The Case of the Soggy Software

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HEIDI: Welcome to The Startup Solution, and “The Case of the Soggy Software.”

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.

I want to tell you a story about some soggy software — and how a decision we had to make about it had implications way larger than the money at stake.

But first, let me set some context.

There are lots of different types of venture capital, and there are many different types of venture capitalists, too. Some of us refer to ourselves as "former operators" — or, in my case, I like to call myself a “recovering entrepreneur,” because I’m never going to get being an entrepreneur out of my system, or out of my thought process.

Having been in the operating hot seat myself for over ten years, I also have a fair amount of scar tissue from my own “oh shit” moments — and I also have a ton of empathy for how challenging it is to lead a startup.

My operating days are pretty far back in the rear-view mirror, but I’m constantly surprised at how often things I had to deal with back then, still apply to what entrepreneurs are slogging through today.

So, while most of the cases on The Startup Solution are about other entrepreneurs, this time, I want to share one I suffered through myself.

And even though we no longer ship software in boxes, the lessons to be learned from the case of the Soggy Software are still highly relevant today.

. . .

When I was in my 20s, I co-founded and ran a software company that published a number of products, including one called WriteNow, a popular Mac word processor.

The incident in question happened when we were going through a tough time, a lot like what many startups face today. We were struggling to ship a new version of WriteNow and were plagued by numerous bugs. Back in those days, when you said "ship" software, you really meant ship it: we put it on diskettes, bundled it with a printed manual, and put it in a fancy box.

Physical products meant we had actual, physical inventory to store.

At the time of this situation, we had recently announced that we would be shipping a new version of WriteNow very soon. Unfortunately, we still had close to a thousand boxes of the old version in our stockroom.

You know what happened in those days when you announced an imminent upgrade? Customers stopped ordering the current version, waiting instead for the new one to ship. So, all those old copies of WriteNow weren’t likely to be going anywhere, anytime soon — or probably ever.

That inventory, however, was not the source of our current woes. We knew the old stuff probably wasn’t going to sell. No surprise there, but the crisis was that we weren’t ready to ship the new version. We were four weeks behind schedule and had everyone on deck after work every day, hunting bugs to get us over the finish line.

We served pizzas and even gave out little prizes for squashing bugs. We were under a lot of pressure, but we also felt a strong sense of team spirit. I mean, the team kept showing up even though we didn’t force anyone to participate. I think it was because they enjoyed not only the camaraderie but also the feeling that we were all pulling together to achieve our shared goal of getting that upgrade shipped — so we could cash all those waiting checks. (And, yes, it was that long ago, when people mailed in checks for software upgrades.) The pressure was even more intense, because, in typical startup fashion, we didn’t have a big cash cushion. We weren’t going to be able to make payroll in just a few more months unless we got that puppy shipped, and those checks in our bank account.

One morning at the height of this crisis, I got a 6 am phone call from the office — and if you know anything about software engineers, you know this is not a normal time to hear from them. And in fact, it wasn’t one of them.

VOICE: Hey, Heidi. Good morning. It’s Stacy, and I just got to the office.

HEIDI: It was our office manager.

STACY: So, there’s sort of a good news bad news situation. A fire alarm apparently has gone off, and the sprinklers went off — the sprinklers that are in the ceiling. And .. um, but there was no fire, so that’s the good news. The bad news is that the sprinkler system just drenched the stockroom. I think you probably wanna come over when you can. OK. Talk soon. Bye.

HEIDI: I scrambled to work and was met by a very soggy scene. We were grateful that there hadn’t been a fire, and no one had been hurt — but water can sure make a mess. Everything in the stockroom was ruined, including those soon-to-be-obsolete boxes of WriteNow.

An hour or so later, the landlord called me.

ROGER: Hi, Heidi, it’s Roger. I heard about the false alarm and the mess. I’m just glad no one was hurt. Anyway, I need to get an assessment of damage from you so I can file a claim. Luckily, I have great insurance, and I’ve already been in touch with the adjustor, so just let me know the value of what was destroyed, and I'll file a claim for it. Talk to you soon.

HEIDI: We were relieved to hear he had insurance and that he was already on the case. But when we started to talk about his question, we found ourselves struggling with how to respond.

After all, all those copies of WriteNow were drenched — and ruined. At retail, they’d sell for $275 each, which is what we would have charged to send them directly to end users. Even at wholesale, at $150 bucks a pop, they were worth close to $150,000. Then again, if we were to re-manufacture them, they would only cost us about $10 each. So what was the right value to assign to the soggy software?

Before you answer, let me add another number to consider: Zero.

I mean, we knew most of those boxes would probably never be sold anyway. So, other than the cost of cleaning up the mess, had we really lost anything?

The landlord didn’t seem to care at all. He just wanted a number. So what number do we go with?

At first, I’ll admit, there was a temptation to value the loss at retail. Going with the direct-to-consumer price per unit, which we could have easily validated with past sales receipts, would have been a quarter million dollars. I mean, “cash crunch solved” is very tempting when you are a startup running out of money. Even at the wholesale price, we would have still ended up with over a hundred thousand dollars. That amount would have easily tided us over for a few months, long enough to get WriteNow shipped and to cash those checks.

But, neither of these numbers felt right in our guts, because we knew those units would likely never have sold, given the imminent new release.

So, my cofounder and I agreed to sleep on it overnight and meet again in the morning to agree on a number.

And in the morning, we had both landed on the same conclusion: We needed to file a minimal claim, just enough money to clean up the mess.

So that’s what we did. And I remember at the time feeling that it was absolutely the right thing to do — and also feeling really pained to walk away from all that seemingly easy and much-needed money.

We did it because we decided that the cost of taking the money would have been way higher than the benefit of the money itself.

Why? Because claiming an “enhanced” value of something to get more insurance money is, in fact, lying and cheating. And lying and cheating were not part of our company culture.

To the contrary, we strove for quite the opposite. Look, everyone in the company knew the tough financial situation we were in. Everyone also knew that the old inventory was effectively worthless. So, everyone would also know that if we got some big insurance settlement, that we would have broken our values to get it.

That’s the funny thing about a company’s culture. People think it’s free food or slogans on the kitchen wall. But it isn’t. The only things that truly form or impact culture are actions — especially the actions you take as the leader.

If you aspire to a culture of high values, but you break it for opportunity or convenience, then guess what? You actually don’t have a culture of high values.

If the CEO thinks that it’s okay to file a claim based on a “very loose interpretation” of the truth, then why shouldn’t an employee also think it’s okay to expense that nice dinner with their mom?

The truth is: that six-figure check would have come at the expense of our culture, which was worth way more to us than that or any check. So as painful as it was, we chose our values over a tempting but sketchy payoff.

As your startup’s CEO, you may think your job is raising money, hiring people, and building and selling products. And yes, those are all things you are responsible for. But you are also the modeler of the culture you want to create, whether you know it or not, and whether you like it or not.

Especially at early-stage companies, the CEO’s behavior dominates the culture — for better or worse. Even your small and seemingly insignificant actions are guideposts to everyone else about what is and isn’t acceptable in your company’s culture. And because of this, you need to be thoughtful and deliberate about what actions you take.

That may sound like an extra burden on you, but let me reframe it in a more positive way. Since culture is an important part of your company, for attracting, retaining, and motivating great people, and since you have the singular most influence for setting that culture, your actions are actually great and powerful tools for doing so. The entrepreneurs who understand that, and consciously make decisions to shape their cultures, often build not only the strongest cultures — but also the most lasting and successful companies.

So what actually happened in “The Case of the Soggy Software”? We cleaned up the mess, killed off the remaining bugs, and got WriteNow shipped, albeit 48 days late. We cashed all those checks, kept our culture intact, and our company lived to fight another day — and the inevitable next crisis. But that’s what living the startup life is all about, Right?

. . .

Thanks for listening to this episode of The Startup Solution, a podcast from the venture capital firm Threshold Ventures. We hope you have enjoyed this episode, and if you did, please leave a rating or review in your favorite podcast app. I’m Heidi Roizen.

Further Reading

Terrific article from BetterUp on what company culture is and how to build a good one

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