Of my three legitimate startups, two of them were undeniable failures. The first proved a disaster: I was inexperienced, arrogant, and in denial. All of my investors lost their money, and I even lost a girlfriend on the way.
My second entrepreneurial endeavour was a modest success, laying the groundwork for my third startup which proved to be my proudest failure. My investors still lost money on me, which involved substantially higher investment than the first, and from professional parties. Of course, the outcome was not as I had hoped. We were competing in a market with a strong technology and a proven customer demand. In the end, we simply failed to execute quickly enough and lost out on the opportunity to my competitors. As founder and CEO, I hold myself entirely responsible for our inability to execute.
Yet as far as failures go, once the initial sting wore off of seeing our market opportunity slip away from us, my investors guided me through a successful winding down of the business that minimized the damage to shareholders and was fair to all stakeholders.
It was so long ago that I regret not having kept detailed notes of my experience, but inspired by this post from Roger Ehrenberg and piecing together what I can from memory, I recall the following tidbits:
- We fortunately began in the context of a strong working relationship between my investors and me. I had spent approximately one-third of their money on a small team that developed a technology that was innovative at the time: panoramic photos for virtual tours on web sites.
- We had a product, packaged into an easy-to-deploy kit and tailored for a specific market niche which validated the need. We had obtained some early customer traction, and I felt we were well-positioned for a wide-scale rollout. But we didn’t move quickly enough. Two principal competitors – one with a superior technology and no market traction, another with an inferior product but a mind-boggling marketing budget – completely blind-sided us. Before we could react, we witnessed a swathe of large customers in our market become suddenly locked away from us.
- My competitors’ advances were not widely broadcast, and I could have easily chosen to plod on for another 18 months by spending the remainder of our equity raised. But that didn’t feel comfortable, at least not without my investors fully on board with the prospect of a head-to-head competitive battle. Accordingly, I alerted them to this unwelcome market development.
- After about a month of honest and constructive reflection and analysis, we collectively decided that to continue on our current course would not provide a reasonable chance of success. Moreover, we also concluded that changing course at this point in the game would not have been any easier than merely scrapping our product and starting with a clean slate. The best course of action appeared to be a clean winding down of the company.
- Following my investors’ guidance, I allocated a small pool of the remaining cash to pay off all creditors and constitute a very fair severance package for my employees.
- I mandated an external intermediary to sell our technology asset, which in the end did recover some cash but barely enough to justify the fee and extra time involved.
- I returned the remainder of the money to my investors. They received about half of their money back. I exempted myself from the severance package, but my investors insisted I take one too.
- Thanks to the help of the outstanding advisors around me, we managed to harvest some strategic learnings from the experience and prepare the groundwork for a future venture.
- Beyond the business-specific lessons, I would summarize a few of the more general takeaways from the failure to be:
- Having a strong relationship with my board and investor base. I felt the fit with my investors was very good at the time of accepting their money, and only later did I appreciate how critical this was.
- Not being afraid to deliver bad news, first to my board and investors, subsequently to my employees and trade partners
- Taking a long-term time horizon. Gut-wrenching decisions are always easier if kept in perspective. Moreover, burning bridges for short-term comfort would have permanently damaged my reputation long-term.
- Failing before. I would not have been cool-minded enough to make the difficult decisions in this instance if I hadn’t royally screwed up a previous company.
I’m convinced that I learned more about running a startup on this one failed company than on some of my more modest successes, an experience that I still carry with me to this day.