Raising money has always been hard. Nevertheless, some industry insiders and VCs believe it’s now so difficult that it’s not even worth trying. Either cut costs and get to “default alive” or look for a buyer and shut down, they say.
This isn’t how founders think, of course, but at some point, pushing forward is no longer the right thing to do.
Photo credit: connel / Shutterstock
If you’re a founder and you haven’t found product-market fit, if your churn rivals your growth, or if your user number is growing by less than 10% each month, it may be time to think about closing.
Here are the steps I took, plus some things I would do differently.
Step 1: Tell your people
As a founder, there are usually two forces driving any communication: the desire and responsibility to tell the full story, and the need to be positive to keep staff, partners, and investors enthused.
I understand how founders believe they can turn things around. My company never found product-market fit, but that didn’t deter me.
We moved geographies, switched models from marketplace to SaaS, and even changed the entire purpose of the business. I thought we were good enough to pull it off, but we couldn’t.
I lost people at several points along the way. Surprisingly, when I told people their jobs were at risk, they weren’t usually as upset as expected. Some offered to work for less pay rather than see colleagues lose their jobs.
I realized how much people value transparency, no matter how bleak the picture is. I also learned how much my team cared about the company – they behaved like owners and, in some cases, seemed to care more about the business than about themselves.
If I were in the same position again, I would give staff as much information as possible. I would also provide options, like allowing everyone to take a pay cut rather than having to pick specific individuals for termination.
Step 2: Write to shareholders
Most founders don’t write thorough, regular investor updates, especially when things aren’t going according to plan. It’s tempting to delay a report while waiting for good news, but it’s the wrong move.
If you don’t tell your investors how bad things have become, they can’t lend their advice or expertise.
Be frank and present the facts to investors instead of being evasive or defensive, or blaming the macro environment.
Explain what was and wasn’t working as dispassionately as possible. It’s important not to be emotional but to describe your business’ weaknesses and vulnerabilities plainly and frankly.
Step 3: Call a board meeting
It shouldn’t be the founder who decides to close a company, but the board of directors. While most boards have a pretty good understanding of their company’s prospects, they’re rarely as well-informed as the CEO.
If you feel the business has passed the point of no return, it’s incumbent on you to call an emergency board meeting.
Create an agenda with a single item for discussion: the firm’s future. List the options you believe remain available and come prepared with a summary and a recommendation.
Perhaps board members will offer new ideas; perhaps they won’t. Don’t let the situation drift. Decide in the meeting, create a formal resolution, then act.
Step 4: Make a shutdown budget
Budgeting may be the last thing on your mind, but you need to know your cash position. It’s critical to know what you have, what you’re spending, and how much time is left.
When we closed our company, we made sure we had time to spare. It’s not easy to shutter an operation in Singapore, and not doing so properly can have serious consequences.
Having a budget will give you the best possible chance of dissolving the company on your own terms and avoiding insolvency. The best outcome for all parties is arguably for the company’s directors – and perhaps other stakeholders – to agree formally to cease trading, try selling the company’s assets, pay creditors, and close. This is much cleaner than involuntary liquidation, perhaps instigated by a creditor or shareholder taking you to court.
Emergency budgets don’t need to be works of art, but they do have to be accurate. Enlist the help of your accountant to make sure you’re not missing important liabilities.
If you have to dissolve your startup, it’s likely that you and your shareholders will receive nothing. There are other mouths to feed, which take priority.
First, pay the shutdown costs. Next come secured creditors, who may have loaned the business money secured against certain assets. After that come the employees, then the unsecured creditors (including suppliers), and finally the shareholders.
As founders, we accepted the risk associated with our startup, but our creditors didn’t. It’s irresponsible to leave suppliers and employees unpaid, and there can be consequences for doing so.
Step 5: Speak to a lawyer
Thanks to some excellent colleagues and advisors, my team acted early and responsibly – we got the right legal support.
Photo credit: imagincy / 123RF Stock Photo
This dramatically reduced the chances of us doing something incorrectly, being sued, or becoming personally liable for debts and going bankrupt. Always speak to a lawyer.
Step 6: Sell what you can
Selling companies and their assets takes time, even when things are going well. Doing so in times of strife is difficult.
I made several attempts to sell the software we’d built but to no avail. Despite creating two fairly serious lines of inquiry, I couldn’t get a deal signed.
If you find yourself in this situation, remember that it’s not just your intellectual property that a buyer might value. In one of our conversations, it was the team, not the software, that drew the most interest.
Step 7: Keep shareholders informed
When faced with the decision to wind the company down, you need to keep your shareholders abreast of developments. If the board votes to shut the firm down, this needs to be communicated as soon as possible.
When I wrote to explain our board’s decision to close the business, most of our investors weren’t surprised. I maintained our quarterly investor updates throughout our twists and turns, so investors who read those were familiar with our rollercoaster journey.
Having said that, I did still receive one or two negative replies. This taught me that you can never overcommunicate.
Step 8: Find a coach or mentor
Often in startups, failure is seen as a badge of honor. It’s something to be celebrated, and possibly a rite of passage one must navigate before finding success. But for founders who have experienced failure, it certainly doesn’t feel worth celebrating.
I spent the best part of 18 months as a shell of my former self. I had been a confident person, but I started to doubt what – if anything – I was actually good at.
The best thing I did was to get a coach. Before finding help, I was ashamed to tell my story and felt personally responsible for my employees’ job losses and my investors’ financial ones.
Having someone to confide in, especially a person who wasn’t involved in the business and wasn’t a family member or friend, was invaluable. They helped pull me back from some dark places and made me realize I hadn’t done anything wrong.
I’d tried my best to look after all of the stakeholders, but this part would’ve seemed almost irrelevant if a coach hadn’t reminded me.
I found the best people to talk to were fellow entrepreneurs, especially those that had been through a failure themselves. As well as having practical advice for the immediate challenges, these people provided perspective on what I was facing.
If you can’t find someone, look me up.
Step 9: Update your resume
When I stopped paying myself, my family lost its only source of income. For several weeks, I couldn’t even think about getting a job, but when I finally started looking, I realized my chances of landing a corporate job were slim.
I ran my own company for years, so it wasn’t clear to me or to employers what role I might be suitable for. I discovered, to my dismay, that scaleups and corporates were looking for specialists instead of generalists like me.
Today, the market is awash with thousands of talented individuals, many of whom have been let go from overjuiced tech companies. Unfortunately, employers have access to plenty of people who look like a safer bet than a former startup founder.
I could easily have made time to start interviewing earlier, and a steady wage would have made life back then a lot more pleasant. The lesson here is to think about yourself sooner rather than later.
Step 10: Don’t try again … yet
Research shows that people who have already started and exited a business, whether successful or not, are more likely to begin a new venture than those who haven’t. However, contrary to popular belief, failed founders don’t always have better prospects for success.
Instead, other studies point out that entrepreneurs who recognize their own responsibility in past failures have improved their chance to succeed.
After experiencing the stigma of failure, some entrepreneurs have no intention of ever trying again. This is often compounded by the fact that they also lost the resources that helped them start in the first place, such as capital, relationships, and reputation.
Others feel the opposite way. They’re determined to put the lessons learned to good use and repair the psychological, social, and financial damage they’ve suffered.
But this type of entrepreneur should wait. With the odds stacked against them, it’s important that founders don’t cloud their judgment with emotions.
How long it takes someone to rebound from a failure is highly personal, but you will know when the time is right, as I did. Until that time, let yourself rebuild.
Step 11: It only gets harder, so make the next one count
It may not seem possible right now, but if you allow yourself to recover, in time you may feel ready to go again. It took me 18 months, and most other failed founders I know bounced back within one or two years.
The second time around is definitely harder. To begin with, you’re older.
Statistically, as any internet search will reveal, founders in their 40s are more likely to succeed than their younger counterparts, but that’s not always how it feels. In my case, not only was my financial position weaker, but my responsibilities had also grown.
I was an older man with two children and a home. What’s more, my network and access to resources had diminished. When closing my previous startup, several investors said they would back me again, but understandably, none of them did.
Fortunately for me, I found what I needed to start again. I’m convinced that I’m a stronger founder and a better investor now. I may not always know what to do, but often I know what not to do.
As a parting thought, if there’s one thing I’ve taken away from the whole experience, it’s the importance of making good choices. Not everyone can be successful, but anyone can do the right thing.
Put your investors’ and employees’ interests ahead of your own and eventually you’ll come out of this a better person. In the meantime, good luck with the decisions and difficult times to come.