Ep331: Lou Adler – Avoid Raising Capital from Friends If You Want to Keep Both

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Guest profile

Lou Adler is the CEO and founder of Performance-based Hiring Learning Systems – a consulting and training firm helping recruiters and hiring managers around the world source, interview, and hire the strongest and most diverse talent.

Lou is the author of the Amazon top-10 best-seller, Hire With Your Head (John Wiley & Sons, 3rd Edition, 2007), The Essential Guide for Hiring & Getting Hired (Workbench Media, 2013), and the Lynda.com Performance-based Hiring video training program (2016).

His current “Diversity Hiring without Compromise” initiative is focused on developing a color-blind hiring process that ensures the best people get hired regardless of race, religion, age, sexual preference, and physical challenges.

Lou is one of the top bloggers on LinkedIn’s Influencer program writing about the latest trends in hiring, employment, and recruiting. His articles, quotes, and research can now be found in Inc. Magazine, Business Insider, Bloomberg, SHRM, and The Wall Street Journal.

The company’s new mobile-ready learning platform—TheHiring Machine—provides instant access to all of the tools needed to find and hire outstanding talent.


“Do not take money from your friends unless you want to lose them.”

Lou Adler


Worst investment ever

Lou was running a company with 300 people in it when he was 32 years old. He hated his boss, and they would argue every other week. Lou would quit every other month. One day he just left for good.

Becoming a recruiter

In his old job, Lou would work with recruiters who were making so much money. This enticed him to become a recruiter after he quit his job.

When Lou became a recruiter, he realized that hiring was just like any other business process. You just had to do it right. There were so many things being done wrong, and if he did them right, he could make a lot of money. And that is precisely what he did.

Winning the recruitment game

After year two, Lou tripled and then quadrupled his income. He could not believe his luck. After riding on this wave of success for about 25 years, Lou decided to try something different. He decided to automate his recruitment process. This was during the dot-com boom.

Losing his business and his friends

Lou invested a million dollars and borrowed another million dollars from his friends and used the money for his new business venture.

While Lou’s idea was a smart one, the market was just not ready for it. For this reason, everything fell apart. He lost his company and the friends he had borrowed money from.

Lessons learned

Raising capital by borrowing from your friends is a bad idea

Be very careful when asking friends for money to run your business. When you take someone’s money, you got to deliver. If you do not, you will undoubtedly ruin the friendship.

Learn how to manage your cash flow

Cash flow is vital in running a successful business. Do not ignore it. Learn how to manage your cash flow, and everything else will fall into place.

Andrew’s takeaways

Being skilled in something does not necessarily make you a good businessman

You may be very good at doing something, for instance, a great technician, then you decide to start a business as a technician. Soon enough, you will realize that the job of running a business is very different from the position of being a technician.

Sometimes the problem is just your timing

Just because a business fails to succeed does not mean it was a bad business. Sometimes, it is just the timing that is wrong. Great idea, but at the wrong time.

Cash flow is king

It is not cash that is king; it is cash flow that is king. Raising money is easy. The real challenge comes in creating the cash flow to build a profitable business.

Do not mix friendship with business

If you have to borrow money from your friends to run your business, make sure that you do it professionally. Do not let friendship get in the way, because if the company fails, so will the friendship.

Actionable advice

Life is not all about money. Think about what is important to you and let that drive you.

No. 1 goal for the next 12 months

Lou’s number one goal for the next 12 months is to finish writing his fourth edition of his book  Hiring With Your Head: Using Performance-Based Hiring to Build Outstanding Diverse Teams.

Parting words


“Be good and be safe.”

Lou Adler


Read full transcript

Andrew Stotz 00:04
Hello, fellow risk-takers and welcome to my worst investment ever stories of loss to keep you winning. In our community we know that to win in investing you must take risks but to win big, you've got to reduce it. This episode is sponsored by a stock's Academy's valuation masterclass, they call it the boot camp for valuation because it takes almost 150 hours and students must value about 15 companies to graduate. It really is the complete proven step-by-step course to guide you from novice to valuation expert go to my worst investment ever.com slash deals before March 31 2021 to claim your 30% podcast listener discount. Fellow risk-takers This is your worst podcast host Andrew Stotz and I'm here with featured guest, Lou Adler new Are you ready to rock

Lou Adler 00:51
already in rock and roll? Well, maybe for a minute or two. And now that I say that, no, I wrote take a very slow walk that would be much better, I think.

Andrew Stotz 01:02
So I'll introduce you to the audience, and then we're gonna get into it. So Lou Adler is the CEO and founder of performance based hiring learning systems, a consulting and training firm helping recruiters and hiring managers around the world source interview and hire the strongest and most diverse talent. Lou is the author of the Amazon top 10 best seller hire with your head, the Essential Guide for hiring and getting hired and also, the performance based hiring video training program is current diversity. Hiring without compromise initiative is focused on developing an colorblind hiring process that ensures the best people get hired, regardless of race, religion, age, sexual preference and physical challenges. Lou, why don't you fill in a few tidbits about your life.

Lou Adler 01:49
Yeah, well, hey, you know, when you read that, I said, Jesus, who

is he talking about? That I do those things. I said, No, that's the fake body. But

Lou Adler 01:58
he give you a real bio. So I'm giving you my worst investment ever. So that's why I say this is I actually want it to be a stand up comedian. And I paid about a million dollars in training, and people gave me my money back so they wouldn't work for jokes. So that was actually turned out to be a good investment. If you buy that one, I might have a bridge for you. Now I my background is kind of weird. I started as an engineer. running a company when I was pretty young, hated my boss, became a recruiter made a lot of money. Thought I could build a scalable system. So I took it all and invested in a company and lost it all so but had a good time along the way. It was pretty much the short story. And the long story took 50 years to make that story. So we can address any pieces and parts of it. But I do live in beautiful Laguna Beach, California. And I'm happy to be here and I owe a lot to some of the things I did and some of the things I didn't do.

Andrew Stotz 02:55
Fantastic. Well, then I guess it's time to really just dig into that story. Yep.

Lou Adler 03:04
Was it Oh, we want to start over?

Andrew Stotz 03:06
No, that's fine. We're, we're, we're just a casual show anyway, so we just enjoy ourselves.

Lou Adler 03:13
Don't worry about it. It's not worth much more than that. don't charge for this.

Andrew Stotz 03:18
Well, I guess let's get into it. And now it's time to share your worst investment ever. And since no one ever goes into their worst investment thinking it will be. Tell us a bit about the circumstances leading up to it and then tell us your story.

Lou Adler 03:31
Why would actually say no, I probably went into it known as a piece of stupid thing to do so well, probably the stupidest one, which was it which would lead to the more stupid one is I was running a company with 300 people in it. 32 years old, hated my boss. I argued every other week, quit every other month. Talk to his boss. He was the chairman and he tried to convince me and then I just quit. But I was working with these recruiters. So this is 40 years ago, 19 more than that 42 years ago, so I decided to become a recruiter. Only because these guys make a lot of money. I mean, literally this recruiter I met was the number one recruiter in the world. When I met him. He had a lived in a mansion had a butler had two Bentley's and invited my wife and I were working 80 hours a week, he invited my wife and I over his house for dinner. And as we're driving home, my wife says, Why don't you become a recruiter? This one on when I was quitting all the time. So I actually said generally I'll do this and I work he and I work together. When I became a recruiter, I realized that hiring was just like any other business process making parts. You just had to do it right. And it was so many things done wrong. That if you did them right, you could make a lot of money. So that was


Lou Adler 04:58
After your two I tripled question. quadruple my income, it was really it was unbelievable. But then after about 2025 years of that I said, You know, I think I can automate this process, a stupidest investment. Because I quit being a recruiter lost my company, invest in my own million into it raised another couple million lost my company after that this was in the.com, boom, and everything fell apart. But I still have a house in Laguna Beach, and I still have plenty of money. And I decided to create a trading company, as opposed to a technology company. And actually, I think if I was younger, I probably could start over again. And that is that idea. 22 years ago, it's now ready for primetime. So Oh, took me 22 years to realize it. Now the technology just wasn't ready for it. So in many ways, that was the worst, the best. And so, so be it. So that was it. And the one bad thing about it. And I think I would get skipped everybody. Don't take money from friends. And literally, you will lose your friends. Even if you win, you will lose your friends because they'll start arguing about it. And I lost all my friends a lot. And that was really the big loss wasn't the money. It was the friends I don't have these friends that were friends for 20 years. I borrowed money from them, they start angeling. And then we go arguably each other and they walked away. And so that was a that was a loss of money. It was a you can recover the money. I mean, it's depends on what you want. But I do live and going to beach, I've been married 50 years, that same woman met her in a bar in Southern California when I was 22. So I was still married me Sabrina 50th anniversary last month. However, I would say this, that might have been my worst investment. Now that I've come up with three, I only was starting with one. I used to be perfect. I mean, literally, I was perfect. 50 years. I'm begging the world. I can't believe what happened. Better things I got worse. So now she makes me work out of this cubby hole in the basement of the house. That's not my cubby hole. That's what. That's where she lives. I live in the basement downstairs. So

Andrew Stotz 07:02
that that reminds me of something I always say I told my mom I said, you know, something miraculous happened when I broke out with my last girlfriend. She said what I said I stopped snoring.

Lou Adler 07:16
similar story.

Andrew Stotz 07:18
Yeah. Nobody noticed it anymore. Alright, so how would you have to joke? I

Lou Adler 07:23
mean, Andrew, when you have to explain I

Andrew Stotz 07:25
know. I yeah. I don't have a career. I have a I'm a radio guy more than a comedian. So

Lou Adler 07:33
now I can tell that that's for sure.

Andrew Stotz 07:35
Now, let me ask you. So let's explain some of the lessons. Let's summarize that. And then I've got some thoughts that I've got on on your story. How would you describe the lessons that you learned?

Lou Adler 07:47
lesson that I learned I think is it's good to have a plan. But the plan won't work. And then you get the pressure of someone else's money. Raising money is not a positive thing. You owe that money to those people you just bought. So don't add it, I got all this money. Now. That's not it. You've just given your life to these people. And no matter how good the planning is, and I could deal with pressure, I mean, I ran a company turned a couple of companies around with a lot of different situations. When you take someone's money, you got to deliver, and those people aren't your friends anymore. And it's it's tough. And I think that's probably the lesson I learned don't take money from friends, if I had to say one thing. And then when the crisis comes, and this was the.com, boom. So a lot of people lost a lot of money. I wanted to change the direction of the company, then they got pissed off, because I changed the direction of the company and doesn't matter. I mean, that to me is it's an arm's length transaction, it's a pure transaction is nothing about friends or want the relationships no matter how competent you are. If you have a good situation, fine. But in the.com, boom, which is tough. A lot of people lost a lot of money. And it was a challenging situation. But you get seduced by doing I gotta do it. I gotta try it. And I'm kind of glad I tried it in some ways. I wish I hadn't. But now, I don't know. You go down these paths, and you just gotta take whatever lessons you get from the Pats.

Andrew Stotz 09:16
Well, that's quite a lot of lessons. And if I think about it, these are some of the things that I take away. First thing I take away is, I remember the book, The E myth by Michael Gerber. He's

Lou Adler 09:27
look he's he's a he's related to my cousin. I know Michael Gerber.

Andrew Stotz 09:31
Yeah, he's, I mean, I liked it. But you know, the thing that he got across to me in that is that sometimes, you know, we're a great technician, we're really good at doing this thing. We think, Oh, I'm gonna start a business doing that thing. And all of a sudden, you don't realize that, hey, that's a totally different job. You know, the job of running a business is very different from the job of being a technician. And I think most people don't get that. So that's the one thing It reminded me of that. The second thing that you mentioned You know that the technology wasn't really there. There's a company that I, I talk a lot about when I teach about finance and valuation. And that's a company in America called fast and all. And it's the code ticker code is fast. But the idea that they developed in 1968, was that they were going to dispense parts for factories through vending machines, and the technology just wasn't there. But now it is. So they had an idea, but you just couldn't do it to the extent that you can do it now. And so that's an important message too, about timing, sometimes, you know, it's the wrong time. Great idea, but wrong time. And then, the last one that I look at it, you just reminded me of one of my episodes, Episode 192. The guy is a guy named some pot who's from India, and he had a software company and he was trying to raise money, and they were putting the money in, everything was done. But then the money never arrived. And he had to basically go out, pounding the pavement, and generate the cash flow to fund his business. And at that time, it felt like it was, you know, awful. But the truth is, he taught me the lesson, it's not cash, that it's King, it's cash flow, that's King. And you're teaching me that lesson that, you know, it's not all, you know, glory, to raise money, create the cash flow, create a profitable business, and then you don't have to lose your friendships or rely on other people. But your business may be smaller, but it's yours.

Lou Adler 11:32
We're talking about cash flow. And this is a story I told just a couple hours ago to somebody. I, somebody asked me what my favorite job was. And my favorite job was when I was 27. I was director of business operations for Rockwell internationals calculator company, consumer calculator company first, it was actually one of the first handheld calculator companies. And we made this the first handheld printing calculator. And the whole, we had this one electronic component which was printed doesn't matter. But the yield, we cost that added 60% yield. And the calculator sold for 100 $110, or something that Sears was going to sell it for twice. And we had 20,000 a month, we were really this was the it was gonna change our company from 10 million a month to 25 million a month. And it was gonna happen in three to four months. And it was exciting. 27 had a skilled pool job. And it turned out that printhead at a yield of 60% was about $8, which was fine. But the yield turned out to be 10%, which means the price of that thing was 60 $70, which no profit, we're losing 20 $30. But the cash flow was the problem. We were planning on building 20,000 calculators a month, and the material was coming in a factory. But we only could ship out 2000 a month. So not only are we putting $60 on it, we were building millions and millions of dollars of inventory. And the company in a year and a half had to write off 100 $20 million of inventory. Nobody was taking account of the cash flow. And it was actually a Harvard case study about that. And somebody and I read it, somebody said, Oh, you used to work at this company to show me the Harvard case study which isn't, let's say the mid 80s. They said it was a marketing issue. No, it was a cash flow management issue. Nobody even thought about all the material coming in the factory because we couldn't produce the part that yield. It was just an interesting when you mentioned the cash flow, I invest when was a company's investment. But I was a I was 27 didn't matter how to fund job and it was a great experience.

Andrew Stotz 13:42
It's a

Lou Adler 13:44
and it was still a good sport, managing cash flow.

Andrew Stotz 13:47
Well, it's a great lesson. I think one of the things I was in I've been a financial analyst all my career. So I look at companies from the outside in. And then I have my own company, which is a factory in Thailand that we have had my best friend and I've had and he runs for years. And what I've learned is that most people miss, there's two types of investments you have to make in a business. The first type is generally like a capital investment. Yeah, you got to buy computers, you got to buy desks, you may have to buy some manufacturing equipment or whatever. That's really the fun and the easy part. But it's the hard part is the investment, you have to make an inventory that most people miss, and therefore they think are willing to need, you know, $100,000 to do this, but they're missing the fact they're gonna need 500,000 to manage that cash flow, not only the inventory that's on your floor, but the accounts receivable that you got to give you know that the credit that you got to give to your customers and people just missed that. So it's a great reminder.

Lou Adler 14:48
So here's another reminder that my next company after that was a company called the Allen group which was an automotive Mark manufacturing and distribution company. And, in fact, ultra Kissinger Henry Krishna As a chairman, this was a company I quit at the group president, but they were so into cash flow and this was in the mid 70s. So this company, really you, you are budgeted your cash flow, I mean a budgeted cash flow. And I was VP operations of a manufacturing division. And I remember one month, we had a truck coming in from Long Beach, you know, Long Beach of material coming in. And it was the end of the month I could not afford on the books, even though I wasn't gonna pay for it. I couldn't put a ladder in a truck, I actually locked the gate. And it was a truck driver yelling and screaming at me because he wouldn't come in because I couldn't receive those goods and put it into balance sheet. I mean, it was so stupid. I mean, we're talking about one day, but they manage you a budget and cash flow every single month, which was receivables, inventory, working capital, all those things, you talk about Andrew and I, that to me is, so I kind of thought I knew how to run a business. I didn't know how to run, you get over that part of the business, but not getting the all the other stuff coming in. So interesting. You got to understand all the pieces.

Andrew Stotz 16:02
So the let's let's, let's move on now and just ask this question based upon what you learn from this story or stories, what you know, and what you've continued to learn over the years. What one action would you recommend our listeners take to avoid suffering the same fate?

Lou Adler 16:18
Yeah, it's a good one. I don't I think I because I was old at the time. So. So when I lost that money 5253 54 so I'm 74 now. I got real conservative. I decided I couldn't do it again. I couldn't force it. So I created a very conservative company. That did fine. So it wasn't a huge win. But it certainly so the lesson I learned was, you know, it's really about the money. I mean, is it really about the money, you got to really understand that and I realized, Hey, you know, I can no I live in Laguna Beach. I mean it COVID I can't go outside. That's I mean it literally the police prevent old people from going outside. I look. I mean, literally, I was looking for fake ID so I could sneak outside.

No, no, I'm really 27.

Lou Adler 17:07
Well, that's what it said. They didn't believe me. So kick me back in the house. Now, literally, I can't say this. And I can't say what I'm about to say. Because now I got in a police cruiser I, my wife twisted her ankle and they drove us back to the house. And I gotten a police cruiser is a couple while back. That is the most uncomfortable thing in the world. I gotta tell you, I mean, it is plastic, and you got no seats and minutes. I mean, going

Andrew Stotz 17:35
built for comfort.

Lou Adler 17:36
They are miserable. Maybe the front seats. Okay, but the back seat. Now that's no fun. I know, that wasn't a lesson I learned about COVID. I don't even know what the question was. No, I think it's the fact that people go out for all this money. And maybe the lesson learned is, is that really what you want? Because once you get to a threshold of enough money, it's what you do with that money in the rest of your life. That's important. And if I made more money, and maybe I mean, I'm a quarter of a mile from the beach, or would I really be happier if I was a half a mile to the beach and had 100 yards and had a better view? When I eat more? No, I still travel the world, we at least normally do nice things. So there's a point in time, you got to say, Okay, what really is it and then you're driven just by getting money, or you're driven by something else? And I think that, to me, is a lesson that most people don't learn. And I you know, how do you put it in balance. I'm not one to judge other people's value systems. But to me, it's part of thing you got to do.

Andrew Stotz 18:37
It reminds me of a song by Bob Dylan called Bob Dylan's dream, where he's talking about the fun of youth and the carefree nature of being in a room with your friends and all that. And then later, he says at the end of it, he says, you know, each one of them I've never seen again. And the idea is that, you know, I think one of the lessons that I take from what you've explained, is, you know, separate this concept of friendship from business. And if you're going to raise money, go out and do it professionally. And, you know, do it with the people that are the professionals rather than trying to do it with your friends, because you could lose your friendships. And I think the message I'm getting from you is, it's just money. But relationships are, you know, a huge key. So Well, last question. What's your number one goal for the next 12 months? besides just getting on the beach?

Lou Adler 19:32
Yeah, well, that would be great. I get my vaccination shot. No, I think I right now I do have a real business, which I'm writing the fourth edition of hire with your head. On the subtitle hi with your head a using performance based hiring to build outstanding diverse teams. writing a book is very, very challenging. I just got an email from the person who's going to Harvard professor who's going to write the foreword for it. But nonetheless, without That's my personal goal is to do that, as you get older, it's waking up every day exercising and just moving forward and valuing what you have and appreciate it and perfectly and I think as an old person, older, I don't think my wife and I are people our age are as affected by COVID. Elisa, United States, grandkids who haven't seen their friends in a year. Mid kids going to high school kids going to college meeting people starting out with work, I mean, this has huge impact on their lives. I mean, it's uncomfortable, and you get cabin fever and all this, but you got to value what you've got. And you got to make up some last years and I'm, I'm hopefully my goal is to hopefully that we can make up those last years and see some interesting things happen. So I won't be around to watch it. So my goals are pretty small right now. So yep, thank you for asking.

Andrew Stotz 20:53
Fantastic well, listeners. There you have it another story of loss to keep you winning. Remember to go to my worst investment ever.com slash deals to claim your 30% podcast listener discount on the valuation masterclass. As we conclude, Lou, I want to thank you again for coming on the show. And on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Lou Adler 21:23
No, I'd say be good and be safe. Beautiful. Thanks, everybody. Thank you, Andrew.

Andrew Stotz 21:29
Thanks. That's a wrap on another great story to help us create, grow and protect our well fellow risk takers. This is your worst podcast host Andrew Stotz saying. I'll see you on the upside.


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About the show & host, Andrew Stotz

Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it.

Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth.

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