When the startup is struggling, don’t panic, and try to analyse the problem with some distance
As a reporter in the startup tech ecosystem, I’ve seen a great deal of companies launch with fanfare then dissipate with nary a whimper. This is not uncommon. In fact, according to statistics, successful startups are the exception not the rule; it is estimated that 97 per cent of startups will fail.
This is the harsh reality of being in a world that believes in a flat hierarchy and prides itself in building and scaling products fast. This is a world where “hustling” never takes a breather; a world in constant motion and flux.
Working under those conditions certainly gives you the flexibility and speed to iterate plans quickly but it also makes you more susceptible to the effects of a storm.
Good winds will push you far ahead and may bring you a sweet windfall. Grey clouds overhead? Well, prepare for a rocky ride.
In February of 2016, my company nearly became part of that “97 per cent”. A confluence of unfortunate circumstances saw our staff count reduced by half. There were anxious rumblings and tears. But thanks to our resilience, and the fact that we were (and still are) still committed to the vision, we pushed ahead.
If you are a struggling founder reading this, you might be sitting in your cheap swivel chair, biting your teeth, wondering if the sun is about to set on your company.
There are many things you can do at this stage, depending on your predicament. And they can be lumped into two main options: let go and sink, or find a way to reach dry land.
But first, it’s time for some self-reflection; you have to identify why you are failing.
First, Identify the why
Most startups fail when they are at the infant stage. It could be due to a variety of factors ranging from having too little traction or funding to scale, to arriving too early or too late to the market. Or, your Customer Acquisition Cost (CAC) and your aggressive hiring drive could be causing your burn rate to become unsustainable.
Or maybe, your business model was ill-conceived from the beginning.
Take for example, a marketplace business. Before Ng Jing Shen became the co-founder (and now CEO) of the prominent Asia-based dating platform Paktor, he was building his first company, a Singapore-based activities marketplace called Restless.
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But, he encountered two problems: one was that the activities were generally too costly, and the second being the quality of the vendors.
People don’t want to pay S$30-50 for organized activities. For the vendors, it only makes financial sense for them to run it if they can charge at a min S$30-50 per head. And that is beyond the price of a movie ticket, a brunch or a coffee catch-up with friends,” Ng told e27.
Just from a domestic market perspective, it is unfeasible, especially when there are platforms like meetup.com offering free activities.
“If you have no buyers, you cannot onboard sellers. This is the classic chicken and egg problem that plagues all marketplaces. While there are some activity providers that will be willing to sign up, Restless had 200 vendors, they are also only willing because they need the additional help that the marketplace promises. So there is a natural tendency that only vendors who have insufficient demand will want to go on your marketplace and vendors with high demand do not. This leads to a marketplace fill with activities that people do not really want to attend anyways.”
To be fair, this business model isn’t exactly irredeemable. It has its merits, but the problem really lies in the execution, fine tuning and study of the model.
“Get a lot of good vendors onboard first either by subsidizing their entry or providing a tool that they need instead of trying to sell additional demand [for their activities] which they don’t need,” says Ng.
That way, it becomes easier to build a heavy user density early — which will also lead to more vendors coming on board.
Building a company when you are still wet under your ears is tough, which is why a study found that successful entrepreneurs tend to be middle aged.
Many young entrepreneurs start out working with friends. But just because you and your best bud get along swell on football pitch or in university, it does not mean that relationship will translate well into the business world. I’m not saying working with people you can trust is bad thing, but when you take your relationship to a corporate level, the dynamic changes.
You and your pal may not be ready to handle ‘boring’ things like accounting and HR. Imagine going from surfing together, eating cheap ramen, calling each other “bros” to suiting up in front of investors to decide how share allocation and salaries.
When your startup makes the leap from being a little scrappy unit to a funded company, everything take on a more serious tone — you are playing for keeps now. There has to be proper governance. Your books have to be in order lest you fall into legal quagmires in the future. Allocation of shares, employee salaries, tracking of revenue and other costs have to be tallied and recorded diligently.
If this not handled carefully, friction builds up and soon the relationship falls apart and both of you are either at each other’s throats or simply not talking. This conflict will then inevitably spill into employees and soon they may take sides. What you get is a fractured company stalled in a toxic pile of bullcrap.
Other personal problems, left unchecked, will also cause severe damage to your business. A young founder, who chose to remain anonymous, recently told me about how a bad breakup with his fiance, souring of relationships with his good friends and family, caused him to lose his “positivity”.
“This in turn affected the business side of things. My co-founders lost confidence in me; in my vision and decision-making abilities,” he said.
At one point, he said he even experienced borderline depression and could not confide in anyone. In order to protect the reputation of his company and not affect the morale of his employees, he went on a sabbatical to recharge and contemplate on his life.
When, he came back, the company was deflated. Rumours had been spreading about his absence; that he was abandoning the company. This affected the bottomline of the company and key people left.
“When I looked at where the company was going, I realised I may have been the cause or responsible for the downturn, and that perhaps I shouldn’t be the one leading the company anymore,” he said. “Ironically, I was listed in Forbes 30 under 30 and I was invited to speak at events. So although I was down in the dumps, I had no time to feel or show it.”
Sometimes, the company may be chugging along fine; but if your personal affairs come apart, expect the company to follow suit.
Speaking of success metrics? How should I handle attention?
Perhaps you are a solo founder who has just cashed in a big sum of investment. Now you want to shout it to every media outlet and speak at every tech conference.
You are all filled with positivity and eager to share your success story – why not? Good publicity equals better branding for the company which equals more deals and partnerships, right?
Well, yes and no. There has to be a balance. You can’t be neglecting your employees and business, and you are still at an early stage company, which means that it is time to double down and work out a strategy for the next stage of growth.
There have been cases where founders went gallivanting overseas after cashing the cheque, speaking at every possible tech meetup or conference in hopes of boosting their image only to come home to a disintegrating company.
When the leader is absent, the ship is rudderless. And If you, as the founder with the vision, can’t be around to inspire and lead, guess what? Your employees, left to fend for themselves, will start to murmur and grumble. And soon opportunistic headhunters swoop in and bring them to other companies (like your rivals), by the droves.
Also, but don’t be hooked on just closing deals and chasing more investment and revenue. If it is done at the cost of neglecting proper governance and accounting, you might just piss off your current or next potential investor, and this may completely derail business. Generally, a house not in order is just unattractive to investors (unless your product is really outstanding).
Also Read: 8 steps to a successful subscription box business
As you can see, there are myriad of reasons why your startup is facing impending doom. Should you choose to throw in the towel, here’s how to do it gracefully.
Not the end of the world
As a founder, you carry an exceptionally heavy burden; your employees depend on you to make payroll, your customers expect you to deliver the product they paid for, and your investors demand healthy report cards.
But, know that although you may be days from collapse, it’s not the end of the world.
First, take a deep breath, brew yourself a nice cup of tea (none of that heart-pounding espresso, please), find a nice, quiet space to sit in and think:
What do you have left? Do you have any outstanding debt? How much do you owe your creditors? If you are a SaaS company, are you able to give your customers a partial refund? Do you have enough in the bank account to make the month’s payroll?
And, I know this may seem common sense to most, but don’t empty the company coffers and take off to the Caribbeans without a word of warning to your clients or employees. (If you do, don’t ever dream of coming back unless you like prison showers.). Have a deep discussion with your co-founders and investors. Be transparent about the problems. Work out a plan to repay your investors.
Now, you can liquidate your company. If you have valuable intellectual property (IP) and assets, you can sell them at a discount. You can pursue a merger and try to do an acqui-hire with a bigger company or startup. This will help in continuing the goodwill for the employees. Sell off physical assets like your laptops, office chairs and table and your foosball team on Carousell or some other classifieds or auction site.
Build a concise deck that carefully details the events leading up to this dire state of affairs and call for a company town hall meeting. Answer every question your employees have for you. Just keep in the mind that the mood is sombre now (trust me, I’ve been in that scenario) and tensions can be high. Do not ever push the blame on any team or employee. Have the humility to fall on your own sword.
Discuss the options that were available, and why you have arrived at such a decision. Although you are still the CEO, gather some buy-in and feedback from the team and make sure everyone is in line with your plan; let them know their input is still valuable and everyone is part of the decision-making process — this is especially true for an early stage startup with a small team. Of course, at the end of the day, only you should make the final decision.
Be realistic about your company sell-off or closure date. By having an honest forecast ahead of time, you can better plan forward for not just yourself but also your employees, who may want to secure job interviews elsewhere. It’s not easy watching your baby bleed out before your eyes I know, but maintaining a stiff upper lip will help with company morale and allow you to think through your situation more objectively.
It is obviously a difficult situation for employees and showing empathy and support during this period, for example introducing them to recruiters and people in your network, offering to review CVs and provide reference letters, makes a lasting impression down the road.
Your investor, on the other hand, might want to position you as a COO or CTO in of their other portfolio companies. Many companies see startup founders as experienced and battle-driven, and are seen as good for business development roles and willing to take risks and be innovative.
So fret not, being a failure makes you more attractive for employment! It will also give you more exposure in the industry as well as good remuneration. Then, at an appropriate timing down the road, you can come back to the startup scene and start up again, with more experience.
Keep buggering on
Britain wartime Prime Minister, Winston Churchill, is widely known for his famous maxim, “Keep Buggering On”(KBO), which he used to rally the British public to stand strong against the threat of Nazi Germany.
Founders would do well to adopt that same attitude. If the fire of entrepreneurship still burns in your belly. Here’s what you can do.
Seek out a white knight rescue. This involves finding a investor willing to support the company. However, investment terms offered might not be in your favour.
You can conduct a layoff or retrenchment exercise. It will help your company to stay afloat for a longer period in hope of potential sales closed or new investment, but impact on company morale will be very severe (at least for the first couple of months).
You may have to cut your entire marketing team (which is typically the case since they are not the core product). You will then need to think about how to squeeze more efficiency out of the remaining spend and how to use other free/low-cost channels.
Going part-time is also an option. Downsize your team to a 3 to 5 man startup and find other employment options and keep the company afloat by working on this part-time. This option is chosen in hope of a breakthrough in a significant milestone, but progress and development of your company may be protracted and there is high chance of you burning out.
You can also pivot. But ask yourself why and how you are going to pivot. If you are pivoting to a vertical or solution just because your competitors are doing it, then you are not thinking deep enough — you are just a follower, and if you can’t predict their steps, they will always outfox you.
Perhaps think of the reasons why and how you shouldn’t pivot. That way, you can better narrow down a solution suits your business model.
If you are burning through too much cash because you have too many products, you should cut out the weaker ones that are not profitable. Out of 10 products, only 3 may be profitable but their profits are used to make up for the losses the other 7 are making.
But that does not necessarily mean you have to fire the teams that are working on those 7 products. Out of those 7, maybe there are 2 that have potential to turn around in the future. Consolidate the teams so that you can build a better version of those two products. That way, you increase your margins and cut your losses.
If the reason for high losses is due to poor sales, you can look at reconfiguring your marketing and distribution channels. Seek out complementary channels that distribute similar lines of product. Establish a partnership with other manufacturers and find out if there is a way to cross-sell products. For example, if you have developed smart portable water coolers, seek out manufacturers that sell home appliances or office ware. Alternatively you can allow manufacturers to white label your product.
Do not bring yourself into more trouble by personally committing to financial liabilities. Your sense of obligation and pride may be driving you to borrow from banks with high interest rates, even if you do not have a clear recovery plan on sales .
In the end, your personal financial distress will hurt not just you and your company but also your loved ones.
Also Read: The first step is to show up
Most importantly, keep communication channels open. Always, always, always be prepared to have honest and frank conversations with your employees.
For the aforementioned founder who was experiencing depression, he came back to his company with renewed vigour, assuming full management responsibilities, with the hope of boosting his employees’ morale. He also started having regular informal hashing-out sessions with his co-founders.
“It took a lot for me to say sorry and continuously have these heart-to-heart sessions with them; to talk about our conflicts; whatever they are feeling, what they are struggling with; to rebuild our trust. There is still kind of like a unsaid gap between them and me, but we are making good progress.”
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[e27 talked to startup fixers, investors and founders for this article. They include Paddy Tan, co-founder of InterVentures; Christopher Quek, Managing Partner of TRIVE; Ng Jing Shen, co-founder and CEO of Paktor; Albert Shyy, Principal at Burda Principal Investments; and Bobby Liu, Senior Director of Topica]
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