Tuesday, April 8, 2008

How Do You Know When to Fold Your Startup?... Facing Failure is a Hard Road

We were a year into working on my first startup, in 1999, and I recall the fond memory of my dad calling me into his room. My friend and co-founder, Jimmy, had just arrived from out-of-town and we were preparing for some fundraising pitches and other meetings.

My dad and mom were entrepreneurs and built a few retail businesses. Some succeeded and a couple failed. My dad is a man of few words but thoughtful when he speaks. He started off by asking me where ViewPlus, our video-on-demand startup, stood in terms funding and our product. I explained that we raised a couple hundred thousand but needed a little over $500,000 to complete our prototype.

"How long have you been working on this?" he asked.

"Almost a year." I replied.

"Bernard, business is like poker. You have to know when to fold."

"Ok, dad... (felt like I was 5 yrs old again)"

"You have to know when to fold. You can't go on living like this..." (translation: stop mooching off us, get rid of all those credit cards, and get a "real job")

"Dad, we're almost there. We just need some more capital and I won't bother you any more."

I think my parents liked my original plan after graduate school. Move to D.C., get a nice policy wonk position, and then enter law school or get a Ph.D. But I followed their path thanks to my friends Jimmy and Peter, who asked me to join them to build ViewPlus during my second year in graduate school. So there I was. A year out of graduate school I was back living with my parents, eating their food, dipping into the FM Fund ("Father Mother Fund" was an often used term), and stressing them out.

The amusing thing was that Jimmy was in the room next door when my father said all of this in his strong, loud voice, so Jimmy felt a herd of elephants fall on his back. I remember walking into the room and Jimmy was acting as if he was stabbed in the chest.

"Urrrggghhh! Urrgghh... dude, we have to close and finish the prototype not just for us, but for your parents! My inheritance that I stole from you will be lost! (running joke that Jimmy loves to tell that he is the favorite "son" of my family)"

Within a few months we closed a total of $600,000 and completed our prototype. Then we raised a larger round for $33 million. It was an amazing turnaround.

Even if ViewPlus didn't take off, I'm very glad that Jimmy, Peter and I stuck to our belief and idea that our product could change the landscape of the cable and satellite TV markets during that early stage of company development. I also appreciated my dad's advice because it gave us a stronger sense of urgency and made us set realistic deadlines for our startup. I believe we gave ourselves four more months from that point to close our angel round. The company eventually failed, but it was good to go through that first hurdle of our fear of failure and accept its possibility which allowed us approach the real end more composed and rational.

So this is an important point that comes up with the countless tech startups and small businesses in the world. Whether you're a restaurant in NYC, a winery in New Zealand, or the next new search engine in Palo Alto, for numerous reasons failure can occur, so you have to know when to fold and not drag yourself, co-founders, and employees through needless pain and suffering. Also sometimes it's actually not your fault, but hopefully an entrepreneur can recognize when it is their fault. Anyway, each person, team and company has different leverage points. It might be resources for some. How much savings do you have? Is there a spouse that can support you for a brief period? Rich uncle? :) Is family a factor? Of course it's harder for a person with three kids to go through certain hardships of a startup versus someone who is 25 yrs old and single.

During my second startup, HeyAnita Korea, we faced the ugly reality of bankruptcy and closing our doors. A few months before we expected to run out of cash, our exec team met to discuss and debate whether we were confident we could close a series B given that the markets crashed. One option was to close our doors now, return the remaining cash to our investors and auction off our assets. Another option was to hit the markets, go through at least a few months of negative burn, and hope for the best.

We had to ask ourselves hard questions. Did we really believe that our voice technology company could be successful? Was this technology too early for the market? Was the Korean market ready for this service? Were we the right team to lead this company? Were we going for our series B like Captain Ahab and Moby-Dick or was our pride not involved in this decision?

After this soul-searching and heated debate, the majority of the team voted to seek a series B in that adverse economic market. This was not an easy road because we first had to convince our existing investor, Softbank, to support us and participate in the funding round. Especially in this environment, we needed their support to gain the confidence of new investors. Endless meetings and documents exchanges ensued. At the same time we were contacting numerous venture capital firms and private equity shops. By a blessing we closed a series B round of $7.5 million. Eventually the company became stable, in the black, and hit over $14 million in revenues.

Recently, Christine and I had dinner with some friends and one of them was sharing their entrepreneurial experience in the consumer goods space. Their product garnered some great press on Oprah and "The Big Idea with Donny Deutsch," but when they really hit the market they found that people weren't buying it. It was one of those products where people liked the idea, but they weren't willing to put down their money. Riding the Oprah wave, they met with a large national retail chain that wanted their product, but when they did the math of the chain's proposal they would be selling at cost or a possible negative. No leverage to negotiate. There were various other issues they were dealing with, so eventually they got out of this business. Was it the right move? Could they have gutted it out? Changed the product with what they learned to be its flaws? Sure, but without revealing other details it seemed like the right decision.

As long as a person is not irrational and blind to their startup's impossible hurdles, I really love and respect entrepreneurs. The founder of one company I advise sold his house when his company hit a cash crunch. I wouldn't recommended this to anyone, but I respect the passion and belief he had for his company.

When Michael Arrington began to track dead startups in his "TechCrunch Deadpool," I thought it was a good thing to bring the realities of the startup world to the forefront. For every Flickr, Quigo and FeedBurner, there are thousands of failures.

When do you know that you should fold? What factors would lead to you such a decision to shut down your company? For entrepreneurs, it might be good to touch upon this subject during the drawing-on-napkin stage, so that they have an idea of realities of startup life. Any stories?

UPDATE: My former advisor at GoingOn Networks and Managing Director at Foundry Group, Brad Feld, has some good posts on "failure."

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