Startups.co to Acquire Zirtual, Service to Resume
startups.co
startups.co
As CEO, it's your responsibility to understand your runway and know whether your business can afford to be operating in a month or two. If it can't, you need to reduce your burn. Depending on a last minute cash infusion to avoid telling your employees things are looking rough means you failed to do your job and run a sustainable company.
Then I thought about our burn, what the spreadsheets look like, how we estimate runway, and so on, and I realize this is uninformed madness.
If you believe this, then you understand that 400 people losing their jobs is the definition of the wholly controllable burn.
Heck, a 400 you should have a part-time or full-time CFO who manages much of that for you to avoid such situations.
It is hard to do at the best of times, particularly hard when things are tight to balance transparency with not wanting your team to start looking for new opportunities when things are getting close to the wire. Add to this different people have different perspectives on what is "close to the wire". For me it's 6 months, for many it's 12 months, for some it's less than 30 days.
The startup I work for does, and other startups provide this level of transparency as well. It's not hard, unless you're incompetent at communication and finance (but you shouldn't, right? because you're a founder/co-founder/leadership who has peoples' financial lives in your hands, because this isn't a game for people who need to make rent/mortgage payments every month).
"We have X in the bank, this is our runway, we have this many more months to be profitable or raise another round."
There is a difference between a well-run company with manageable burn that must raise capital to continue growing, and a company where the realistic prospects of a capital infusion are slim and the financial situation is dire.
I used to work in the game industry, and both studios I worked at ended up gradually laying people off and eventually shutting down. Layoffs are the expectation for a struggling company - sudden shutdown is a sign of poor executive leadership.
I've been a part of a number of companies as they've succeeded and failed, and I've learned the difference between doing so gracefully or incompetently.
You either succeed or you learn.
Beyond that, when I found out what they were actually paying ZA's, compared to what we were paying, I was appalled.
Absolutely amazing in the worst way, especially with the CEO constantly talking about the need for being transparent; this obviously wasn't something that snuck up on them.
Edit: The CEO gives more information here: https://medium.com/@marenkate/zirtual-what-happened-and-what...
Waiting until the 11th hour to let people know you're out of runway? Absolutely terrible, in my opinion. Personally I think you need to give people notice 6 months out. Then constant updates thereafter with what you're doing, the risks, etc. Springing this on them like this is just incompetence.
It's a speculative startup in a new category. Most of them fail. You won't get 6 months' notice when they do.
Why? What's wrong with "here are our numbers; as you can see we're at about 6 months left of runway but we have X, Y and Z that we believe should take care of it without issue"?
Seems like being transparent in the finances would be a good thing. To me at least; I know as an employee I feel much more comfortable when I know how the company is doing. It at least let's me know I have some solid time left should the worst happen.
But once that's done – and perhaps in somewhat coarse, conditional, speculative terms – a running detailed 'soap opera' of the sustaining-funding-hunt can be destructive. Many employees would honestly not want to be distracted by a play-by-play: "that prospect fell through but we've got more meetings next week! drop dead date is still 152 days away! next update tomorrow morning!" Employees also don't want their most-jittery (but possibly still key-role) coworkers to depart early: making the worst-case scenario incrementally more likely.
The balancing will always be tough: is a believed 80%-chance of uninterrupted operation enough to keep sending a cheery, full-speed-ahead message? Or must you alert, "20% chance of failure!", to everyone? (Which, of course, causes some to assume the risk is even worse, and might derail the 80% chance of success.)
It's the idea of a firm, quite-long threshold – and in a startup domain that's inherently uncertain – that I find absurd. ("6 months" is three times larger than the 60-day federal law for notice of mass plant layoffs, by giant well-capitalized corporations.)
I was thinking more along the lines of: notification at 6 month mark, list of things we're doing to ensure smooth operation. I wouldn't expect issues at that point especially since everyone joined a start-up, they know it's not going to have money for years of operation. Then update people when you check off the items on the list that you said you were working on, good or bad. Not any more frequent than that. Depending on the amount of money it may be a good time to start about some minor culling if possible.
At month 3 you probably want to start culling employees so you can stay afloat longer should things not pan out. This way you can stretch out your life for far longer than waiting to cull at 2 or 1 month.
At least those are my thoughts. Nothing like "guys we failed, new update tomorrow morning!". Then again I haven't run a start-up; only have been part of a few. That just makes sense to me I don't know what works best in practice.
This is why people generally laugh at tech journalists (specifically in SV). Things always appear rosy on the outside of pretty much every startup that exists. Then the capital crunch inevitably happens. All of the media outlets focus on the wrong things (fund raises, valuations, celebs, etc) and not the real things the rest of the business world values (profits, returns, sustainability, value-creation, etc).
1: http://thisweekinstartups.com/maren-kate-donovan-zirtual/
I really feel for the 400 employees who lost their job, but I am happy to see a sense of reality being forced into some of these companies. Building a business on people rather than tech is a much much tougher thing to do both execution wise and financially. And so the real innovation if someone wants to "change the world" without trying to cheat the system is to find a way to make a profitable business with a huge part of the business being used to pay salaries. This as we can see is a very hard thing to do. And so I applaud them for trying.
For many entrepreneurs who are used to thinking about business as something which is based on software, servers and an internet connection, this is completely uncharted territory. You don't reap the benefits of scaling your business as if it's just a matter of adding more servers. The primary challenges with these kind of business if they are to be built on a solid foundation is.
1) Patience – It takes a long time to scale an employee based business up to anything worthwhile and sustainable
2) Selective – You have to be smart about which sectors actually have enough money and need for your service to make a proper ROI
3) Employee satisfaction. You can't just treat your people as if they are freelancers without giving them freelance opportunities. Instead you have to really care about your people and make them want to work for your company and do a great job.
This is weird as hell.
This surprised me. They burned through a round in just a few weeks? And looking at their funding history[1], they closed $2.6M back in June. So that's $3.25M in less than 60 days.
It looks like the July round was targeting $3M and they only got $650k[2]. Maybe an expected deal didn't go through and it was just as much a shock to the management as the employees. This could just be a case of unrealistically high fundraising expectations, with unfortunate consequences for everyone. OTOH, assuming they hit the end of their runway, they had a burn rate of at least $1.6M/month, so I don't know how that last round was supposed to help for long.
Anyway, this is all armchair speculation. I hope their CEO can take some time and then share her experiences. It would probably serve as a good lesson for others.
[1]: https://www.crunchbase.com/organization/zirtual/funding-roun... [2]: http://www.sec.gov/Archives/edgar/data/1566557/0000897069150...
The CEO:
Jack Dorsey has a fairly good description of what the CEO's role is - that of an editor (http://www.quora.com/What-is-the-role-of-a-CEO). The CEO should do 3 things:
- Build and nurture the team
- Communicate internally and externally
- Make sure there's money in the bank
It looks like Zirtual's CEO screwed up all three of these - it's inexcusable and ludicrous to think she didn't know how much money was in the bank, and the burn rate. She probably knew exactly what was going to happen, she saw the writing on the wall, and tried her best to figure out an outcome for the company and team.
It could be that the Startups.co acquisition was the perfect thing to do, but to do it after missing payroll, breaking user and employee trust, and in such a ham-handed way is ridiculous. She played chicken with cash flow, and she lost. 400 employees who thought they had a job had to suddenly go through a stressful shake up, and start worrying about bills, insurance, and their livelihood, right before school season starts.
The Investors:
According to Crunchbase, this company raised $5.5M from VCs like Mayfield.
Don't these investors have an obligation/responsibility to their Limited Partners to invest their money wisely? Don't these investors ask the CEO for monthly or quarterly financial statements (or something simpler like - "How much money in the bank? What's your Accounts Receivable? What's your monthly burn rate?").
Why didn't someone say something 6 months ago? Why didn't someone say something 1 month ago, so that there could have been a more orderly pause in the business while trying to sell it?
What's the point in simply investing in deals and not spending any time to advise/help start-ups? The CEO of Zirtual could be super talented, but she's not run a start-up before. Shouldn't investors spend some time with her making sure things don't go off the rails?
It's events like this which erode trust in start-ups, investors and founders.
Perhaps offering support, direction, and a way to rectify what is "seemingly" a mistake is more helpful.
There are not too many variables when it comes to her responsibilities on that matter. It's crystal clear that she made the wrong choice in how to deal with the situation.
In the end I respect that they stop it at the very moment they could no longer pay instead of owing everyone one hour of work.
Without more information, I would say they handled it okay.
"Earnings" is a measure of profit. Zirtual claims it had an $11 million annual revenue run rate but, as we now know, was not at all profitable.
It's amazing that in startupland folks still can't seem to use basic accounting terms properly, especially in situations particularly sensitive to their misuse.
Edit: Really, guys? It's a terrible name.
It was near death yet Musk is now a SV hero?