All companies begin with the joy of starting something new. An idea, a product, a process, a team that is coming together or reuniting after being apart.
But just as companies come to life, they also come to an end. Not every idea reached its audience at the right time or was received with the excitement its founders had expected. In other cases, market indications could be positive, but the fundraising was unsuccessful for all sorts of reasons. Whatever the situation may be, you and the team reached a dead end, and it has become clear that wrapping up is the right step.
First of all: don’t worry about us.
From an investor perspective, the venture model always assumed portfolio attrition, and that some of the investments we made in each fund would not come to fruition. It was our good fortune that over the past 10 years we’ve lived in a low-interest-rate environment, that coupled with abundance of cash, created the perfect conditions in which companies don’t die because they can always raise additional money.
Rising inflation required central banks to respond with interest rate hikes, which in turn depressed the capital markets and brought the 10-year streak to an end and sent us back to the original model. Companies will find it harder to raise money, investors’ tolerance will be lower and as a result, more companies will need to shut down operations. That’s just the name of the game.
So if this is what it comes down to, don’t beat yourself up. Instead, focus on the road ahead to steward the process.
I have observed various reasons for companies shutting down, and these underlying reasons can influence the strategy for the shutdown process.
Here are three hypothetical scenarios to help you focus on the different outcomes that will be relevant to your specific circumstances.
- Money has run out
Company 1 pivoted in 2019 after raising money a couple of years earlier. The new version of the company benefited from the accumulated experience of the founders from the previous attempt, and the beginning was optimistic. Despite the fact that the new product was received well by the market and initial sales showed positive signs, the company was unable to attract investors to put large enough commitments to give the company the fuel power it needed to succeed.
Over a period of a few years, the product improved and the team grew, but sales growth was modest, and the company raised only via SAFE. Fast forward two additional years, and the company became incredibly efficient, and was able to continue to grow at a similar rate but not at venture scale (which is one explanation for the inability to raise funds).
The founders fought tooth and nail to find an investor, but the money started to run out and only a few months of cash remained. It became clear that it was time to prepare for shutdown. The founders timed their decision according to the remaining cash, which they defined as their closing budget.
Takeaway: If the reason for shutdown is lack of resources, it is important to allocate money in advance for salaries and other expenses that I will outline below.
2. “Our product reached a deadend”
Company 2 was a well-funded series seed in the height of the market that began a frantic chase after a product and “land grab”. A long list of regulatory requirements relevant for creating a moat, plus changes in the privacy laws that required complex work-arounds, diverted focus and slowed down progress. Discovering that companies with similar goals were able to raise larger amounts and were moving faster only added pressure.
When the product was finally launched, the market changed, and with it, the opportunity the founders saw when they initially raised; their users–tech companies like themselves–changed their spending habits as the market tightened, which negatively affected sales. A significant amount of money remained in the company’s account, but the team was determined to give it back to investors rather than attempt to pivot. The next step was to prepare for shutdown.
Takeaway: The biggest challenge you’ll face will be to come to the conclusion to close, and to explain to yourself, your co-founders and the team the reason for the decision.
3. Investor fatigue
Company 3 is a fintech startup that boomed in the pre-COVID days. It raised a growth round from a top-tier investor just as we learned to spell “pandemic” and put on facemasks before interacting with people. The pandemic killed the business, and the company did not recover. Several attempts to pivot resulted in a product that yielded slow growth, but nothing that resembled the success of the pre-COVID days.
Thanks to cash conservation actions and US government COVID funds due to the loss of revenue, the company was not about to run out of cash–on the contrary. But financial results continued to be far below expectations. The growing gap between valuation and results as well as board fatigue caused investors to ask that the company fold operations and return the remaining cash to investors.
Takeaway: Your focus here is to conserve cash in order to maximize shareholder value.
Ideally, the first attempt in all three scenarios is to sell: sell the company as a whole, find a good place for the team, (aka, acquihire), and sell the IP. Though these alternatives require time, founder bandwidth and motivation, they often yield the best outcome when there is no viability to keep running the company.
However, selling isn’t always an option, or can take time that you don’t have. In the meantime, you can still sell other assets such as desks, computers, other hardware, anything, while you focus on closing the company. The cash income from selling equipment will give you breathing room if you are down to the last dollar.
And now, we will go step by step through what needs to be done to close your company.
Operationally, the first order of business is to cut the burn. In my view, this is the right first step in any case, but certainly if your resources are limited and you need to maintain systems for existing users of the product until they transfer–then this is a must.
Closing a company may take from a few months to a year, or more, if you have subsidiaries or are operating in a highly regulated business or country. Also, the act of closing a company costs money — from paying taxes and fees to employing accountants and lawyers. You’ll need every dollar you have while keeping in mind that you have no additional resources to fund un-budgeted costs.
If your company is closing because you ran out of financial resources, cutting the burn is beyond a recommendation: it’s mandatory. Even if you prepared in advance and created a closing cost fund, you are likely to come across unexpected costs. Your target here is to avoid facing the unpleasant reality of finding resources from investors or founders’ pockets for the unaccounted-for expenses.
We’ll talk more about how to cut the burn shortly.
We now move to the nitty-gritty process of unwinding the business. Like everything else that I’ve described so far, it is hard, painful and not what you set out to do when you first started. I hear from founders that have gone through it that it is a time of reflection, of processing internally what has gone awry, what they could have done differently, and lessons, mostly personal.
The focus of this phase is to look at the three main commitments you have: employees, customers, and service providers. I recently recorded a short video that goes into this in more depth. You can take a quick look at it here, or keep reading:
- Employees
Parting ways with the team that was built with effort and attention to capabilities and company culture will be hard. You will need to identify a skeleton team that will be necessary to keep the product going until customers are migrated.
In addition, someone will need to be in charge of the back office finance. It could be a strong office manager, your finance lead or one of the founders. The rest of the team will part ways. If you have subsidiaries in other jurisdictions, find out in advance what is legally required in this case. In Israel, for example, you will need to consider employees on maternity leave and army reservists to ensure they receive due process and fair notice.
When looking at the financial commitments associated with your employees, look into accumulated vacation days or sick days that you will need to pay. Those will increase your employee costs for the final months.
2. Customers
When it comes to winding down your business, your relationship with your customers is governed predominantly by the terms of service (ToS). It should define what happens in the case of separation and the amount of notice that the company committed to. The notice period will determine the length of time the company will need to be operational before servers and support are shut down. If your company provides an essential infrastructure or security service, you may want to assess whether the notice period provided in the ToS is sufficient.
You can follow this link for a helpful guide I created on how to control the messaging around closing your business across different media outlets.
3. Service providers
As you start thinking about cutting down the burn to the minimum required, prepare a list of all software, system products and services the company is paying for.
Stop auto renewals and look into exit clauses of large ticket items, particularly cloud services, Salesforce, Slack, and Gmail. In some cases if there is no exit clause or if it is far away, you’ll need to negotiate early termination with vendors. If that is the case or if there is no exit clause, it may work to your advantage to negotiate pre-payment of the contract in exchange for a discount. For the sake of your closing budget, track any potential penalties.
Talk to your lawyers and accountants to budget this project so you have visibility into their costs, which could be hefty. If your bookkeeping and salary processing is done by an outsourced service provider, do not forget these costs.
Another big item is your insurance policies. Check to see what you can bring to an end immediately (for example, office content and third-party insurance), and what will need to run over for several months or longer, like D&O insurance, omissions insurance, product liability insurance, etc. Some of these may need to be kept alive for a longer time and that, too, will influence your budget.
Your office lease is another huge liability that you want to dive into before you decide when to close. Look into the timeline for ending it and find out:
- Can you sublease?
- How much time would you need in order to find a tenant?
- What is the penalty for breaking the lease early?
You’ll need to time this well in order to prepare a budget for your rent payment during the transition and to provide notice such that you would not lose the deposit, which is a potentially large income for your closing budget.
Pull together expected income and expenses into a monthly tracking spreadsheet that will help you manage the situation and bring you to clearing all your liabilities. Don’t forget the small-ticket items like bank fees, or lease payments on office equipment (e.g. printers, coffee machine, etc.). I created this budget template, which is the basic list of costs and revenue, to help get you started and ensure you have the main items covered.
Things will get more complicated if your company has venture debt or banking debt. If there are no resources to pay off the outstanding debt, the entire closure process will need to be coordinated with the debt holders, who effectively become the owners of the company at this point since they are likely to have the IP, bank account and/or equipment as collateral. They will be highly motivated to sell assets to recover what they can, and they will likely get involved in managing the cash flow to ensure the excess amounts are used to pay off the outstanding debt.
