The Case of the Company that Wasn't

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HEIDI: Welcome to The Startup Solution and “The Case of the Company That Wasn’t.” 

Hello, I'm Heidi Roizen from Threshold Ventures. The Startup Solution is a podcast where we unpack the “oh shit” moments faced by entrepreneurs and then find the best ways to get through those moments alive — and with a little luck, maybe even better off. 

. . .

Today’s episode marks a milestone at The Startup Solution as it closes out our first season. During the last 10 weeks, we’ve talked about departing co-founders, down rounds, boardroom blowups, and more, 

I hope you’ve come away with some useful ideas for your own startup situations.

And, if there are other topics you’d like to hear me address next season, please email me at [email protected]. I may not be able to address everything that comes in, but I’ll try to unpack the juiciest ones in the next 10 episodes.

It seems appropriate to end this season with what is perhaps the hardest thing an entrepreneur may ever face. And that is: what to do when your company just isn’t working.

The voicemail you are about to hear comes from someone we’ll call Amir, who was definitely having an “oh shit” day. As usual, this case comes from a real experience I’ve had, but Amir is a composite, and I’ve changed some details in order to adhere to our entrepreneur protection program. 

AMIR: Hey, Heidi. It’s Amir. I wanted to talk to you about the results of the new product tests, and I wanted to do this before we put together something for the board. The download rate for the app is only, unfortunately, a quarter of what we expected. It’s just not going well. Worse, the usage rates of the app seem to be dropping way off after just a few days. I’m not really sure why this is, but we’re working on figuring it out. Unless we see a dramatic change, though, this product direction simply isn’t gonna work. Please give me a call. Thanks.

. . .

HEIDI: What Amir is experiencing is remarkably common, but it’s not something entrepreneurs or investors like to talk about. But I think it is one of the most important things to talk about.

Let’s start with a basic reality about startups. As I’ve said before, many, if not most, startups end up not working. That may not be what people want to hear, and I hope it doesn’t end up applying to you, but that is the reality.

Now, that doesn’t mean that you shouldn’t try your hand at entrepreneurship — after all, if you don’t, all us VCs won’t have anything to do. Seriously, entrepreneurship is an amazing driver of the US and global economies. For example, did you know that, of the top 10 most valuable companies on the planet today, more than half began as venture-backed startups? That’s quite a remarkable number.

And you don’t need to build a multi-billion-dollar company to be successful. There are thousands upon thousands of entrepreneurs who built companies you may never have heard of — who still provided jobs, created helpful or even life-changing products and services, and also generated financial returns for their employees, investors, and themselves.

In fact, I hope that what we are covering today might even increase your willingness to give entrepreneurship a shot. Because I believe that, even if your company doesn’t end up working out, you will still be okay — as long as you manage things correctly. 

. . .

So, let’s talk about what “managing things correctly” really means. 

Let’s use Amir’s call as a starting point. That call — and what led up to it — provide some pretty strong indications that Amir is facing the kind of decision that I want to discuss. 

Amir’s situation is not that unusual. People come up with bazillions of nifty ideas for how to do interesting things with technology, but not all of them end up being compelling enough for people to use and, ultimately, to pay for. That’s called product-market fit, and sometimes the fit just isn’t there.

For Amir, unfortunately, this wasn’t his first set of disappointing results. In fact, this was the third product he’d tried to build his company on. 

The first was a mobile app with some early consumer buzz. Then, one of the major platform companies added features that pretty much did the same thing for free. As a result, Amir’s downloads and usage dropped to near zero. 

Then he and his team spent six months turning their code base into a sort of gamified app, jumping on the trendy bandwagon of the day. But no one seemed to want to use that, either.

So then, they pivoted yet again from a mobile-centric app to a desktop app with greatly enhanced functionality for design professionals — a new segment for them, but one that they hoped would generate usage.

Apparently, it didn’t because that’s the phone call you just heard. 

. . .

Pivots are the stuff of legend in Silicon Valley. For example, Twitter was supposed to be for subscribing to podcasts, Flickr was a game, and YouTube started as a dating site. So, yeah, those were great pivots, and they worked out super well.

But, at least in my experience, most pivots don’t work out. 

Why? Well, some pivot into a market or industry they don’t really understand. Some pivot to a place already packed with competition. Some teams have the wrong skill sets to actually tackle the pivot since it’s not what they were hired for. 

Now, I’m not saying never try anything new. But I am saying that you should apply the same discipline I hope you had when you were pursuing your original idea to the new things you’re gonna try. 

And I don’t always see entrepreneurs do that because, frankly, I think they’re kind of afraid that nothing will be as strong an idea as their original one — which already failed. And so part of them just wants to keep batting away in the hopes that something miraculously hits. 

But as the saying goes, hope is not a strategy.

Amir was kind of guilty of some of this behavior. He didn’t apply much analytical rigor to his pivots. Instead, he did more of a “what can we do with what we’ve got” pivot. And then, he pivoted into a professional market that he had no experience in. As the results showed, it wasn’t a successful strategy.

So, what should Amir do? And what should you do if you find yourself in this same situation? 

Well, let me start with a cautionary tale of what not to do.

. . .

If you are an entrepreneur, you probably love your company. I know this because, when I was an entrepreneur, that’s how I felt. You probably spend every waking hour working on it. Your team may be the only humans you see every day. You’ve got your logo on every piece of clothing you own. Your company becomes, literally, your identity. 

And so, when customers don’t show up, you feel it as a sort of existential crisis. 

You know that the only way to keep your company alive is to bring in money, but your revenues are declining. And investors don’t see it as a good bet, either. But luckily, you still have money in the bank, so you’re not dead yet. 

And you love the people, the culture, the very idea of being a company, so you just don’t want to give up.

So, you start casting around for something else you and your company can do before the money runs out. There are a lot of frantic whiteboard sessions and all-night hackathons. And no idea is too crazy to try. 

And, like all entrepreneurs, you are an optimist, so you cling to those positive parts of any experiment. You keep everyone on the team because, well, they’re your team. And you keep hoping that someone will buy the stuff you are putting out there — if not today, then for sure tomorrow. 

But no one does, or at least not enough to matter, and then one day, you realize that you have only 30 days of cash left. You finally start to embrace the reality that soon you won’t be able to make payroll, so you start desperately searching for a buyer, but it turns out that it takes weeks to even get on the calendar of your prospect’s M&A people. 

And even when you do connect with them, most of them look at your declining revenues, burn rate, and impending cash-out date and say, “Uh, no, thank you.” 

Team meetings and board meetings get heated, and everyone starts pointing fingers at everyone else. And then, the money does run out. Your company dies a death of disarray, with employees and customers pushed off a cliff. 

It’s an ugly, miserable way to go. 

But it doesn’t have to be that way. You can have a better outcome, even if you don’t find product-market fit, but it takes doing something really hard. 

What it takes is for the entrepreneur to face the reality that their company isn’t working and — this is the key part — to do that while there’s still sufficient cash to navigate either a sale or a wind-down. 

And how much cash do those options take? 

Well, every company is different, but from my experience, it takes six to nine months to successfully sell a company. And it takes about two months to properly wind a company down if you can’t find a buyer. 

Of course, your mileage may vary depending on other issues, such as employment agreements, leases, or customer fulfillment obligations. 

Oh, and when I say cash left, I don’t include money that you may have borrowed. You need to have sufficient cash net of debt to get the company sold or wound down before it becomes insolvent, for both legal and practical reasons.

. . .

Let’s stop and take a breath here because I know this is hard to hear. 

This isn’t the outcome anyone hoped for when they started their company. But it’s also not an uncommon one.

And I, for one, think it’s much wiser to proactively and thoughtfully deal with this reality rather than letting it turn into a big disaster in the end.

In the best executed of these challenging situations, I’ve seen entrepreneurs tackle what’s in front of them with rational thinking and realistic assessments. 

They embrace the data, model out what options are available, and figure out the costs and time frames for execution. Then, they also lay out what success would look like. That is, they determine the minimum metrics of user engagement or revenue that would confirm that they’ve found something worth doing. Because there’s no point burning all this time and money and then kidding yourself about the results.

Most important of all, they do all this within a period of time that still leaves them enough time to sell or wind down if the results don’t come in as they’d hoped. 

In fact, I’ve seen some entrepreneurs call the game when they still have a year or more of runway in the bank — winding down and returning the remaining capital to their investors. I have great respect for the entrepreneurs who make this call, and I’ve seen many of them go on to start up again with new ideas and new capital. Just because your company fails, it doesn’t mean that your reputation has to.

This is a conversation the entrepreneur should be able to have with their board and lead investors. By doing so, not only can they benefit from any experience or resources the others can bring to the table, but also, the process can help to get the key constituents informed and aligned. That way, they’re all more likely to be invested in the tough choices that will have to be made along the way.

. . .

So, what happened to Amir? He took a cold, hard look at the data and realized that none of these product directions were going to work. He still had nine months of runway at the current burn rate, so he agreed with his board that he would spend three months trying to find a buyer, and if he couldn’t, he’d do an orderly wind down. 

Unfortunately, Amir didn’t find a buyer, and so he began the wind-down process with six months of cash left. That was enough time and money to negotiate a settlement on his lease, fulfill the contracts he couldn’t cancel, and give the employees a small severance. He even returned a little bit of money to his investors. His investors agreed that, while this was not the outcome anyone had hoped for, Amir was thoughtful and professional in how he handled everything, and he left with good wishes and the respect of everyone involved. 

. . .

So, what can you learn from “The Case of the Company That Wasn’t”?

First of all, that entrepreneurship has a high failure rate. That doesn’t mean you shouldn’t try. It does mean you should be mentally prepared for it to not work out.

Second, if your initial product doesn’t gain traction, a pivot is something you can consider. But before you do, determine upfront what success would look like. Don’t kid yourself if you don’t have the expertise or the resources to field a competitive product. And, of course, if you do launch a product, don’t kid yourself if the results come in below the threshold of success, either.

Third, it is better for all involved if you allow yourself enough time to navigate a sale or wind-down, instead of running at full speed until your cash-out date and then crashing and burning.  In my experience, doing this properly means calling it with at least six months of runway left, preferably nine, or at least sixty days if it’s going to be straight to a wind-down.

And finally, as hard as this may be to believe, you are not your company. Your company can end, and you will still go on. But how you manage the end process matters. Company failure doesn’t have to mean reputational damage if you do it properly. In fact, countless entrepreneurs have done this before you, and many have even gone on to start new companies. 

Oh, and if you’re wondering what happened to Amir, here’s the voicemail he left me six months later:

AMIR: Hey, Heidi. It’s Amir over here. I am so excited to tell you that I’ve actually joined another startup. One of my friends from grad school is actually putting together something in the construction workflow space and reached out and asked me to join as CTO. It has been so nice to be in a CTO role where I think I can actually flex my superpower, which all along, I think, was the tech side, anyway. 

. . .

HEIDI: And that concludes “The Case of the Company That Wasn’t.” For the record, this situation is real, but Amir is a composite. And no startups were exposed or harmed in the recording of this podcast.

Thanks for listening to this episode of The Startup Solution, a podcast from the venture capital firm Threshold Ventures. This also marks the end of the first season of The Startup Solution. We’re going on a quick break, and we’ll be back on October 18th. I’m Heidi Roizen from Threshold Ventures. Thanks for listening.

Further Reading

Great interview with Gokul Rajaram on the ‘shut down and return capital' option

Aaron Harris on the founder’s decision to shut down

Forbes article on how to decide when to close your business

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