
How startups should die - waratuman
http://blog.42floors.com/startups-die/#.UkGtI2RKlq4
======
brd
Absolutely yes to "Pass the Hacker News test". Seneca's letter Epistle XI is
one of my favorites and teaches this exact lesson.

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](http://www.stoics.com/seneca_epistles_book_1.html#‘XI1)

I've found it to be a great technique for making better decisions.

~~~
rubidium
There's also the deathbed technique. Imagine you're 91 years old, with a few
members of your family around, and you're thinking back over your life. How
would you wish you would have made the decision?

Admittedly, this only worked really well for me after I sat with a grandparent
at their deathbed.

~~~
rmason
My grandfather worked in real estate and owned a number of commercial
buildings that he lost during the great depression. It took him sixteen years,
but he paid every one of his creditors off with interest.

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.

~~~
telephonetemp
Interesting story. Did your grandfather make the money to pay off his
creditors through entrepreneurship? How did his career go once he had paid off
the debt?

~~~
rmason
Yes he started a business installing furnaces. He was well respected by the
guys who survived in real estate and had no problem finding business. When the
war was over he did go back to real estate but never as big as before. He
explained that he never would again be comfortable to be so highly leveraged.

------
pixelmonkey
I was once on the other end of this -- witnessing a startup that failed "the
wrong way". The unethical way.

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!

~~~
fludlight
> That is called theft, plain and simple!

Not theft, but fraud. Unfortunately, it happens in many startups that don't
have a qualified finance/business guy in a senior role.

~~~
jacques_chester
Off the top of my head there's also breach of trust and possibly trading while
insolvent.

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.

------
mbesto
> _I remember sitting down with Paul Graham as our startup was failing. I
> remember how unbelievable difficult it was to get myself to that meeting.
> The last thing in the world I wanted to do was to tell him my startup was
> failing. It took him 30 seconds to process the failure and then he moved on.
> He was so unbelievably supportive and so excited for whatever it was I was
> going to do next._

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.

~~~
larrys
"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."

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."

~~~
fludlight
> 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)

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.

~~~
Ologn
> This is why you never invest more than you are willing to lose.

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.

------
tomasien
I wrote like 10 topic sentences for comments about shutting down a company and
then just erased them, because what a horrible set of memories that topic
brings out. I like reading about failure from Jason because he's had a win and
is on his way to another, so he can talk about it with a pretty even mind.
Personally, I've only got like 10% of a kind-of-win since shutting my first
company down, and it still makes me absolutely ill.

~~~
jaf12duke
Jason (OP) here.

Yep, know that feeling. Well.

Would love to have you over to the office to chat. Ping me offline. jason at
42floors

~~~
nobodysfool
Seriously, no way would I pay a bill that the business owed when it was
shutting down out of a personal credit card. It's the business, not you who is
liable. Also, if you can pay on a credit card, you can pay the business on a
payment plan and it will cost you a lot less.

------
TomGullen
I liked this article thank you. My theory on dying startups is that if its not
working its better to go out with a bang (eg a crazy pivot or a high risk high
reward gamble) rather than a bleed out.

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.

~~~
YokoZar
If the business is sure to fail and you have money left but no clear idea what
to do with it, wouldn't simply liquidating and giving partial returns on
investment be a reasonable option?

~~~
mattzito
It depends (imo), on the amount of money you have left and who its from. If
you've raised $1m from well-to-do-but-not-rich family members and with $500k
left you're realized you're totally unqualified to be in your business, or the
concept was terrible, no valid pivot, etc., then yeah, give the people back
your money.

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.

~~~
dkersten
If you had $100k left and you tried the FedEx gamble, and lost, you could very
well get done for reckless trading. I don't think that's worth the risk.

~~~
pratik661
It should be a risky venture for the company (ie a new strategy). I think
gambling in Las Vegas would count as fraudulent.

~~~
dkersten
Maybe I should have responded to TomGullen's post since he mentioned the FedEx
story.

------
ballooney
"back in 2007, we were enabling college students to debate issues on their
campus. And in the unfortunate theme of that era, we had lots of people using
it but nothing resembling a business model."

Let's all be thankful things have moved on so much since that era!

~~~
jaf12duke
They really have. When I look around the current batch of YC companies, I find
that virtually every one has a built-in business model from the beginning.

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.

------
dfrey
Why is the founder taking on personal credit card debt to pay the bills of the
company? Shouldn't the company just go bankrupt and then that's the end of it?

------
Causalien
I am in the process of shutting down my first company and I would like to
thank you for sharing your experience because every decision I make right now
has huge ethical implications.

~~~
nobodysfool
Don't pay your debts on credit, that's just idiotic. If you can pay a credit
card company monthly, then you can pay your debts the same way as well.

------
rralian
My first startup was a bit of a fad. A fast rise to millions of users, and
then a slow peter out -- no matter what we tried. We also didn't know what we
were doing, to be fair. Anyway, as we were on our last legs we got a couple
offers for our email list of about 6 million users. My co-founder wanted to
take them to get _some_ money out of it, but it was an easy "no" for me. We
were doing this on the side of day jobs, so failure probably didn't feel quite
as catostrophic and we didn't feel as desperate. Still, probably a good thing
he would have had no idea how to get at the database (designer).

------
3327
Basically boils down to an 'honor code'. When you are going down imagine
yourself as a great person and that history will remember every action you
did. If you keep your respect and dignity people will respect you and you live
to fight another day. If not no matter how successful you may or may not be,
someone will someday say: "yeah its a great company but he fu*ked so so so
over". You don't want to be that person. You want to be: "yeah he put 3
companies under but he always manages to pay his debt".

~~~
vacri
This isn't really true. AirBnB got to greatness by using a lot of shady
tactics earlier on, and HN was split half-half on whether this was a good
thing or not. History essentially forgot those shady tactics, and AirBnB is a
gorilla now.

~~~
milesokeefe
What were some of those shady tactics?

~~~
vacri
I can't remember the detail, just the arguments really. I recall things like
misrepresenting themselves to people on craigslist and violating things like
'don't send me promotional material' settings.

------
ballard
I'm not a fan of nascent bragging about killing your latest startup, leaving
customers out in the cold without a good reason or advanced warning. Find a
buyer or pivot, otherwise it's just flushing time, money and credibility down
the drain.

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.)

------
nwenzel
Right after reading the pg essays, any startup founder should read everything
Jason has written. Cuts right to the points that many are too uncomfortable to
talk about.

------
dmyler
Financial transparency FTW. I've worked for two companies that were extremely
transparent. It's made me feel like a) the company knows I am a big kid and
can take the good & the bad news, and b) views me as a partner in the work,
not a cog in the machine. And if declining finances leads some people to
leave, that's infinitely easier than having to let them go.

------
eggbrain
Just curious, but how much would a list of 1-million targeted emails go for?
High five figures? Low six figures?

I'm trying to put myself in perspective of his struggle -- was he potentially
buying another year of runway? Another month?

~~~
mathattack
Part of the question here is also, "What did you promise (implicitly or
explicitly) when you got those email addresses?" That's really where it
becomes an ethics issue. Our data gets sold every day.

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.

~~~
jaf12duke
OP here.

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.

~~~
Causalien
In this situation. Do you think your moral obligation to repay your debt
outweight the moral obligation to your user's data?

Or compare this to the moral obligation to repay your investor vs that of the
user's data.

~~~
mathattack
Exactly. Could you be open for a lawsuit if you didn't pay your creditors in
order to respect the privacy of the email holders?

It's a very fine point, against the backdrop of a very good article.

------
001sky
_Our entire team is made up of entrepreneurs that have at some point failed
their own startup. There are hundreds of companies like us that are always
looking to hire awesome entrepreneurs._

------
hapless
Coral Cache link.

[http://blog.42floors.com.nyud.net/startups-
die/#.UkHADudq0Qm](http://blog.42floors.com.nyud.net/startups-
die/#.UkHADudq0Qm)

------
namenotrequired
I love the honesty that always shines through your posts, thank you.

