How to gracefully wind down a failing startup

How to gracefully wind down a failing startup

Eric Mathews is an entrepreneur and investor. He founded Start Co., one the fastest growing venture development organizations in the United States developing, accelerating, and investing in high growth startups in logistics technology, information technology, and medical device as well as women-led tech startups.

Whether you are driving a car or running a startup, looking ahead is oftentimes more important than looking behind.  When times get tough at a startup – and I mean really tough – it is easy to look backwards and reflect. Unfortunately, if you decide you need to declare your startup a failure, you cannot look backwards. You must continue to look ahead.

Generally, there are two ways this situation can turn out. You can handle failure with grace and consideration for all stakeholders, or it can be handled so poorly that you will not be able to raise money for a next venture or find a job in the startup world.

The decisions you make while unwinding your business are very important to your ability to walk away bruised, but nonetheless with your head held high.

For founders here are some key considerations to remember as you contemplate and manage winding a startup down.

Strategy and communication considerations

Before the news hit the general public, you must make sure your communications with all levels of staff are in check.

1. Keep your investors, shareholders, and board members in the loop

It is crucial to let the people who have advised, funded, and supported your startup in on your decision to shut down before moving on. Even during the contemplation stage, you should consult with them for the best course of actions. While they may be disappointed, they are there to help you unwind appropriately.

Consulting your investors, shareholders, and board members allows transparency, and putting their input to action means you are still loyal to their opinions even if your product didn’t work out.

2. Keep the media (and your social media) out of the equation

Until a clear and agreed upon plan for unwinding the business is in place – including a detailed PR strategy – do not share this information to the world too soon.

Admitting your startup failed is never pretty, so make sure your PR strategy is approved by your investors, shareholders, and board members. They are as involved in this as you are.

3. Do not go through the process alone

The lone CEO winding down a business needs a trusted friend, partner, lawyer, or mentor to help out and provide guidance. This is when it might be good to have had co-founders for your business to discuss the situation and decide how to move on together.

4. Keep perspective during the process

Remember that most venture-backed businesses fail. Admitting this to your investors is not the most desirable situation, but it’s likely that they’ve dealt with this before.

The best thing to do to be graceful, appreciative, and walk away confident in your next venture so they may believe in you enough to potentially work with you again.

Financial considerations

You can’t discuss the closure of a startup without thinking about what will happen financially. Here are some things to keep in mind.

1. Ignore the financing that is just around the corner

It might be tempting to believe that a potential big business deal or upcoming financing could turn things around. More money won’t fix a problem that will continue to loom if it is something you can only fix temporarily.

Recognize the reality of the situation and instead of burning money on lottery tickets, preserve what little cash remains in the business to wind it down.

2. Maximize business value and save cash

You don’t want to spend all your money saving a startup that is doomed. Take measures to cut headcount and expenses down to zero as quickly as possible so you have some cash left.

3. Be smart about the remaining money

Ensure that you have kept enough money in the business account to pay all debts. This is crucial for your investors who do not want to inject more money just to shut down a failed business. In fact, telling your investors you need more money is possibly the most difficult thing to ask for after letting them know you are closing your business.

If you have a significant amount of debt left, the creditors will go after investors to get paid, because they have money and you, the founders, do not. Letting this happen will be a straight path to burning a bridge with the people who believed in you in the first place.

4. Fire sale will take on a new meaning

If you mismanage the messaging around your failure and the timing of shuttering the startup, you could lose the last few chunks of cash to take care of unfinished business. Explore every option for the sale of the business even at a discounted rate to return money to your investors.

Note that once you declare your failure publicly, your business will significantly decrease in value. Your business will be worth even less if you are shutting the service offering immediately to save money. Lastly, it will be worth the least if you are shutting down the functionality immediately. Plan strategically to get the most out of a failed situation.

We know this is something no one wants to go through, but the reality is this happens all the time – and it is imperative to be prepared for the worst.

Image credit: F.Schmidt/Shutterstock

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