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Startups fail. That’s part of the natural entrepreneurial cycle.
A great post is making the rounds from an entrepreneur who has 30 days left before he hits the wall. His blog - My Startup has 30 Days to Live – promises to be a powerful one, at least for 30 days. I’m only sad about two things: (1) It’s anonymous and (2) There are no comments so it’s one way.
I left a message on “Ask me anything” asking him/her to reach out if I can help. We’ll see if he/she responds – or it’s either (a) a one way rant or (b) a fake failure story.
Either way, entrepreneurs need to talk about failure. It’s fine – I’ve failed at a ton of things. On Monday, I gave my “How To Fail” talk at Techstars Boulder. Included were all the Startup Summer students as well as a bunch of members of the Entrepreneurs Foundation of Colorado. I told the story of my first failure (my first company – Martingale Software) and my biggest failure (Interliant). I made some broad points and then did an hour of Q&A.
I hope it was useful.
I see entrepreneurs, especially first time entrepreneurs, in denial all the time about the possibility of failure. “Failure is not an option”, or “I’m afraid to fail”, or “Everything is going great” (when it isn’t). Sometimes failure is your best option.
Denial of reality – and what you can do – is a big issue. Ignoring reality until it’s too late is another. Not reaching out for help when there is still time is yet another. Fear of failure – which is the mind killer – is yet another.
In one of my darkest moments of Interliant, I was sitting hunched over at the kitchen table of one of my co-founder’s (Len Fassler) – breakfast table. We had a brutal day in front of us and I was waiting for him to finish getting dressed so we could head to the office to deal with things. When he came into the kitchen, he saw me and said “C’mon Brad – suit up – let’s go.” He patted me on the back in the wonderful way he always does and said “Just remember – they can’t kill you and they can’t eat you.”
Follow My Startup has 30 Days to Live. Learn from it. And if the entrepreneur uncloaks, let’s try to help, even if it’s just providing emotional support.
This post originally appeared last week in the Wall Street Journal as part of their Accelerators Program in answer to the question “When and how should you wind down a failing business.”
Some entrepreneurs and investors subscribe to the creed “failure is not an option.” I’m not one of them.
I strongly believe that there are times you should call it quits on a business. Not everything works. And — even after trying incredibly hard, and for a long period of time — failure is sometimes the best option. An entrepreneur shouldn’t view their entrepreneur arc as being linked to a single company, and having a lifetime perspective around entrepreneurship helps put the notion of failure into perspective. Rather than prognosticate, let me give you an example.
My friend Mark’s first company was successfully acquired. After being an executive for several years at the acquirer, Mark decided to start a new company. I was the seed investor, excited to work with my friend again on his new company.
Over three years, this new company raised a total of $10 million from me and several other investors over several rounds. The first few years were exciting as Mark launched a product, scaled the company up to about 40 people, and tried to build a business. But after two years we realized that we weren’t really making any progress — there was a lot of activity but it wasn’t translating into revenue growth.
In year three we tried a completely different approach to the same market with a new product. Mark scaled the business back to a dozen people in an effort to restart the business. Over the course of the year we tried different things, but continued to have very little success.
By the end of the year there was $1 million left. Mark cut the company back again — this time to a half dozen people. He started thinking about how to restart for a third time on the remaining $1 million.
Mark had never failed at anything in his life up to this point. He was proud of this, and the idea that he couldn’t at least make his investors’ money back was devastating to him. But he was stuck and started exploring creating an entirely different business, in a completely different market, with the $1 million he had left.
Mark was newly married and was working 20 hours a day. We were talking at the end of the day during the middle of the week and he was so tense, I thought his brain might explode. I told him that as his largest investor and board member, I wanted him to turn off his cell phone, take his wife out to dinner, have a bottle of wine, and talk about whether it made any sense to spend the next year of his life trying to restart the business with the remaining $1 million.
After resisting turning his phone off, I insisted. I told him that I gave him permission to decide that it wasn’t worth the next year of his life at this point and that as his largest investor it was perfectly ok to shut the business down and declare it a failure. I then said I was hanging up the phone and would talk to him in the morning. Click.
He called me back early the next morning. He was calm. He started by saying thanks for giving him permission to consider shutting down the company. This had never occurred to him as an option. During dinner, he realized he needed a break as he was exhausted. He wasn’t coming up with anything to do to reinvent the business and was just desperate to figure out a way to pay his investors back.
By morning, he realized it was time to shut things down, return whatever money was left, and take six months off to recover from the previous three years while he thought about what to do next.
We gracefully wound the company down and returned five cents on the dollar to the investors. Mark took six months off. He then spent six months exploring a new business, which ended up being extraordinarily successful. And he’s now very happily married.
Failure is sometimes the best option if you view the process of entrepreneurship as a lifelong journey.
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.
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.
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.”