Previous essays in this series have focused on deciding to start and deciding to stop. The latter concluded with a promise to discuss some alternatives to a dead stop when all seems lost. I’ve talked with a half dozen startups in this very boat just in the last few weeks.
Recall my seven signs that may tell you to quit:
- You aren’t having fun.
- You aren’t personally earning your market value.
- You’re getting stuck with customer baggage.
- There’s looming trouble in your space.
- Your support network is melting away.
- It’s taking too long.
- Competition is beating you.
One thing I should add to this list now is a cataclysmic event, such as losing big orders due to a hurricane (not hypothetical), getting bounced by your primary customer (happened to me in the 90’s), or getting blindsided by an IP issue (been there).
You might have arrived at this situation in a number of ways. Here are just a few examples:
- You never really got adequately funded.
- You got funded but are far short of your projections.
- You couldn’t deliver a really eye-popping product or service advantage.
- You got nicely profitable and on a great trajectory only to have that taken away by a major revenue contraction.
No matter your path to the precipice, if your favorite peroration is this: “We shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender…” then let’s try some decisions you can make:
Join forces with another company in a similar predicament. This is not meant to fall into the “two wrongs make a right” category, but you have likely gotten to know who are the players in your immediate space. Perhaps you have complementary products or additive customer bases with one of them that you respect. This is rather a Hail Mary type of play that rarely works, but you obviously don’t have a bounty of options. The preferred route would be to strike some sort of formal business relationship that generates more revenue for both parties. If you skip that stage of courting and try to go straight to the altar, you’ll sink both companies dickering over valuations, personnel, legal structures, and all the other inherent mismatches. On the other hand, you might find having more of interest to your respective customers levers up your sales and marketing activities and gets you on a better path. Maybe some of your customers will appreciate having a broader offering and more of a single-source concept for whatever it is that you and your new partner do. And, perhaps you’ll get to the altar in due time.
Hang out with a better class of people. If you have a way to get your company exposed farther up the food chain in your universe of potential customers, go for it. You’re much more likely to talk your way out of a jam if you are talking with people who can help you. Whatever your market sector, there are meetups in your neighborhood of similar companies, and unless you are in rural America you probably have some success stories within reach. You also know which national meetings are worth your while and your expense. You may be so close to your own original idea that you can’t see a fairly obvious mutation that could make a major improvement in your odds of success. Getting yourself known by others who really understand your space on a national scale is a great way to expose new opportunities. You won’t find them when you and your current team just keep talking to each other over lunch.
Protect and retain the stars in your company. I say in almost every episode that startups are a team sport, and you’ve probably figured out who are your most valuable players. If you’ve suffered a reversal, they’ll be disappointed along with you, and they’ll pretty quickly get focused on preserving their own careers. They’ll realize all those high-value options they were awarded may not be in the black for quite a long time. If they have spouses to explain this to, they’ll be getting swayed by them to jump ship. You absolutely must be quite candid with your group. Everybody in a startup with fewer than 100 people seems to know anyway all that’s going on and who’s getting paid how much. The glass walls in those WeWorks are transparent in more ways than the obvious. It’s incumbent on you to treat everyone fairly and openly, and, if you intend to keep fighting, you need to make sure you come up with an irresistible plan for the “keepers” in your crowd. If, and this is a big IF, you can retain their confidence for a plan B, then you will have earned the right to keep at it. If not, don’t kid yourself about your prospects.
Avoid the standing start. You should do all you can to manage your new plan in a way that preserves some momentum and some of your valuation. Carrying across a cadre of proven talent is a key aspect of that, but anything new that repurposes your customer base, your technology stack, your brand recognition, and your important industry relationships separates you from the guy or gal with an idea and a plan. No one after perhaps years of toil wants to be pushed down to a pure startup classification again. Millions of dollars of valuation on paper can become hundreds of thousands pretty quickly. It’s a tough sell to investors to say that what you tried before didn’t fly but you’re going to do more of the same in a slightly different way and make it work this time. It gets a bit easier if you have conceived a bona fide pivot with a compelling new thesis that builds on your foundational work. When you are deciding exactly what you are going to do to stay in the game, never lose site of how investors will look at your valuation.
Distill the essence. I’m familiar with companies in the lurch that have come up with pivots that are far more complicated than their original plans and seem to rely on assumptions that have already been proven wrong. But, there’s always a plot twist that gives hope in the new and improved iteration of the story. I favor going the opposite way and focusing on the best kernel of product in your kit and trying to get it to an inflection point where it starts to carry the load in the rebuilding process. It’s a great feeling to have a product catch on and pull you along for a great sales ramp. I’ve enjoyed that a number of times. Very often it was not the product or service I thought would be the winner, but when one of those presents itself, trust the results and keep feeding it all the nourishment required. If your investor deck is growing in a rescue situation, chances are your revenue is shrinking along with your appeal to potential funding sources. You may have to skinny the team in order to skinny the focus, but far better for a few to prosper than all to be shown the door in the end.
Sell something. It goes without saying that it’s better to generate more revenue from customers than to try to get too creative. But, the context of this discussion implies that you’ve probably already hit the limits of what you can do in the routine course of business. You can attempt to sell some IP perhaps; I’ve seen that done a few times to bring some cash in the door to fund a pivot. But, unless you’ve got rock solid control over the IP, preferably with patents where possible, that’s a tall order. Most software based companies, which are the preponderance of the deals I see, aren’t blessed with much in the way of fully prosecuted patents. Your last resort in your decision tree is to try to sell the whole company. You will want a pile of cash for you and the core of your team and the ability to walk. Your buyer will offer some decorative stock certificates and compensation with handcuffs. Closing that gap in any way that makes everyone happy is extraordinarily difficult. Unless you’re big enough to pay a $1M transaction fee to an investment banker to stitch the deal together, or you have a lead investor who is willing to jam you together with another portfolio company that can profitably take you aboard, your odds are slim. It’s not impossible, but it’s a last resort in my view. Your best bet may be in my first paragraph above where I suggest finding a business partnering deal that works and letting nature take its course from there.
So, as you face business “end of life” decisions, perhaps some of these notions will be helpful to you. Cue Kenny Rogers…