Bad Endings, Good Endings

What's the most troubling thing you tend to see startups do as they start to fail?

Yeah, it's almost choreographed. The set of moves a startup goes through when it starts to struggle. You try some pivots and that doesn't lead to bad behavior. You try to get a bridge loan from your existing investors. First off, you try to raise money from new investors and they say it ain't going to go. So then after that doesn't work, you go to your existing investors and say, please bridge us, give us money for anybody to know what it is, enough money to get over this bridge to the point where we can sort things out. And boy, do you see some nasty dynamics between investors who are willing to do it and those who don't want to do it, but also don't want to be deluded because basically anybody who steps in when they're in trouble is it'll be what's called a cram down where who's ever going to put the fresh money in is going to take a big, big chunk of equity at the expense, dilution expense of everybody else. And you can get these nasty board fights and the poor CEO, the founders are caught in the middle of this. So there's nastiness there. When that either works or doesn't, you start to try to sell the company and boy, do you see some messy, nasty behavior there. A lot of it on the part of the acquiring entities. They're kicking the tires. Who wouldn't? You know, the entrepreneur gets excited because they get all sorts of expression of interest. You know, every competitor in the space wants to look at our company. Well, guess what? They want to sort of meet your employees. They want to see how much you're paying them. They want to learn more about your products. And they're all going to look and they're going to, they're going to string you along. And so you get people who know that they've got, you know, clock is ticking, your cash is running out and they know how much cash you have. So you get some really awful behavior around mergers and acquisitions and the acqui hires, which I think, again, it's a thing we lionize on the east coast and Silicon Valley. It's a great exit approach for lots of teams. Well, guess what? Not everybody goes right. That acquiring entity is doing a tryout and they're going to interview all your people. And some of them get to come and many of them don't. And it's painful. A team that's been working together really hard to Sort of see that some of them don't make the cut is nasty. You know, founders themselves can do bad things. Transparency is really tricky at this stage when you're in trouble, because if you're very open with your team about it or your investors, you can scare them off and some employees may leave, and that'll just hasten the downward spiral. And so, you know, ethically you're torn up about how open and honest to be about what's going on and whether to misrepresent or at least be quiet. And so the founders has to make some tough choices. The last sort of tough choice a founder has to make is whether to sort of toss the keys on the table and basically say, hey, board, you know, I am obviously not going to make any money from this thing. I've got a lot of life ahead of me. I have better things to do. You drive and boy, if you want to sort of destroy permanently your relationships with venture capitalists, try that move. So, yeah, it's just pain and nastiness at a lot of the stages there.

Well, I'd like to then flip the coin, though, and talk about what I've found that the last part of the book is truly extraordinary and talking about how to fail, but how to fail with integrity, with your character in place. So let's talk about that, because that to me is a key takeaway of. Of what you've. I keep saying the book, but the book is just a manifestation of this. These lessons or patterns you saw. But also, I really like the last.

Part of the book.

So can you talk about that? The importance of integrity and character at the.

Yeah, for sure. The goal for a founder, if they're going to fail, I mean, you want to do your best not to, but if you're going to ought to be to fail, well, and they're really two dimensions to that. Failing gracefully means that everybody who's owed money, and I don't mean your investors, but your vendors, your employees, the tax authorities, everybody gets repaid. Your customers get moved to a good place. If your product isn't going to be available, you move them to some competitor who can do for them what you've been doing. And you're. You're open with everybody about what happened. You help your employees find new work with your investors. It's so easy for the founder to. Basically, at this stage, a lot of founders will be embarrassed. They'll feel disgraced and they go silent and they don't reach out for help and they don't update people on what's going on. So your investors are actually. You lost their money. They knew that. Anybody who invests in startups knows that that's part of the game. But you do owe them an explanation and a thank you. So that's all failing gracefully and then post the failure. Take some time to wind the thing down. And basically the experience is an entrepreneur is going to be surging with all sorts of emotion, sadness, anger, grief, rage at the co founder who dropped the ball or lost attention and all this stuff. And it takes time for those emotions to settle. And the best way for a founder to do that is to sort of alternate between distractions, you know, find a hobby, do some exercise, something different side project and rumination, sort of reflecting on what happened. And eventually the founder will find a space, hopefully where they've learned from the experience. And unfortunately a lot of founders don't. They're at one of two extremes. Many founders will continue to blame everybody else and the universe for what happened in the not their own failings or faults or mistakes, and they haven't learned nothing. They're probably going to go found or try to found again and they'll make exactly the same mistakes over again. At the other extreme, you have people that take too much responsibility and so you want to avoid those extremes. The people who take too much responsibility will never be founders again. And some of them shouldn't be, but most of them would probably be perfectly fine to get back on the horse and do it again. And it's a shame for society if they don't try. So if you fail gracefully with transparency, and if you can explain to people what happened, what your role was, what you did wrong, what you'll do differently next time, you're actually pretty well positioned to bounce back. And what we see in the research is that more than half of failed founders go back and found again. And the ones who really learned from the experience and failed well, I think are particularly well, well positioned to do it. They preserved relationships and reputations.