. When you think about the whole conversation we’ve had, this is years in the making. And then it kind of all comes to culmination on one day. So I guess the question is, after all this input, what’s next? You do something, you make a transaction, what’s next? Patrick, you’ve kind of exited two separate businesses. What advice do you have for entrepreneurs as they think about what’s next for them?
Patrick McQuown (32:34)
Yeah. Well, number one, talk to the wealth manager before the wire hits. Just figuring out is an attack strategy, right? You got to have a plan for that for that surprise tax bill, right? You know, it’s you got to have that. So, you know, one of the things I wish I did was kind of sectioned 179 my way to a private jet. I mean, I didn’t I didn’t do any of that, right? I didn’t take advantage of 179. And so
You know, now everyone advised that that’s part of your plan. Like what’s next? Because then you can 179 it, you know, into into funding that and then cut down on on on your tax bill, right?
Patrick Collins (33:14)
Hey
Patrick, for our listeners, can you talk about what that is? Section 179, for those that don’t know.
Patrick McQuown (33:18)
Yeah.
Yeah. Yeah. So section 179 basically allows it has to be in the same tax year as your exit. So if you sell in, in November, you better really have a plan in place, right? Cause you only got, you only got 31 days to go, right? But what it allows you to do is to have another, another corporation, and then you can take full depreciation on anything that’s on the depreciation right away in the first year. You can take it all in one year.
And so for example, I had a buddy that, that, that went through about a $5 million, capital, capital, instance, and he was a health trainer. And so I’m like, you’re opening up a gym bro And that’s what he did. He bought, he bought all the bikes. He bought all the, all the weights. did all that. now granted he spent more than what his tax bill was going to be, but that now over the past seven years that he’s had that has generated way more.
way more income for himself than had he not done it. And so yeah, 179 allows you to do that. And so you should have a plan for that.
Patrick Collins (34:21)
One thing I’ve also counseled people on, especially entrepreneurs who, you know, were maybe not pulling a ton of money out of the business. Maybe they’re making a good living, but not anything gigantic. And all of a sudden, boom, they’ve got $20 million. They got $50 million. It is a life-changing event. And I’ve tried to tell people, you know, go slow in the beginning from a decision-making standpoint. You’re gonna be tempted to go out.
and buy the brand new car, the $300,000 car, the new house, all that stuff. And that still might be part of like, that might be okay, but to kind of do that without a plan, I think is always a little dangerous because all of a sudden you end up with just this life changing wealth. In a lot of ways, it’s like athletes to some degree that get this signed a big contract right out of college. They’ve never had a lot and all of sudden they just have this ton of money in their bank account. We’ve all seen the stories about how they kind of go broke. So I would say,
thinking about if there is a big liquidity event, just taking it slow, putting a plan in place. It doesn’t mean that you can’t do that stuff. I just wouldn’t do it without a plan basically.
Patrick McQuown (35:27)
100 % 100 % I mean, there’s other things you know, you got to create a do not lend policy for random relatives. You know, I mean, I was I was relatively young, I was only I was only 33. And I’m getting a call from my aunt that I don’t know very well. Am I on my dad’s side? I’ve only seen her a few few times. You know, and she wanted a loan and she referred to me as the money guy and I no you know, like you can’t get out of that thing. And then and then you kind of have a you have identity crisis because your whole life was
Patrick Collins (35:32)
No
Patrick McQuown (35:55)
you in this company, now you’re walking away. so, you know, selling sounds great, but keeping your money is even better. So do some planning before the wire hits.
Finding Purpose After an Exit – advice to find a way to stay in the game and Patrick’s evolution to academia to support entrepreneurs at Towson U
Patrick Collins (36:05)
So, so Patrick, one of the things that strikes me is that you’ve done two exits, but you’ve done them really well in the sense that you’ve kind of transitioned to almost like a different career to some extent, but it’s in the same vein of like entrepreneurship and helping people. So how did you come to that decision? Cause I think that’s something I’ve seen with a lot of founders that have sold is kind of a
a lost sense of purpose and not knowing exactly what to do next. And some will get into consulting, some want to kind of get back into the game somehow. But how did you think about that? That just kind of fall on your lap? Was that something that was very purposeful on your end? How did you do it?
Patrick McQuown (36:40)
Yeah, that’s a great question. So you know, the first time I was like, I’ll take I’ll take a year off. And I had nothing to do. mean, I was on a nonprofit board. And I cannot sit idle like that. That just doesn’t work. Right. So I was like, Well, you know, I’ll go I’ll go adjunct an entrepreneurship class at Georgetown. And that that that kept me in contact with people to have clients in and stuff like that coming to speakers. That’s where I kind of like fell in love with academia. was like, wow, this
This is fun to be on campus again, right? With young people and all that type of stuff. But I didn’t think of it as a career. And then, you know, did did the second company raised all this money, had that exit. was living in Connecticut and typically, so I was in my young 40s at that point. That’s the perfect time to go be a venture capitalist. Here’s what they don’t tell you about the venture capitalists. You act like you’re the Kardashians. You’re really the personal shopper for the Kardashians, right? And then the other thing is like, you know, 19 or 20 ventures aren’t going to work. So you’re just
ruining the lives of 19 entrepreneurs for that one entrepreneur that’s going to hit the grand slam. And that didn’t interest me. So I went to go teach at Yale and that’s where I found what was called the Yale Entrepreneur Institute and just, you know, really was like, this is what I wanted to do and just kind of applied, you know, my, my skillset to break into it, uh, you know, as a executive director. And so, you know, it’s, it’s, I love it. It’s the best. And, you know, I,
I firmly believe that making a shift in your career in your 40s is actually a good idea for everybody.
Patrick Collins (38:06)
Great, yeah, I’ve found that a lot of our clients that have sold businesses, the ones that have done it best are not the ones that bought a place in Florida and now golf five days a week. They’re the ones that have stayed actively involved somehow, board work, volunteer work. Some have started other businesses, maybe not as big as what they had initially started, but they’ve done something that really has kind of kept them engaged. I think, you know, allowed them to, you
use all that brain power they had to go towards the greater good in some ways, to have a purpose and whatnot. how difficult has it been for you to go from building something to now advising a lot of people? And I would think sometimes that could be tough to say like, gosh, just get out of the way, let me do this, because I can do a whole lot better. Does that ever come up or is it pretty easy for you to transition to that role?
Patrick McQuown (38:55)
Not really.
mean, I kind of considered this my third startup, right? When they recruited me, they said, well, we’re going to give you this building. what the original president, Kim Schatzel, wanted was totally different. And to her credit, she’s like, well, you’re the guy with success. You go ahead and build it out how you want. What was hard was getting people, my colleague, artist, for example, has been here for, I don’t want to age her, but over 20 years, right? So she’s
she’s really in that kind of like, here’s how a university system works. And that’s not the way we work. That’s not the timing we work. That’s not anything. And so we did Crystal Ray high school students. And, you know, she was really nervous at first. And I’m like, no, we just do it. Like, that’s what we do. And so it’s the final day where they’re giving their pitches. I’m like, how you feeling? She’s like, just F it. We’re going to do this. I’m like, yeah, that’s what we do. Right.
So, you know, the leadership has been great on kind of like, let me do what I want to do when I want to do it structured and how I want to do it. You know, my, my small staff sometimes has to come to me and say, look, we kind of can’t take on it much more, you know, like that type of thing. But, but, you know, it’s, it’s my third startup and just like any other startup, I’m concentrated solely on outcomes. That’s not incomes outcomes. And so
That’s a different mindset too in a university. so leadership likes it, I like it, and it’s going great.
Joint Venture Venture Studio – Towson StarTUps partnership with MedStar to bring Medical Technology inventions to market
Patrick Collins (40:18)
Yeah, it’s interesting. have a client here at Greenspring. I won’t mention any of the names here, but who went from corporate America to academia. And it is a totally different mindset. You would think that that would be such an asset for a university to say, have this person who’s been super, super successful in business, and now they’re going to come teach at our university. And I think what
what they found was that university doesn’t kind of put a lot of weight on your experience in the business world. They put more weight on your experience in, you know, getting grants and writing papers and being cited and all of these different things. And that’s, you know, a little bit different, but obviously it’s, think it’s really neat. The partnership between the startup, the accelerator program and the building itself and Towson University, because I just think there’s, it was,
I thought it was a great kind of plan for Towson to be able to kind of have the insight to be able to do this. Because like you said, it doesn’t really exist too many places. So it’s really neat to see it happening here.
Patrick McQuown (41:20)
Yeah. And you also find, call it, call it, you know, collisional networking, right? It’s networking that happens, but it’s unintentional. It’s not like we’re all showing up for a meetup, right? And so, you know, for example, the SVP of analytics of MedStar and the head of tech transfer from MedStar used the coworking space. They then saw, you know, how we took Stochastic, which was ER, emergency room AI, right? And
They sold for 10 million cash and they didn’t raise any dilutive funding. see this other, these other med tech companies that, that we have in the program. And they came to us and said, you know, Hey, look, our doctors have inventions. They don’t want to be, you know, CEOs. What if we brought you these inventions and then you brought them to market and the university had some equity in these companies and we form what’s called a joint venture venture studio that is now ongoing. And for a school like, like a university, like,
which will never have a med school, will never be Hopkins. This is a very, very kind of noble way for us to take other research that’s not per se ours, but is researched just like anything else and then bring it to market and have a stake in it. so that was not, Patrick didn’t think of that on his first year, right? That kind of came up because there’s people in our system that also were innovative and forward thinking.
Innovative Ventures Done the Maryland Way – Jbrds children’s shows, Miva bottle + foam roller, Zenjoy relaxation drink, and sleep apnea
Marcus Schafer (42:43)
Well, tell us about some other cool things. mean, a lot of our listeners either are from the Baltimore kind of Pennsylvania area or our current clients that live here now. So tell us some other cool things that are happening locally in our community.
Patrick McQuown (42:57)
Yeah. So for
those that are watching, bought about about some examples, right? This is this is Jaybirds, right? And it’s all Baltimore County. And so this was Dr. Jay LeBeau, who is the head of foot and ankle for the O’s. And he basically put a shoe on his grandson, he said, this industry is just taking adult shoes and shrinking them down, you know, for toddlers. And that’s not how works. Because your bone in the back doesn’t drop until you’re eight. So there’s there’s elevation in the shoe.
And so they’re manufactured overseas, but the fulfillment is all done out of, I’m sorry, Halberd Sports off of Pulaski Highway. That’s where all the fulfillment is done. This Miiva is this, which is these two gym rats, they’re total gym rats, but they also know how to code in 3D print, which is…
not normal, but they came up with this is a water bottle that’s dishwasher safe that doubles as a foam roller. so runners are going absolutely crazy for this. This one Zenjoy is three area high school best friends that you know how the nineties and the aughts it was all about hustle, hustle, hustle. So that gave us like five hour energy drink and all that. And now it’s all kind of about relax. This is this has
aptogens in it that basically like ash ganda that that calm you down. And these guys with only $40,000 figured out for products for you to have manufacturing figured out fulfillment. And they are in every single giant store, they’re in 200 Foodline stores, and they’re, they’re absolutely crushing it. It’s all being done done right here in the county. And then obviously, we have tech companies and med tech companies. We have somebody that’s redoing sleep apnea, whether it’s non invasive, they’re not doing surgery on your and it’s not a mask.
It’s almost like an Invisalign that you wear. And then it sends electrodes down to stop you from snoring and closing the pathways. We got a whole bunch of really cool stuff in here and we’re kind of doing it the Maryland way.
Marcus Schafer (44:54)
I love it. Yeah. I mean, you read so much about kind of all the technology and innovation is claimed to be coming out of these big metro areas and they definitely produce a ton of it, but it’s just super cool to see that happening in our own backyard.
Patrick McQuown (45:08)
Yeah, I mean, look, I was on the committee that was working to designate this area a tech hub. And you know why we didn’t get it? Because we just tried to copy what Silicon Valley and New York do and Boston does. That does not work. You you got to do it your own way. And so, you know, we can do it the Maryland way. We don’t have to copy, you know, how they do it in the Valley and in New York City.
Marcus Schafer (45:32)
great. Pat, I think we’re getting towards kind of a time limit here. Do you have any last questions you want to get in with Patrick?
Money is a Bit Like Manure – When you pile it up it smells, but when you spread it around it tends to grow things
Patrick Collins (45:42)
Well, think maybe obviously you Patrick counseling a lot of these and coaching a lot of these founders to an eventual exit. And that’s the topic of our podcast here. So maybe any final thoughts you have on founders that are thinking about an exit. What are kind of some final thoughts that you think people should leave this podcast with?
Patrick McQuown (46:03)
Yeah. So I mean, look, when it ultimately happens, it’s not it’s like waking up from a really long game of Monopoly, right? Where you thought any minute you could lose everything, right? But instead you came out with some cash. You know, for some it’s a vacation. That’s not me. That’s not what I wanted to do. And some just go right into like, let’s start another company, right? But as I said, it is a
existential crisis because it kind of was your whole identity, right? It’s like doing sports. You know, if you’re a top tier athlete, you can’t just retire one day. It’s not it’s not how how how how it looks. And so, you know, yeah, I would say staying with a company that acquires you is basically like raising a daughter and then being her roommate in college where you get to witness all the bad decisions she’s going to make. You know, you just don’t want to be around for that.
Patrick Collins (46:54)
Ha
Patrick McQuown (46:57)
You know, and so and so, yeah, I mean, look, I’ve always said, you know, there’s a saying that that money doesn’t buy happiness, right? And I think that’s that’s kind of a that’s kind of a insulting thing. just want to without money. But what I will say is financial freedom does buy happiness as long as you can make decisions in your life because you’re financially taken care of. And what you have to do is just decide, does that mean I get a yacht or does that mean I get a scooter?
Where is it that you get that happiness? And that’s, think, the ultimate goal.
Patrick Collins (47:29)
Yeah, that’s great. think the thing I would add, we really kind of touched on this, I think throughout the whole podcast is just really knowing yourself through this process, knowing what you want and don’t want out of this process. If you are looking to exit and you’re really the goal is to get a check, I would think about what’s next for me. What is it that I’m gonna get? How am I gonna get fulfillment? Because obviously none of us can die with it. Obviously there is an element of money that does
provide some level of freedom to people. But then on top of that, you still have to live your life and you have to, you know, hopefully do the things that you want to do. And if what you want to do is run a company and you just sold it because you think that’s what you’re supposed to do, you might be unhappy. thinking of, you know, or maybe that’s the plan is you are going to start a second company. So I just knowing yourself, spending some time thinking about just that question, what do I really want for myself? What I really want for this business?
It can prevent so many headaches that I’ve seen happen that people just haven’t even so go, go, go. And then once you get in the midst of a deal, feels like all you want to do is get the deal done. And a lot of times you don’t stop and think like, is this really what I want? So I would just caution anybody that’s listening, that’s thinking about this, spend some time with yourself, spend some time with your team, with your family, talk about this stuff, talk about life after an exit. Is that really what you want? And then if it is great, then you know,
then do all the stuff you need to do to get your house in order.
Patrick McQuown (48:55)
And the last thing I’ll say to what you said, Pat is outside of just knowing where your personal happiness is. I, somebody else said this, and I forget who, you know, money’s a bit like manure when you pile it up all in one place, it tends to smell and it’s kind of gross, but if you spread it out, can grow things. you know, and I think, I think that’s, that’s the other thing is, you know, just think about how do you, how do you spread out that money and have, you know, a positive effect on, on
something other than just yourself. And that can come from any number of things.
Learn more about StarTUp3 – sign up for the newsletter, join events, and use the free space.
Marcus Schafer (49:26)
Absolutely. Let me just ask one last question, which is if people are listening and they’re super excited about your story and what you’re building here in Towson, how can they stay in the loop as to what’s going on with you?
Patrick McQuown (49:38)
Yeah,
great question. on our website there is a kind of sign up for the newsletter and our events. Obviously we have the showcase with the accelerator, but we also have a night where you get to meet the cohort. We have a happy hour where you just get to come in and get to see who’s in the accelerator. We do speaking events that feature entrepreneurs. And then we also do work with high school students. There’s any number of ways that people can see it, get involved.
participate. We have a there’s there’s other people that are starting a fund that invest directly into some of these companies that come out of the accelerator. And we’re not doing the 220 model, which we don’t have to get in and out. But that’s why VCs have to hit a grand slam. And we’re not we’re not going to do that. We’re going to do it the Maryland way where we don’t have a carry and we don’t have a management fee. And so there’s a lot of excitement around that. And just come on into the startup. Come on into the building. I like to say nobody walks in is just whelmed.
You know, they walk in and they’re like, holy moly, this thing exists. And it’s just absolutely crazy. And it’s it’s like nothing else. And so come see it. It does not disappoint.
Patrick Collins (50:38)
I will second that on all fronts being, you know, someone who works across our green spring advisors across the street from the, from the startup, the building itself is worth just go over and walk in because it is impressive what they’ve done. And the fact that it’s free to the public, if you’re in business and you need a place to work or you need a place to kind of meet with, with your team and you want to get off campus, it is a really, really cool spot. So I would, I would encourage everybody and the showcase events that they have with the accelerator.
It just such a really cool thing to see innovation working at a really early stage in a business. Sometimes if you’re in business, you forget about that stage. At least I do. It was 20 years ago when I started GrainSpring and I remember the excitement that I had. Now you get to see that in people’s eyes and how they talk about their products and what they’re building. So it’s just a really cool, special place.
Marcus Schafer (51:30)
Well, Patrick’s, thank you both for sharing expertise for how entrepreneurs can think about planning for an exit, doing the deal, and then life after the exit and innovation in Baltimore. All right. Thanks so much, gentlemen.
Patrick McQuown (51:44)
Thank you.
Patrick Collins (51:44)
Thank you.
Sources
1 Patrick McQuown’s bio – https://www.towson.edu/campus/partnerships-research/patrick-mcquown.html
2Poets and Quants article on Towson StarTUp – https://poetsandquants.com/2024/10/11/unlike-anything-anywhere-in-the-world-inside-towsons-open-to-all-startup-accelerator/
3 Towson University The StarTUp – https://www.towson.edu/startup/