See Part 1 - Intro
See Part 2 - Early stage failure
See Part 3 - Late stage failure
This post Part 4 - Dealing with failure

Running on Empty

Prelude to a fall

Failure is rarely surprising. Preceded by choices that didn’t work out.

Signs of failing startup:

• CEO replaced
• Pivot
• Raising money from new investors
• Trying to sell
• Raising a bridge round
• Layoffs

Pivots

Successful pivots happen early in a venture's development.

Late pivots
Pros:

• Good understanding of unmet needs
• Ample resources from large funding rounds

Cons:

• More energy required to shit resouces
• Not enough runway left

Term: Pro-rata - existing investors can the option to invest in startup to maintain their ownership percentage.

Raise from new investors

Bring new expertise and contacts.
Conflict of interest with existing investors.
Might be spetical to invest if existing investors are not taking pro rata allocation.

Selling

Logical to sell to rival or big company.
“Good businesses get bought, not sold”

Bridge loan

Lower valuation-stock value is decimated for current investors and vested employees.

Layoffs

Reduces burn rate.

Issues about being transparent with employees

• Loss of trust in leadership

Can start death spiral

Decisions:

• How deeply to cut?
• Who to cut?
• Severance?

Pulling the plug

Keep running- only prolong death
Note:

• Failure is slow motion
  • No growth -> ambiguous investors
• Life support is feasible
• Entrepreneurs do not like to quit

“My startup has 30 days to live”

Three pitfalls:

• No sounding board
  • Negative conversations can cause defections
• Feel moral obligation to persevere
  • “Once you take other people’s money, you can’t quit.”
• Ego hit

Advice

• Set milestones with deadlines
• Ask advisors if it makes sense to persist
• Ask yourself
  • Are you out of moves?
  • Are you miserable?
  • Do you still believe in the vision?
  • Are you close to closing the window for graceful exit?

Shutting down

Quit or stepdown

• Seeing venture to the end can be a learning experience
• Avoid bad reputation

Acquihires
* Investors can get modest return
* Large company maybe toying with startup to get a better deal as cash winds down
* Hard to make investors and employees(side deals) happy.

Winding down

Advisors
Find accountant and lawyer
* Sort out liquidation preferences
* State and government licenses

Approach - take inventory of assets and payables

Order of payments:

1. Taxes
2. Employee wages
3. Refund customer deposits
4. Secured claims
5. Unsecured claims
6. Preferred shareholders
7. Common Shareholders

Bankruptcy - court appointed trustee for % of asset value recovered

• Yields less value
• Trustee takes commission
• No founded input into payout of unsecured claims

ABC - for fee

• Out of court
• Faster than bankruptcy
• Recover more value

Workout - mostly for small startups

• Founder negotiates payouts

Communication

Collect receivables before informing customers

Employees

• Severance
• How to file for unemployment
• Medical benefits
• Help them find new job
• Show appreciation

Bouncing back

3 phases - recovery, reflection and reentry

Recovery

Three areas:

• Personal finances- loans on credit card
• Relationships - ignored due to working long hours
• Emotional distress - guilt, shame, regret and disappointed

Elisabeth Kubler-Ross - Five stages of grief

• Denial, anger, bargaining, depression and acceptance

Revisit old hobbies, focus on physical fitness

Dean Shephard - distractions and rumination can be restorative.

Remember everything is temporary.

Reflection

Diminished self worth -> feeling depressed

Dejected -> give up
But Narcisist - repeats same mistakes without changes
Find middle ground.

Postmortem analysis

• Was failure avoidable?
• What did I learn?
• What am I good at?
• What can I improve?
• Should people follow me again?
• Should people invest with me again?

Reentry

Engineering a graceful shutdown makes it easier to try again with key employees and investors.

Use experience to:

• Know tactical do’s and don’ts
• Examine motivations
  • Risk
  • Independence
  • Wealth
  • Lead
  • impact