Failing Gracefully

Sometimes, despite our best effort, things just don’t work out.  Or to put it a different way, shit happens.

Since the first of the year, two of the companies I’ve been involved with have decided to wrap things up.  In both cases, these two young CEOs had developed strong ideas, tirelessly pitched their concepts, raised significant amounts of money, recruited first-class teams, launched, pivoted two or three times, only to ultimately find out that their carefully nurtured idea was not such a great idea after all.

But what I found most impressive, was that both of these CEOs managed to come to this decision while they still had ample amounts of money in the bank, and therefore had time to wind down their companies gracefully, while there was still time to create a reasonable outcome for their employees, their investors and their customers.

It made me realize that while we all seem to chatter endlessly about what it takes to build a company, we almost never talk about what’s involved in taking one down.

Part of that is because entrepreneurs are relentlessly optimistic – a necessary trait for overcoming the years of adversity and naysaying that accompanies getting a startup off the ground – so it certainly cuts against the grain for any of us to say “enough”.

Perhaps like a test pilot, we’re hesitant to acknowledge failure or even the slightest lack of confidence in our abilities, perhaps scared that others will think that we are somehow lesser as entrepreneurs.

And maybe we’ve been overly influenced by survivor bias, since we mostly hear about the one company that completed their hail-Mary catch, rather than the 10 companies that choose to drive full speed ahead until the very moment they ran out of gas.

Despite my desire to back CEOs who are going to be bulldogs about pursuing every last lead and chasing down every last pivot, I also have to respect a leader   who not only has the smarts to recognize when he is going down a dead end road, but also the discipline to be just as aggressive about engineering a safe landing for all of his stakeholders.

There’s more than just reputation at stake when you leave yourself options.  You get to . . .

  • Sell a living company – In many ways a start up is like a shark, if it’s not moving forward, it dies.  So while your company may not be growing fast enough to remain viable as a stand alone, starting your wind-down early lets you keep the doors open while you consider your other options.  It allows you to keep your existing customers happy, allows you to keep your current team together, and allows you to show potential acquirers a more accurate picture of exactly what they are getting.
  • Sell your technology, not just your team – In the late ‘90s two of the smartest guys I know built an incredible tool that did auction pricing arbitrage.  When they failed to get follow-on funding and closed up shop, the team landed on their feet.  But the technology?  Last I heard it was on a hard drive in the founder’s attic.   There’s no question that technology acquisitions usually require longer and more extensive due-diligence than pure talent acquisitions, so leaving yourself time for suitors to adequately appraise you, makes it more likely that the fruits of all your efforts will eventually see the light of day.
  • Be more aggressive about your price.  Nothing undermines your negotiating power like desperation.  Having money in the bank allows you to say no, which dramatically strengthens your hand.
  • Look after your own reputation.  Sure, nothing will cement your reputation in the valley like success.  But it’s still possible to get points for the manner in which you’ve managed all those alternate scenarios.

Maybe you didn’t generate the 10X return your investors were hoping for, but fighting to at least return their original investment is still a materially better outcome than a complete wash out.

Maybe you didn’t get your employees the payday that sets them up for life, but at least you landed them in a promising new opportunity as well as getting them “a little something extra” that made their last 18 months of hard work well worth it.

And for you, while you may not have ended up as “the next Zuck” like you always dreamed you would, you’ll still did the very best you could under the circumstances.  Your employees will know it.  Your investors will know it.  And most important of all, you’ll know it.


About Marc Randolph

Marc Randolph is a veteran Silicon Valley entrepreneur, high tech executive, and start-up consultant. Most recently Marc was co-founder of Netflix. Follow him on Twitter: @mbrandolph
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2 Responses to Failing Gracefully

  1. Chris Betts says:

    I agree. However, I’ve noticed that some VCs opt for a quick shut down to a managed sale or orderly wind down. Their intent to focus on the next 10X return trumps minimizing portfolio losses at the margin or the concerns of other stakeholders.

    • Good point. Even more dramatically I’ve seen VCs actually block a sale (or a wind down) to force the entrepreneur to swing for the fences. As you point out, a 2x is not much different to them than a total loss, so why not go for it? My observations about the wind down or sale more usually refers to seed round companies where there fate is more in the entrepreneurs hands.

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