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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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The Vomit Moment

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I’ve had my share of vomit moments – both in business and in life. It’s that moment where a specific thing happens that causes you to want to run into the bathroom and vomit, which you sometimes actually do.

Some of my memorable vomit moments including the night that I asked my first wife if she was having an affair and she nonchalantly said “yes.” Or when I woke up at 4am in the morning and realized Feld Technologies would be out of money in two days if I didn’t go collect some of our accounts receivable – primarily from customers who were clearly stalling to pay because of their financial issues. Or when I finally came to terms with the fact that the only real option for Interliant, a company I had founded and had gone public, was to file for Chapter 11 because we simply couldn’t service our debt. Or when I got sued for $150 million for fraud and read through the first filing which had my name on every page at least 10 times (after three years the suit was settled for for $625,000 and there was no finding of fraud – the other side spent $3m to get $625k – ultimately not a good plan for them.) Or when I got a call that a close friend, who was a CEO of a public company at the time, and his wife had been in a near fatal car accident and were both in surgery (they ended up surviving, recovering, and are doing great.) Or when I got a call that an acquisition of a company I was an investor in, which we had struggled through for months and was an outstanding outcome for everyone involved, had been called off because it wasn’t approved at the board level of the public acquirer. Or when I was on an airplane with my three Foundry Partners coming back from NY and we were diverted to Colorado Springs because of a massive storm in Denver and as we were landing I literally threw up – for the first time ever on a plane – because it was such an excruciating landing.

Some of the vomit moments, like the last one, are tangible. Others are conceptual. But they all share one thing in common – an intense moment of anxiety which is followed by the passage of time. Whatever caused the vomit moment either resolved quickly, or is something you have to go deal with for a while. While you may be paralyzed in the moment, I’ve found the most powerful thing is to realize that time will continue on and that you almost always can address the issue that caused the vomit moment and get to some sort of resolution. This resolution won’t necessarily be an external definition of victory, but it will allow you to move on to the next thing you need to address. The worst thing you can do is stay paralyzed, or go into a phase of explicit denial about what is going on.

At the Feld Men’s Chautauqua in Aspen this weekend, my cousin Kenny asked us all what our favorite quotes were. Mine was “It’s not that I don’t suffer, it’s that I know the unimportance of suffering.” (John Galt in Atlas Shrugged). Understanding that the vomit moment is part of life (and business) and accepting it, rather than fearing it, or denying it, results – at least in my opinion – in a much better life.

We will all have our vomit moments. But we will usually survive them. And taking action after they happen is the best approach.

What are some of your vomit moments?

What Just Happened With OnLive?

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Disclaimer: I’m not an investor in OnLive and I know nothing about the specifics of what happened. I’m just speculating, but it’s informed speculation based on my experience.

I read a few articles over the weekend about OnLive potentially going out of business, potentially screwing its employees, and a few other things. The first articles were weirdly hostile with a focus on how OnLive just laid all their employees off in preparation for a sale in order to enrich the founders/investors at the expense of the employees. By the end of the weekend the reporting was more thorough and balanced.

Companies fail – all the time. It’s part of entrepreneurship. It’s painful and sucks when you are part of a company that fails (I know from experience – I’ve been there many times) – whether you are a founder, employee, or investor. But failure is part of it and at the moment of acceptance of failure, a good founder and board look for the most graceful path forward, however messy and yucky that might be.

One of those approaches is something called assignment for the benefit of creditors (ABC). If you were around during the collapse of the Internet bubble, you’ll remember this. It’s a lot easier and quicker than a formal bankruptcy (via a Chapter 11 filing) and allows the assets of a company to quickly be sold to a new owner. In some cases this is just for cash to pay off creditors; in other cases it’s a way to sell the company to a new owner and keep the business operating.

OnLive looks to me like the second case. The news is coming out that it has a new owner, that many of the employees have already been offered jobs post ABC, and that the service will continue to operate and customers won’t be negatively impacted.

The key thing to understand in an ABC is that 100% of the equity is wiped out and deemed worthless. The founders equity, the investors equity, and the employees equity. When a company goes into ABC, it’s almost always because the value of the liabilities far outweighs the perceived value of the assets. No buyer was found that was willing to take on the liabilities while giving the equity holders any economic value. So – an ABC effectively “cleans this up” for the new owner – compartmentalizing the liabilities in the ABC process and using the proceeds from whatever asset sales come out of ABC to pay off some portion of the liabilities.

Occasionally investors will get something in an ABC because they are creditors. If the last round (or rounds) have been in convertible debt, or just straight debt, the investors (whoever holds the debt) will be creditors. They can often be pretty high up in the creditor stack and sometimes recover some or all of their debt. But their equity will almost always be worthless.

In a situation where the company is immediately purchased out of ABC (which is what it looks like happened in OnLive’s case) many of the employees will be rehired by the new owner. While their stock options will be worthless (as is all equity) they are often immediately offered new stock option packages. Usually the vesting clock resets completely; sometimes a new owner will be extra generous and offer a shorter vesting term.

In OnLive’s case, it feels like the company simply ran out of options and couldn’t find a new investor or a buyer who would take on the company outside of ABC. Rather than shut down, they found a buyer / investor (which could be a subset of the existing investors) who would recapitalize the company and keep it going as long as he didn’t inherit the liabilities. Hence, the ABC process.

Rather than screwing the employees to enrich management, this feels to me like a pretty employee friendly approach. Hopefully the stories this week will clear this up, rather than end on “it looks like the investors and the founders screwed the employees.”

Don’t ever forget that failure is part of the process.

Have A Wake For Failed Startups

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In my upcoming book, Startup Communities: Building an Entrepreneurial Ecosystem in Your City, Mark Solon (Highway 12 Ventures) tells the story of a “startup wake” in a section where he gives an outsiders view of the Boulder startup community.

“I’ll never forget one of my early visits to Boulder. After a full day of meeting with startups, I was asked by the entrepreneurs I was with if I’d like to join them and some peers for a “special dinner.” “Sure,” I replied. “What’s special about it?” “It’s a wake” they deadpanned. That dinner showed me that the fabric of this small mountain town was different than anywhere else I’d been. Turns out that earlier that week, a local startup had decided to shut down and the “wake” was the startup community’s way of showing these young, fragile entrepreneurs that it was okay to fail – that the honor was in trying.  They made those founders feel good about themselves in a moment that was critical in their development as entrepreneurs. As an aside, in this case the founders didn’t run out of money. After giving it their best effort, they realized their business wasn’t going to be the great success they had envisioned and they decided to return their remaining cash to their investors. The epilogue of that dinner is that the founders had roles at other local startups within a few weeks.” 

I was thinking about this last night as I was emailing with an entrepreneur who’s company is struggling. Failure is a normal part of the entrepreneurial cycle and it’s talked about regularly. There are endless stories about the entrepreneur who failed and then created a monster success for his next company. But there’s not enough discussion about how startup communities should embrace failure.

I think this is especially important for first time entrepreneurs in a community. It’s easy to prognosticate about failure when you’ve been successful; it’s much harder to go through it. It’s even more painful when it’s your first time and everyone around you seems like they are doing great, even if they aren’t really but are just putting on a good act. So a natural instinct for an entrepreneur on a failing path is to turn inward, shut down, and withdraw.

If your peers in the startup community (the other entrepreneurs) don’t notice, it’s even worse. Failure sucks – it’s often emotional, physically, and financially painful. When your friends suddenly ignore you, avoid you, or don’t have time for you it just reinforces the pain.

Having a wake for a failed company can turn this around. If you are an entrepreneur and observe an entrepreneur in your community failing, do something about it. Organize a group of entrepreneurs to have a wake. Surprise the entrepreneur who is shutting down his company and take him out. It doesn’t have to be a debaucherous, alcohol laden evening (although it can be) – rather do something that you know the entrepreneur in question will enjoy and appreciate. A nice meal. A quiet conversation. A show of support from his peers. Encouragement. Acceptance that failure is part of the entrepreneurial process.

If you are an entrepreneur in a company that is failing, don’t be ashamed. Most startups fail. What matters is how you handle it and what happens next. Let your fellow entrepreneurs throw a wake for you, let the moment happen, and then get on with the next thing. Life is hopefully long. And, for all the entrepreneurs who are leaders of their startup community, make sure you do everything you can to make sure everyone knows failure is ok.

I’ve Failed Over and Over and Over Again in My Life

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What a great short Nike commercial staring Michael Jordan.

 

“I’ve failed over and over and over again in my life.  And that is why I succeed.”

Interview with Andrew Warner on Mixergy

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Andrew does a nice interview.  We covered plenty of ground, including failure, when to really call it quits, the concept that “life is a fatal disease”, global vs. local failure, working on things that matter, what I think “fail fast” actually means, how to evolve your business (using Return Path and NewsGator as the examples), my obsession with product, how we decided to invest in Pogoplug, more on product and release tempo, a story about my grandfather, a story about Laura Fitton and why I care about OneForty, why it’s so important to always give more than you get, how the Defrag and Glue conferences came about, some book recommendations, and why fear and anxiety are emotions that have zero value to an entrepreneur.

Business Tips via Mixergy, home of the ambitious upstart!

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