How startups should die(blog.42floors.com) |
How startups should die(blog.42floors.com) |
It closes with "Cherish some man of high character, and keep him ever before your eyes, living as if he were watching you, and ordering all your actions as if he beheld them." http://www.stoics.com/seneca_epistles_book_1.html#‘XI1
I've found it to be a great technique for making better decisions.
So in those times when your discipline is failing you. It's actually helpful to know that the HN crowd will catch you. For our industry overall, it's a very healthy self-policing mechanism.
Admittedly, this only worked really well for me after I sat with a grandparent at their deathbed.
I always took it as an example of the right way to act. But I have relatives that thought he was a fool not to declare bankruptcy and move on. There will always be people on both sides of that question, but he continues to be my inspiration as an entrepreneur.
When you're on your deathbed most individual events will be irrelevant. Not to mention that it doesn't really work until you have a visceral appreciation of your mortality, something many younger people lack.
The deathbed concept I had heard frequently with little effect but reading that letter from Seneca had a profound impact on my decision making process.
I decided to use a startup to raise some money for a non-profit. Their business model was to help fund events / organizations with their platforms, and take a fixed 2-3% commission on the funds raised. I raised $500 using the platform. But I never received the check for the $500.
I knew the founder personally. I e-mailed him and week after week he said, "the check is coming, there has been some sort of accounting error". 2 months passed, and no check. Then 3 months.
So, I e-mailed one of his investors, a mutual friend. He said, "Oh no, I think they are in a very bad place and may not have any money. I have stopped using the service." I e-mailed the founder again. He replied that my money was gone, but that he had committed himself to pay it back.
He was looking for work, though, so he wasn't sure when. Then, the platform's domain name quietly stopped responding to web requests, and the whole platform went offline.
I'm now in this weird position where I'm debating pursuing legal action. I'm still in touch with the founder. He keeps saying that he will pay soon, but doesn't.
The money actually came from over 20 people who had donated to the cause. They are unaware the money never made it to the non-profit. The check I was trying to receive was meant to just be a direct donation to this cause. The founder's mismanagement actually led to $20-$40 being "stolen" from about 20 people. In a way, I acted as a middleman, by encouraging people to donate via this platform. And now, I feel very responsible to get this money back. Do I pursue legal action? I've debated it.
So, here's another piece of advice about how startups should die: "if it's not your money, it's not your money". In other words, if your platform deals with money (e.g. accepts donations, facilitates payments) it is NOT OK to use money you owe your customers to fund operations. That is called theft, plain and simple!
And this, my friends, is the fundamental difference between SV and the rest of the world. From my knowledge and experience, something like this simply does not happen outside of America. I haven't decided whether this is universally a good or a bad thing, but one thing is for sure - (us) Americans are very tolerant of failure and that is a good thing for startups.
Yep, know that feeling. Well.
Would love to have you over to the office to chat. Ping me offline. jason at 42floors
FedEx was a good example of this, if I recall correctly the CEO took all the cash they had and went to Vegas with it. Usually wouldn't turn out well, but that time it did. If you need money, and have exhausted all your options you have to take a course of action that gives you a chance, no matter how slim, over the slow bleeding death which would be a long painful and hopeless experience.
Not compromising ethics like you mention is so important in life. Ethical decisions are harder in difficult circumstances (teetering over the cliff of failure) but those moments in life are when your ethics count for the most and mean the most, and as you mention they can also pay off in the long run (but this shouldn't really be a consideration from a purist ethical standpoint). The captain shouldn't go down with that ship.
But if you've raised $1m from professional investors and you have $100k left, for example, you might be better off trying to double down or raise more money.
Let's all be thankful things have moved on so much since that era!
I think the craze of 2007 was that you could make something that would become popular. Popular felt so much better than not popular. Max Levchin once called it blowing up a balloon. They get big fast, but they're just full of air.
Recently a guy applied to the current place I am working, and unfortunately I had to explain to my superiors about his history of poor interpersonal skills at another job that we worked together at. This guy wont be getting a job now.
Work hard to make sure that when you leave, it will pay dividends in the future.
For a first bootstrapped startup, a FNAC that doesn't require much overhead / support and can be built slowly for awhile is a starting point. It's not a proper startup, but it's something that puts founders and customers in less jeopardy.
(Startups proper are go big & fast or bust.)
I'm trying to put myself in perspective of his struggle -- was he potentially buying another year of runway? Another month?
Another question is, "Did everyone get paid?" He did the right thing and saw to it that everyone got made whole. If the business goes into bankruptcy and some creditors are not being made whole, it's much harder to not sell the email list if you can do so legally.
It's during tough times that you see what people's ethics really are. Great job by the OP addressing some of these.
I can't remember what the exact figure was--but it was in the 5 figures. Which for me felt like a potential life-saver.
I don't think what I promised my users was actually that relevant. It would've been super easy to change our terms of service to include the ability to sell or rent user data. I could have written it in a way no one would have understand. Of course, no one would have ever seen the change anyways.
The real issue was that I knew it was wrong. Even if legal.
http://blog.42floors.com.nyud.net/startups-die/#.UkHADudq0Qm
Not theft, but fraud. Unfortunately, it happens in many startups that don't have a qualified finance/business guy in a senior role.
If you take money from A in order to give it to B on A's behalf, you are a trustee of the money -- it belongs to you in common law but not in equity and you cannot repurpose it for something else. If the money cannot be conveyed to B, you must return it to A.[1]
Lawyers and accountants typically keep funds held on trust in a completely different bank from their own business accounts, just to avoid even the possibility of error leading to a breach of trust. To avoid even the whiff that funds on trust might be comingled with regular income.
Trusteeship can arise without anyone signing anything and it comes with high legal standards. If you have a business model that involves doing something like this, you need to consult a lawyer in your jurisdiction about the local laws for trusts.
IANAL, TINLA.
[1] As an aside, I suspect this is part of the problem Readability had with their "we have money waiting for you to collect, Mr Webmaster!" growth strategy.
"Never loan money to a friend with the expectation that you'll get it back, be ready to just let it go."
To state the obvious first SV != America.
And outside of SV there really isn't the sense of "failure is quite ok no biggie".
If you are located in a typical place in america and you lose people's money (I'm not talking about startup shot in the dark funny money) you will be viewed as a failure and less likely to get money again.
If you open up a restaurant or a typical small business (with either your own money or friends and family or a bank loan) and you fail you are thought of as a failure. It's really that simple. Most people won't say "ok he learned something let's take another shot".
Key difference is SV (or with any pooled investment fund) is that they understand that what they are investing in is shot in the dark. And besides it's not their money it's primarily their investors money. OPM. And even if it's their money they are betting on many horses a small amount. Not the ranch.
Had PG been working as an engineer at HP at the time and had put a large sum of his personal money into a venture that failed (money that might be needed for his children's college fund) he might have not been so "unbelievably supportive and so excited for whatever it was I was going to do next."
This is why you never invest more than you are willing to lose. If you do, and the venture fails, the blame for your reduced quality of life rest not on the failed founder, but on the imprudent investor.
The nice thing about SV is not just the big pool of investors, but the big pool of prudent investors who don't behave foolishly.
Absolutely. It can also skew the decision-making process. People investing more than they can afford to lose are not going to be giving helpful advice or making the right decisions for the business.
Or compare this to the moral obligation to repay your investor vs that of the user's data.
It's a very fine point, against the backdrop of a very good article.
Hope the team's still motivated to carry on; good teams are hard to come by.
(VC's are almost obsolete, unless they have mucho value-add: http://wefunder.com/)
To hnriot, who I can't respond to: No, it's not being a chump to willingly give money to those you are close to. The other side of the "be willing to give money to friends" coin is "be aware and careful of who you consider friends". You may be a chump if you give money to people actively taking advantage of your willingness to do so, but those people aren't friends. You should never give money to people who aren't your friends, and you probably shouldn't loan it to them either, unless you're in the lending business.
Also, I agree with everything you said. ^_^
One of the two founders of Genentech was a good friend of his, and so he had the opportunity to put the first money into what became Genentech. But he refused to do it because they were good friends, and instead helped him find other investors.
Somehow I don't necessarily see something like this happening often in today's funding environment.