If your startup is near death or showing signs of potential failure and you have probably less than 2–3 months of run rate, what should be your strategy in such a difficult situation?
There are a few scenarios:
- You are in the midst of fundraising, and the investors you approach are not responding. You are holding out hope for them to come to you. Should you continue to engage them or talk to new investors in the hope that a fresh round of money will help your startup to tide over another 6–12 months?
- You are in the midst of selling your product but the traction is getting slow. You might hear from many people that your product is what they want, and yet, your sales number show otherwise. Should you continue to iterate the product to fit the people who are willing to pay you or give up on the product?
- You are in the midst of a personnel turmoil. People are leaving the company for better pastures. Even if you can raise another round of funding, you have to re-hire new people and rebuild from scratch. Should you give up and shut down the company?
Whenever I speak to founders who come to me on the following three scenarios, I find that they often cling to the hope of fundraising, try to stop the bleeding of the personnel and focus least on selling the product. The whole order in how founders come to this reasoning is totally wrong but hindsight is often 20–20.
It may be easy to give advice to anyone, but the honest truth is that I had been through all three of the above incidents and had no choice to shut down my company, Chalkboard in 2012 and fire people who did not deserve to be fired. I have taken the responsibility to shut down the company, apologise to my investors and clean up the mess that was encumbered with. It took me three painful years during my corporate career to shut down the company gracefully with debts cleared and get the company struck off from the register.
Over the years, while I was patiently engineering my comeback story (which will be some time in the future), I have thought about how to handle such difficult times if I will encounter them again. I had the fortune of having a great advisor with my late friend, Professor Patrick Turner from INSEAD Business School who passed away two years back. He provided me the counsel that I needed during that period of crisis, which I thought I should share it here, and it might help those in crisis to think through how to move forward. In fact, his advice did not help just one but two of my companies as it helped to exit another startup I co-founded to a happy ending.
Patrick Turner gave me his advice in the analogy of a falling plane. He asked me if I was on the plane that was crashing down with many people that might hit many buildings on the ground, what’s my response? In times of life and death, the only way to do this is to figure out to steer the plane to safety and save as many lives as possible. Yes, there might be collateral damage but it is important to ensure minimum casualties. The art of the whole thought experiment is to minimise the amount of damage as much as possible. It may end up that you have no choice to shut down your company or engineer an exit, but in the same light, figure out how to survive so that you can fight another day.
Once you get the falling plane analogy or what I will termed as the Turner advice, how does that work into the failing startup situation? Here’s how I have condensed the scenarios into a set of principles which I will adopt to make sure that it won’t happen again. The first thing is to ask yourself what you can control and what you cannot control. If you will to ask me to rank all three scenarios again, I will rank them to what I can control and what I cannot control.
My advice to you is that when your startup is showing signs of failing, focus on what you can control and throw away the options what you cannot control.
The first priority is to make sure that we focus on sales and make sure that there is incoming revenue to pay the bills for everyone. The reason is simple: it’s something that you can totally control. If people have to leave, then accept it and make sure that you can slowly rebuild the team to fight another day. Don’t incur more bleeding by raising salaries with money that you cannot afford. Figure out how to distribute the job out with people leaving or outsource it till you can hire back people back in. Your only focus is to ensure the startup stay alive if you believe in the mission of the startup. There is another school of thought that if your startup cannot take off in a few months, you should quit. My view is that this school of thought is equally wrong, because different business problems have different gestation periods, and some might take a longer time to build and succeed. It really depends on what you believe.
How about fundraising even if you hope that some venture capitalists or angel investors will save your day? I will be blunt and tell you to stop dreaming. Yes, in the world of venture capital, they don’t like you to be profitable but great traction because it means that they have to take a high valuation, but if we don’t do that, we are just lying to ourselves and we have no choice by continuing with “steroids and drugs” like what happened to some supposedly startup unicorns. It’s the situation where some startups have to continue & get doped by financial morphine and be forced to sell if the money funnel will suddenly dry up. That does not mean that in times of survival, you might need to raise a small round from family and friends to stay alive.
Ultimately, if you truly believe in the mission of your startup, it is important to set priorities based on what business you are building rather than the external factors you cannot control from hiring that rock star you think he or she is or fundraising from people who have their own views that might not align with yours.
Author’s note: Some INSEAD students often asked me why I am still an entrepreneur in residence in INSEAD Business School even though I have been in corporate life for 5 years. You can take a man off the street in being an entrepreneur but you cannot take the entrepreneur off the man. I often answered that I remembered my friends not in good times but how they treat me in bad times. I have asked the school that I am to be rated by the students during my sessions with them and check with them if my counsel to them is valuable. The day when it is not useful, it’s time that I should stop. My personal reason is that I felt that I owe Patrick Turner a great deal of gratitude and the reason why I kept continuing is to help the people he cared about (which are his students in INSEAD) like the way he did for me even though I am not from the school. Patrick was also my reference when I got my first corporate job in Vistaprint. It is only this way that I can remember and honour him as a great friend and continue to live and fight another day.
Acknowledgments: I thanked my wife, Yuying Deng for proof-reading this post before publication.