How to shut down a zombie company gracefully
In this article, I share the process in how I helped founders to shut down their zombie companies.
In the past few years, somewhere between I left the startup world to the corporate world till the birth of my 2nd child, I have worked to help some founders of zombie startups or companies to shut down their companies and transition to move on with their lives after that. In this article, I share the process in how I helped them to work out the shutting down details and in the hope that others can help their friends who might be in this process.
Shutting down a company is never easy for any founder. Oftentimes, there are a multitude of factors that made it difficult for any founder to call it a day. After shutting down my company, I took on a different path in the corporate sector.
It felt a long time ago, but the startup I co-founded was officially shut down in 2014, despite we ceased all technical and business operations in June 2012. Even in my corporate day job, I have to go through procedure after procedure to get to the finishing line in shutting down the company. It was an arduous journey, mainly because we did not build on the right foundation. Setting up a company is easy but shutting down is extremely difficult especially when you take money from investors and the worse situation from government grants as well.
While it is normal for founders to go to successful founders for advice, I have been approached by another group of founders a few months later after the closure of my startup for a different kind of advice. It started with one or two founders who wanted advice on how to shut down their companies and move on. While it is not a scalable endeavor, I just took one or two cases by referrals for about 3-4 years. Everything remains confidential and I have to navigate the complexities in helping the founder to map out his or her path ahead. Gradually, I have done that as part of my giving back to the startup community till the birth of my 2nd child. It has been a distance from the time I have stopped and hence I have decided to put it down on paper by only revealing the thinking in how to do it but not the confidentiality that was entrusted to me.
The problem is described as the following: “I have worked in startup X as a founder for many years and see that it’s going nowhere. I have a change in my personal situation recently and need to think about the future. How do I shut down the company given that I have investors who have been supportive and long time employees?
A change in personal situation can mean many things. It could mean a founder has just gotten married and will have a kid on the way. The money from the startup could not allow him or her to make a decent living and hence he or she can move on. It can also mean that the founder is no longer passionate about the area which he or she has started with. Sometimes, the product market fit was not there. Last but not least, the company has evolved into something that was totally different from what it was envisaged. Yet, the common thing is to help this founder to move on from something that was not clearly working.
What they want to know is how one can gracefully shut down a company. The meetings will be kept confidential and I will listen to their situation and put together a plan where they can execute and eventually shut down their zombie company. In the process of helping them shut down, I have done my best to guide and help them think about what to do next. While I have an extremely difficult time to transition to a corporate career, these founders were lucky that there was a period of traditional companies looking for startup founders to hire. It turns out that I have an address book to different digital heads from major companies out there who might be in need of startup talent and hence as part of the process, I help them to find a job as well.
I remember the advice that was given to me from a late old friend, Professor Patrick Turner from INSEAD when I was in the same situation. He reckons that shutting down a startup gracefully is as important to a founder who manage to find success in building a unicorn. In Patrick’s words, a crashing startup is similar to a plane crash landing and your job as the startup founder is to ensure that everyone on the plane land safely with the least amount of casualties possible.
Except for a well-known Chinese classic “Romance of Three Kingdoms” where the failures are celebrated, history is often written by winners. Of course, like any normal human being, suffering a high profile defeat is extremely painful. Yes, time heals the wounds but the scars remain. From laying off people to make sure that the customers are informed of the shutdown, closing down a startup company is a daunting task. Learning to control the psychology of defeat and failure is probably something that I am still working on even till today.
Here are the steps which I have suggested to founders who have to overcome the psychological barrier of shutting down their companies:
- The first thing is to inform all shareholders that you are closing down the company and get the company to be struck off from the registry in that particular jurisdiction.
- The next thing is to work out how much left in the bank account so that you can do three things: one, pay out the liabilities to vendor and employees you need to lay off, two, cancel existing contracts and three, getting the accounting and audit documentation done so that you are compliant with the law of the land. If you have employees, just make a few phone calls to your other startup friends and competitors, and you will be surprised that they will help you to find a home for them if recruitment opportunities are available.
- Then execute each of the steps one by one till you are the last person standing, get the accounts audited and then get the company shut down and struck off from the register in that country’s jurisdiction.
What I discover from my experience in counseling these founders, the difficult conversation for the founder to convey to their family, friends, investors or business angels who has started with them proved to be the toughest for them to overcome the psychological barrier to shut down the company. You may find this surprising but in an Asian society, the founder often felt more guilty in letting them down and hence I believe that more effort has to be conveyed on the front of the investors to understand that making investments in startups have a high risk of failure.
To end, for those who might think that giving up might be a failure, I have this little quote to close this conversation even if you have transition to a corporate role just to pay the bills, “One can take the man (or woman) off the market from being an entrepreneur, but they can never take the entrepreneur off the man (or woman).”