Editor’s Note: Each week Maynard Webb, former CEO of LiveOps and the former COO of eBay, will offer candid, practical, and sometimes surprising advice to entrepreneurs and founders. To submit a question, write to Webb at firstname.lastname@example.org.
Q. I hate to have to admit this, but I don’t think my startup is going to make it. We’re out of cash, I can’t put more money in, and I don’t think it’s a sustainable situation. What should I be focused on doing right now? Trying to keep it alive, or trying to move on?
—Founder of a struggling startup
I am sorry that you’re in this difficult situation.
Now, what really matters is how you deal with it. Overall, I’ve seen founders address failure in two very different ways:
- Rationalization. As an investor, I often hear a lot of reasons for the failure: “The market wasn’t ready,” “The product wasn’t ready,” “We were burning though cash too quickly.” Well, who chose the market? Who developed the product? Who spent the cash? When it comes to dealing with failure, recovering from failure, and learning from failure, it’s important to take responsibility for any missteps. That’s the only way to ensure that they won’t be repeated.
- Responsibility. I am always looking to see whether or not the founders own the outcome and the mistakes that led to the outcome, and I appreciate and give credit to people who are self-aware and learn from their errors.
A few thoughts on what you should be doing:
Get out of the gray zone. Being in the murky area where you keep spending money and are hoping for a turnaround is a bad place to be. If the idea isn’t good enough or big enough, determine if there is a pivot to be made. What do you need to do to restructure? What do you have to do differently?
Know when to let go. If the idea is never going to make it, determine how to sell the technology and the talent and return some capital to investors. One of our portfolio companies arranged a talent acquisition to Google. In finding a home for their team members, the founders took care of their engineers and returned all the cash they raised to investors.
Treat people the way you want to be treated. As you would with any job, leave on good terms. By treating everyone with respect, you give people another opportunity to remember you in a positive light. You want people to feel as if you treated them as well as possible even though the company did not reach its full potential. It is very likely that you will want to do another startup, and how you handle your failures now will set a precedent for how likely you will be to obtain funding for your future endeavors. Specifically:
- Communicate early. Surprises are bad, especially when all the money is gone. People should know the company is in trouble before it folds. Investors might be able to help get the company on the right path. Give them the opportunity.
- Take care of your customers. Don’t crash and burn. If you have customers on your service, educate them on places to migrate and give them a date for the end of life of the service. (Try to keep it running for 90 days or more after you notify them.)
- Be generous with your employees. Help them get other jobs. I believe some severance is in order. There are some tough calls here about who gets what, and at what expense to investors, and there are no hard and fast rules. The decisions you make will be very situational and depend on team performance among other things. The operative word in this calculus is fairness.
Turn your focus to, “Now what?” Do you have the passion and enthusiasm to go after it again, or do you want to pursue a safer route, with more predictable economics? Take the opportunity to step back and reflect: What really went wrong? What have you learned about yourself that you didn’t know before?
Part of entrepreneurship is failing. Don’t lose your drive to change the world and make a difference. The world needs more entrepreneurs who are bold enough to think of new ideas and brave enough to pursue them.