Startups – When Things Go Wrong…..



There are plenty of people that will help you build a company but sometimes you need help when things go drastically wrong. This post is designed to help entrepreneurs get through some of the rough times.

Decide If the Problem Is Fundamental or Not

First, determine if your problem is fundamental or not. By fundamental, we mean that it could significantly harm or kill the business. Fundamental problems come disguised a variety of ways but some are financial, others are legal, and some are product/service related. Problems that are not fundamental do not require drastic approaches but usually can be solved simply, or at a relatively small cost.

Examples of fundamental financial problems include untenable debt, cap table problems, a high burn rate without offsetting income (or access to new capital), and more. Fundamental legal problems range the gamut from product liability issues to any disclose-able or large lawsuit where your company has liability, and will most likely lose the case, have to settle for a large amount, or will take on significant legal fees that are not affordable by the business. Legal problems can also be employee related.

Examples of fundamental product related problems have to do with products that don’t work as intended, or are not satisfying customer expectations. The fact is that some of the best laid product plans sometimes do not come to fruition. Additionally, with the rapid development environments that exist today, a competitor can decimate a product in what seems like a few weeks or months. Witness what happened to MySpace once Facebook came onto the scene.

If your problem is not fundamental, then there should be easier ways to solve the situation and we won’t address those types of issues here.

Stay Calm

Regardless of the fundamental issue, the 1st order of business is to keep calm. The worst thing to do is begin rash decision-making and get crazy with your constituents in and around the company. So by remaining calm, you can make logical business decisions which could range from putting the company into bankruptcy or insolvency, all the way to selling the company in a “fire-sale” or drastically changing strategic direction.

Surround Yourself with, and Listen to, Your Advisers (You can find more on Advisers and Boards Here)

In a time of crisis, it’s very important to surround yourself with solid advisers, and to listen to your board of directors. We suggesting that you reach out to your best advisers who may have been through something like this before. You may have a variety of advisers willing to help including your existing Board of Directors, advisory board members, your investors, friends and family with strong business acumen, legal counsel, your CPA and more. Or, any of these advisors could lead you to somebody who has faced the same issue. Crisis usually demands new thinking. By bringing in more opinions, you should be able to generate more choices. Many have gone before you, and there is a 90% chance that if you talk to an advisory who has worked with more than a few businesses, they will have been through a situation like this before.

Look in the Mirror

Be realistic about your own participation in the problem. In my experience, entrepreneurs well visionary, can also be stubborn and continue supporting a problem until it becomes fundamental. The hardest thing for auditors to admit is their role in a fundamental problem. We all make mistakes, but the biggest issue is how quickly you can address the issue, not the fact that the mistake was made. In the case of a fundamental mistake, the entrepreneur may look to advisors and possibly even step aside and bring new leadership in. I have seen on more than a few occasions where new leadership comes in and gives the company another chance. Sometimes by being the sacrificial lamb, creditors, upset investors, or even customers might be patient enough for you to turn the company around These are all very hard decisions for the board and the entrepreneur. Listen to your advisers.

Don’t Be Stubborn

Even if entrepreneurs did not cause a problem, sometimes they are stubborn to bring about the necessary change. If a product isn’t working, it needs to change as soon as possible. I have witnessed situations where all of the advisers were suggesting that the best route was to file bankruptcy, but the entrepreneur would have no part of that. Instead of just reorganizing to get back in the playing field, the entrepreneur tried to complete the project but really had no chance, and the situation ended up much worse. As we know with entrepreneurs sometimes they are blinded by their own vision, and cannot let go of an idea or a certain direction on which they have decided. This is one of the biggest failing points we have seen with entrepreneurs. Some of their greatest assets, which include their vision, enthusiasm and work ethic, ends up being their greatest liability when times get hard. The fact is that 90% of businesses fail. A percentage of this failure is due to entrepreneurs not willing to change direction, or restructure a company as needed.

Solutions to Fundamental Problems (a Partial List):

  • bankruptcy or insolvency – seek financial and legal counsel
  • new investment capital at a lower valuation or down–round
  • new strategic direction for the company – go to your board of directors for advice
  • new product direction – utilizing product assets in a new way to develop a product the market needs – think of other uses for the product or the assets that make up the product. Perfect example is Twitter. Designed for an internal communication mechanism, Jack Dorsey then discovered that it could be used as a major communications platform. Now it’s a multi-billion dollar company.
  • merger or acquisition -selling the company or merge it with another synergistic company – this could be a competitor or a complementary company
  • shutter the company, and sell off the assets – try to return some percentage of investment
  • significantly downsize – reducing headcount and/or salaries – possibly ask employees to work for equity until you can turn things around
  • renegotiate debt
  • use equity anywhere you can instead of cash

As a final note, and we cannot stress this enough, do everything possible to keep the entity alive. I have seen companies that have been decimated but have gone on to survive and even thrive because the corporate entity was able to continue. This is of key importance in many businesses since the entity may have an established brand but not be operationally sound. We personally sold a company that was failing to another group that purchased the entity for a very low rate but then turned it into a viable business. While not the original outcome we intended, certainly better than some of the draconian choices we faced at the time.

If we can be of assistance please contact us.