Startup Failure Is When Your Leadership Will Be Tested Most
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Five years ago, my startup Shoes4you was backed by top tier investors like Accel and Redpoint, had been operating for two years, had over two million dollars in the bank -- and failed. It was difficult, but that journey ultimately became one of the highlights of my entrepreneurial career.
Here’s what happened, and what you can learn from it.
Deciding when you should close shop.
As I mentioned, we still had over two million dollars in the bank. We had the option to continue running the company for another 12 months or close. It was a very difficult decision to make as it is not in the entrepreneurial spirit to quit. However, we realized the unit economics of the company simply didn’t work. We tried new algorithms, different marketing approaches, but no new strategy was going to solve the fundamental problems of the business. We couldn’t responsibly continue operating the company when we knew it was headed for failure.
At that point we felt the right thing to do was to let our board know that we either needed to pivot or close down. It was important that we shared the problems with our board from the very beginning, and included them in both the problem and the solution. We ultimately decided all together that the best choice was to shut down.
It can be difficult to make that final call, but you have to try to take a step back and look objectively at your company. Are there fundamental problems in the core business model or vision? If the answer is yes, then it’s probably time to call it quits or pivot. And what’s more important, you need to be transparent with all stakeholders -- like your investors -- throughout the process, rather than surprising them with bad news.
Making the most of shutting down your company.
Instead of seeing shutting down as a defeat, focus your energy on what you can still do to maximize the ROI for your investors and create a positive outcome not only for the co-founders, but also for every single employee.
Below are the three steps you should take to squeeze out some positives while closing shop.
1.) Motivate your team.
Once we decided to shut down, we asked the co-founders to stay for free, without taking a salary, so that we could maximize the return to investors. It was tough for everyone to put their future plans on hold while also not getting paid, so I knew it was going to be critical to get everyone excited about the hard work still ahead of us.
While you may not have to ask colleagues to stay without pay, you will undoubtedly be dealing with a lot of negative feeling among your team. It’s your job to motivate them and keep everyone pushing forward as though it was still day one. One of the best ways to do this is by outlining actionable goals, which will make your team feel united and motivated to get moving.
2.) Sell all remaining assets -- even the AC.
We wanted to squeeze out every penny for our investors, selling each and every item the company owned.
First up, our inventory. Shoes4you was an e-commerce company that sold shoes, so when we shut down we still had 24,000 pairs of shoes. We held a massive sale in our warehouse where we sold the remaining shoes at a discount. We posted flyers, went door to door, and tapped everyone we knew to pitch in -- my mother-in-law and sister-in-law, and even our accounting firm helped us organize the shoes and boxes. Over three days, we had lines of people waiting to get in and sold every last shoe we had.
Not only did we sell our remaining merchandise, but we also started selling everything in our office, including all the chairs and tables. By the end of our downsizing, I had no place to sit. But there was still more to be done.
We didn’t want to pay the penalty for breaking our lease early, so we went to our competitor and convinced them to take over our lease. We transferred the lease to them without incurring any additional expenses, and even sold them our air conditioners.
You will probably have a lot of value you can still get out of your company, and should use your remaining days to recoup as much as possible. Don’t overlook anything, no matter how small it seems. Sell physical products, IP, and try your best to cancel remaining financial obligations like subscriptions or rent. Your investors will thank you for it.
3.) Find a job for everyone.
Our employees had followed us on this crazy adventure and we wanted to make sure they were taken care of. I reviewed the profile of each employee, then reached out to every company where I had a connection to tell them about the people I thought would be a fit.
In the end, every employee got a job that paid better than their job at Shoes4you. Our head of design went to work at FarFetch, which is now a unicorn, our CFO eventually went to work for Redpoint, our head of logistics went to Speedo, and our head of development is now at WalMart.
Don’t forget that shutting down your company also means nearly every employee is now out of a job. You’ve probably built an expansive network during your time building your company, so use it now to take care of the people who believed in your vision in the early days.
After emerging from what some people might see as a nightmare, I realized the experience was actually positive for me in several ways -- and it can be for you too.
1.) It’s not a black spot on your resume.
The amount we ultimately recouped from all the sales wasn’t that much relative to the two million dollars we had in the bank, but it was far more important because it showed our investors that we cared and that we were taking our obligation to them seriously.
As a result, not only was the experience not a black spot on my resume, but it actually allowed me to have a far better relationship with my investors than I did when we first started the company. They appreciated that we had tried so many ways to make the business work, and that we had involved them early on, honestly communicating our challenges along the way. By the end, we had gone through the process with our investors as true partners.
You never know how people will act during challenging times. In those hard moments, step up to the plate and take full responsibility for salvaging as much as you can. Your investors will respect and believe in you even more. In our case, I even later raised funding from one of the investors.
2.) Tell an honest story.
At the time, it wasn’t acceptable to say your startup had failed. Companies would always find a way to say they had “sold,” even if they had only sold for one dollar. We decided to be honest about our experience because we felt it was important for the entrepreneurial community to see that you can fail and still be successful afterward.
The response we received was humbling -- startup founders reached out to tell us how lonely it can feel and to thank us for being transparent with our story. The community and network I’ve built from that experience are invaluable.
Don’t feel like you have to hide your story. Tell it openly and own it, otherwise you do a disservice to the entire entrepreneurial community. You will find that being honest about what happened will actually expand your network as other entrepreneurs will relate to what you went through.
3.) It will set you up for success.
Five years later, I’ve founded my fourth company, Home61, a real estate tech startup that has raised money from top tier VCs like Founders Fund’s FF Angel and FJ Labs. In building Home61, I found that having both past successes and failures has been a major advantage because I’ve already made the mistakes and learned from them. I know now what to do most of the time, and I absolutely know what not to do. Of course I would have liked to have built the next Zappos, but short of that, having my startup fail was the second best thing for my career at the time.
If your company isn’t working out, the most important thing you can do is be upfront with your investors and your team as early as possible, take the time to learn from your mistakes, and understand how they can benefit you in the future. Then, build something new.