How startups should die

Jason Freedman's Avatar By Jason Freedman in Uncategorized on

 

Bake Sale Cartoon

 

When we did OpenVote, a web 2.0 Facebook app company, back in 2007, we were enabling college students to debate issues on their campus.  And in the unfortunate theme of that era, we had lots of people using it but nothing resembling a business model.  And as our cash dwindled down and our traction didn’t explode, I personally faced a crisis.

One of my cofounders had left for an awesome opportunity. I couldn’t blame him.  Our investors had declined to put more money into the company.  I couldn’t blame them either.

I would sit alone everyday working feverishly to try to find any way to save the company.  Amongst a bunch of failed pivot attempts, one opportunity kept creeping back onto the table…

We had our users’ data.

We had over a million confirmed email addresses for a fairly targeted demographic. I had companies calling me interested in purchasing it.  I remember rationalizing with myself why it would be okay to sell the list.  My credit card debt was out of control.  It was a period of my life when every dollar counted and I had this asset.

Would it really be so bad?  Would anyone ever need to know?  Don’t companies do this sort thing all of the time?

 

***

 

We shut down the company a few months later and I moved on. I never sold that list.  I had been close though. I think back on that time every now and again.  What would have happened if it had been ten million email addresses?  What would have happened if the price had been higher? Would I have taken it?

My ethical discipline had been vulnerable.  I know right from wrong, but it hadn’t felt as clear then as it usually does.

But if there’s one thing I am grateful about our OpenVote experience – it is that we decided to let the startup die elegantly.  We paid all of our service providers, which was tough because I had long since run out of investor money.  So to rephrase that – I paid our service providers with my credit card debt.  We closed down all our paperwork thoroughly and correctly.  And I didn’t get tempted into last second shenanigans that I would’ve later regretted.

 

***

 

Fast forward to today.   The deadpool is getting more crowded every day.  That’s part of a healthy startup ecosystem.

I just talked to an entrepreneur who is running a company that is on its last leg (though he is only fifty percent willing to admit it).  He’s raised a couple million dollars, has built a reasonable product, but his efforts at raising another round have just failed and he’s looking for options.

I just found out that he is selling enterprise contracts for software he knows he won’t be able to deliver.

Not only is he going to screw over some customer when they find out that he can’t fulfill his promises, but he is also ruining it for the rest of us.  Additionally, he is screwing his investors who will never back him again when they find out.  I had a phone call with him and I begged him not to do it.  I don’t know.  Maybe I got through, maybe I didn’t.  But all I wanted to convey to him is, “I believe in you. I think you’ll be back with another idea. But for now, die elegantly.”  I hope he does.

 

Tips to make sure you die elegantly

 

Share your finances openly with your team

It takes so much pressure off of you individually when everyone is on your team. And, yes, the less committed of your people will leave you when your cash reserves get low.  But the reality is you couldn’t afford to keep them anyway, so at least now you’re not stuck living a lie everyday to people that work around you.

 

Communicate more to your investors, not less

When you’re dying is the time to communicate the most.  Not only because they might be able to help you with last minute acqui-hire attempts or guidance on how to proceed, but also they might fund you next time if they appreciated your efforts during the tough times.  I remember sitting down with Paul Graham as our startup was failing. I remember how unbelievable difficult it was to get myself to that meeting.  The last thing in the world I wanted to do was to tell him my startup was failing.   It took him 30 seconds to process the failure and then he moved on.  He was so unbelievably supportive and so excited for whatever it was I was going to do next.

 

Pass the Hacker News test

It used to be called the Wall Street Journal test, but that was more about managing the ethics of bankers.  For us it’s the Hacker News test.  Will you be okay with your every action posted and commented on in Hacker News?  Assume there is no way what you do will be kept secret.

 

Pay everyone in full

Don’t push your mismanagement onto other people – employees get paid, service providers get paid, lawyers get paid, accountants get paid. Hell, even the IRS gets paid!  There will be many people who tell you that you don’t need to save money for the lawyers.  Screw that. I’m working with the same lawyer on my third startup now, and he’s the best in Silicon Valley.  I shudder to think if I had screwed him over two startups ago.

 

Pursue interesting acqui-hires

I have already written on how to get an acqui-hire done.  Google and Facebook have set this precedent that acqui-hires can be this awesome cash out opportunity.  That works with a very, very small number of companies. What about the rest of us?  What if you could turn your failure into an acqui-hire with a company that you actually would love to work for?  You won’t make a million per engineer, but you’ll keep your team together.  I will humbly throw my company 42Floors out as an example.  We’re solving commercial real estate and we love working with entrepreneurs.  Our entire team is made up of entrepreneurs that have at some point failed their own startup.  There are hundreds of companies like us that are always looking to hire awesome entrepreneurs.

 

 

Finally, one last note.  Same thing I say to every entrepreneur that comes to me for advice as they’re on their very last legs.  Welcome to the club! We are a culture that celebrates risk takers.  We all fail at some point.   So while you may feel your startup career is over, you actually just passed your entrance exam.