Startups shouldn’t implode overnight, but it happens. And when it does, they leave an ugly debris field of hurt feelings, broken promises, and people waking up with no financial security whatsoever.
These last-minute closures should never ever happen to a startup, argues Zach Ware, managing partner of VTF Capital, formerly known as the Vegas Tech Fund.
“You should never run out of cash. Ever. I don’t understand how it happens,” Ware said.
Ware witnessed it with one of his portfolio companies, Zirtual, but he made sure it didn’t happen to his own startup, Shift.
The two experiences have taught him a lot about what happens when a company is in trouble, and the two paths it can take.
It’s a ‘selfish’ decision
For Ware, the realisation came when his company, Shift, had 10 months worth of cash left in the bank. The company had reached the point where it needed to expand into a new city, but doing so would have scaled back its cash supply to five months. That would also have put Ware in the position of needing to raise capital immediately.
“If we moved to Denver, we’d have moved it down to five [months],” Ware said. “We would have put the company at existential risk.”
Ware realised that throwing a Hail Mary by relying on venture cash to keep the business going and fuel its expansion could have had devastating consequences for his employees if it didn’t work. Instead, he decided to unwind the company and do the right thing for his employees.
In April 2015, two years after launching his car-sharing project, Shift laid off its employees with generous severance packages, helped them through the transition, and liquidated its assets to return some money to its VCs.
“There is absolutely no reason for a company to shut down overnight. That’s a result of a selfish set of decisions a founder made,” Ware said.
But it happens
Then, Ware went through it all again a few months later with Zirtual, a Vegas Tech Fund-backed company that shut down overnight and laid off its 400 employees via email.
“There are very few times when you don’t know that it’s coming. You had less cash than the day before and the day before that,” Ware said.
In her own explanation of its shutdown, Donovan said she failed to secure the VC funding she needed to save it after a deal fell through at the 11th hour. “And at the end of the day… ‘burn’ is what happened to Zirtual,” Donovan wrote. “The reason we couldn’t give more notice was that up until the 11th hour, I did everything I could to raise more money and right the ship.”
To Ware, any startup shutting down overnight is unacceptable. Startup founders and CEOs should have a firm grasp on their numbers and how much longer the company has to live. Securing funding shouldn’t be a hail Mary to save a company because at that point, the CEO has already selfishly chosen to put his or her employees at risk.
“Every founder should have a real time understanding of their business. It doesn’t matter who does it. You have to know it. You have to know your horizons,” Ware said.
“I have absolutely no tolerance for that situation at all,” he added.