Ecomom is liquidating and shutting down | Hacker News Reader

Ecomom is liquidating and shutting down

pandodaily.com

66 pointsDramatize49 comments

We know students are taking their own lives because of the debt they think they can never pay back[1]. Start-up founders are in a similar position, indebted to their investors[2] and under pressure to deliver a return. Do start-up incubators like YCombinator and 500 Startups provide advice and counselling to founders, especially younger entrepreneurs just out of college?

[1] http://www.huffingtonpost.com/c-cryn-johannsen/student-loan-...

EDIT: Added to clarify

[2] A debt of gratitude, where there is a moral obligation to repay investors for their help and funds.

Unlike student loans you can always declare bankruptcy if startup related debt is unmanageable so it's only really an issue for older founders who have actual savings.

None of that debt will be from your investors, and, once you have investors, the norm is that you'll be taking a salary as well. "Funded startup founder" is an immensely privileged position from which to operate and not remotely comparable to that of a 30 year old who chose the wrong major and faces six figures of non-dischargeable debt.

Startup funding is structured as equity, not loans. The situations are not at all comparable. You can virtually always walk away from a failed startup.

That perspective varies by the individual. I know people who have taken money and consider themselves to owe their investors a return. The depression experienced from a lack of ability to deliver that return can be extreme.

There are also lots of funding deals that are loans as well.

There are not lots of funding deals with venture capitalists that are structured as loans in the sense that you & I think of them. Probably none.

You do not owe your investors a return. Anybody who thinks they do doesn't understand how startup investments works, or has taken investment on false pretenses. No early startup founder is in a position to promise a return to anyone.

Do you think your semantic debate strategy will save any suicidal lives?

This might be true for Silicon Valley but for most startups elsewhere this certainly isn't the case. In most places equity simply isn't as readily available so you basically have no choice but to take out a loan if you want to found a company that isn't cash flow positive from day one.

Besides, founders - at least where I live - are required to act as guarantors for such loans. So, no in most places you can't just walk away from a failed startup.

If by "startup" we mean "technology company" I feel comfortable arguing that if "most" companies aren't in Silicon Valley (in fact they probably are), they are at least mostly in the US, where equity financing for startups is the rule, not the exception.

In the US, it is very difficult to get bank debt financing for startups, for the same reason that service providers price your imminent demise into their contracts.

'Startup' doesn't necessarily imply 'technology company'. For example, some run-of-the-mill restaurant certainly isn't a startup in my opinion but a brick and mortar store offering a unique product or concept could very well be considered a startup.

One could in fact argue that the most influential tech companies are located in Silicon Valley. However, in terms of sheer numbers I daresay most startups are actually founded outside the US. Just consider the huge amount of medium-sized enterprise IT companies that offer some essential service or product that no one probably has ever heard of. I'd certainly consider those to be startups (when they were founded, that is), not of the sexiest variety, but startups nonetheless.

Sure. We can just stipulate though that by "startup" I mean "US technology company".

The comparison between personal-debt-funded education and personal-debt-funded failed startups still makes the latter look like a better deal.

I believe educational loans in the US can't be discharged by personal bankruptcy.

So if you go into debt personally to fund your startup, all you can lose is everything you have.

OTOH if you borrow money to pay for college, your creditors can take everything you have -- and money you haven't earned yet.

I'd never fund a startup with personal debt. Although with mortgage tax breaks and the interest rate climate the way it is, it is actually kinda tempting...

Startup founders are not "indebted" to their investors.

Hi! Founder here. I think we indeed are indebted to our investors. Often financially, when the investment comes in the form of a convertible note. But more importantly, there's a social debt. These are people who bet on us when few others would. They provide advice, support, and connections.

Sure, there's a financial aspect to this, and it's not like founders personally guarantee the company's books. But Silicon Valley doesn't run on money; it runs on people. And on their relationships.

Right, but you can always just walk away from it all. It's not the same as a student loan.

You can, but some people have a big conscience and want to deliver on the expectations people have of them, so some people can't just "walk away."

It's those people who are suicidal in failed startup scenarios.

Do we have a lot of evidence that startup failure is actually a suicide trigger? And, more so than student loan debt, or job termination, or flunking out of school? I worry a little about enshrining this bit of conventional wisdom. Startup founders feel pretty exceptional as it is without adding the idea that they carry the weight of the world.

Sure, you can walk away from a professionally managed fund, hopefully with your name intact, but I bet it's not so easy to walk away from friends, family, and small angel investors who believed in you. The mental burden of failure, of disappointing those closest to you, must weigh heavy.

That's a good point.

So don't take money from those people. I'm not trying to be facile here. I'm asking you to recognize that if failing to provide a return to a startup investor generates acute non-dischargeable guilt, that is probably a good sign that you rationalized away the arguments for not taking money from them in the first place. If you're a pro, you do the company thing with the clear and honest expectation that you are likely to fail.

Companies going public spell this out in detail in their disclosures, which practically shout "do not put money into this". And those companies almost invariably have cracked 9 figures of revenue!

Yes and no.

You can also walk away from a student loan; if you go teach English in small Asian villages for the rest of your life, it's not like they'll sent in a SEAL team to extract you.

And you can certainly walk away from regular loans by declaring bankruptcy. Provided you're prepared to have that on your record and on your conscience. And deal with the many years of consequences.

It's the same thing with investor money. Legally, at any point you can just shut down the company, return whatever's left in the bank, and call it a day. But there's more to it than the legality.

It's not the same. Startups go south, the founders split, things get wound down, and everyone tries again, or gets other jobs. This happens all the time. Nobody involved gets exiled to a small asian village. Matt Maroon said it better elsewhere in this thread. Bitcartel also made a good point about letting down early friends & family investors, which seems like it would cause more emotional stress than letting down professional investors.

That said, since it seems like half of hacker news imagines that VCs are something akin to loan sharks. Maybe the new breed of angel investors really are putting an emotional squeeze on founders these days? When I worked at startups, the investors were very hands off unless the founders were really mishandling things. However, I've been out of the scene for a few years, and there seem to be a whole lot more VCs, angels and incubators. Perhaps things have changed for the worse.

I'm not saying it's the same; I'm saying they are points on a continuum. All of which you can walk away from at varying costs.

I'm perfectly ok letting down professional investors. And also the people I hired. And the users. And myself. That's the game; sometimes you lose.

But that doesn't mean I won't regret it when it happens. Or tell those people I'm sorry it didn't work. Or work hard to avert that outcome. That's also part of the game. At least that's the game I want to play.

I have no idea why that's controversial here.

Predator drones instead of SEAL teams?

You feel indebted to the professional investors who picked you along with 5-10 other companies to place bets on with the clear expectation that most of those bets would lose? Why?

This is like the guy a few years ago who felt social pressure to pay back corporate debts for his C corporation because nobody was telling him that the debts applied to his company and not to him personally. But the risk of the company vanishing was priced into all those contracts! The same is true for investments. Anybody who invests professionally in startups has a valuation function of some sort that captures the fact that you --- even if you're Jack Dorsey or Elon Musk --- are more likely than not to fail before your company becomes liquid.

(I am also a founder; this time of a bootstrapped company, but I was one of three founders of a VC-capitalized company a few years prior to starting this one, and the two other startups I worked at were both VC companies.)

No, it's not like that.

I agree that the financial and legal situation is as you say. (Having written financial trading software, I know how to price a deal.) But that's the skeleton. The flesh is the human relationships. I personally feel more responsible to the people I hire than to the investors, in that their commitment is larger and the failure hits harder. But my sense of obligation also extends to the investors, and in all cases it extends beyond the legal minimums.

I think there are practical reasons one might behave that way: Silicon Valley is a small place, and one's reputation has a lot of value. But for me it's deeper than that: collaborative projects come with a sense of obligation to one's collaborators.

I think we're in a silly place now, where we're both vociferously arguing a point we probably agree on. You have to do a good job, yes. You can't phone it in. But you don't have to work routine 70 hour weeks. You don't owe that to anyone.

You're right... but start-up culture glorifies the long hours and epic all-nighters[1], that to do otherwise would have you tarred a slacker[2].

[1] "One of the most pervasive myths of startup life is that it has to be all consuming. That unless you can give your business all your thoughts and hours, you don’t deserve success. You are unworthy of the startup call. This myth neatly identifies those fit for mission: Young, without obligations, and few if any extra-curricular interests. The perfect cannon fodder for 10:1 VC long shots." http://37signals.com/svn/posts/3106-all-or-something

[2] "Startups Are Hard. So Work More, Cry Less, And Quit All The Whining" http://uncrunched.com/2011/11/27/startups-are-hard-so-work-m...

Yep. I'm not sure how I got people riled up, but I don't think I'm saying anything particularly controversial.

I agree strongly on the 70-hour weeks. I'm working on a book about startup misconceptions, and one of the chapters is titled, "Working lots of hours means you're making progress." Interested in being interviewed for it? Stories from actual founders are what will really persuade people.

Details here: https://www.quora.com/William-Pietri/Startup-Misconceptions-...

Well, I've never done either, but if you gave me a choice between having a startup fail and coming out of college with $100k in debt and no job prospects, I'd probably choose startup failure. It'd suck, but, assuming you did things the right way, you don't personally owe anybody a dollar.

When you raise money you take on certain ethical obligations. I owe it to my investors to try my damnedest to make the company succeed. I owe it to them to try to give them a good return on their money. I do not owe it to them to reimburse them the money if I fail. At all. There's no debt of gratitude.

If my startup dies and I go down swinging, then I'll know I gave it my best shot. That will suck, but they knew that was the risk going in. I won't lose sleep feeling like I ripped them off, just as I won't feel they ripped me off if I succeed and write them a check for millions of dollars. (I'd actually be quite happy to do so.)

Student loans, on the other hand, leave you saddled with debt that's hard to get rid of even with bankruptcy. There are a lot of people graduating with law degrees right now who are screwed. I imagine startup failure is painful, but not going to ruin your standard of living for the next 10+ years.

I don't know the particulars of this case. Maybe Jody's depression made him unable to live with mistakes he (or someone else on his team) made in good faith. Maybe he did something unethical and couldn't live with being found out. It's tragic either way.

Great comment. But you don't have an ethical obligation to be heroic in your startup. You are obligated to be honest when the investor makes their decision to back you, you're obliged not to be negligent in your execution, and you're obliged not to misuse their funds. But your kids, as it were, come first.

Sure, that's a rational way to look at things, but human emotion is also part of the equation.

It may be easy to walk away from professional fund managers, but friends and family and small angel investors who believed in you?

Knowing that a social debt can never be repaid, sadly for some people, may be too heavy a burden to carry.

If you took investment from friends and family under the auspices that it would probably get paid back, you lied to them. This is one reason you probably shouldn't ask for investments from friends & family.

Professional investors know the score. Even the very most promising startups bear an unacceptable risk of failure in isolation. They make sense as investments only as a group. Even then, many (most?) VC funds lose money. They exist because foundations and pension funds want to put money into VC as an asset class, not because anybody is counting on returns.

The article doesn't say what the 28 people on staff did. Even if the cost-per-employee was only $50k/year, that would be an annual bill of $1.5m. A staff of programmers would cost more than 3 times that.

It doesn't really explain away a recent $5m funding round, but there doesn't have to be much of a drop in revenues for monthly payments to 28 staff to start eating away at your bank account very quickly.

It's an online retail company - what do you need 28 people on the staff for? Hosting and administration is outsourced, as is warehousing - that leaves a front office guy, a back office guy, a finance guy, a web guy and someone who writes the truly awful copy that you get to read on Ecomom.

And a buyer, and a customer service person, and accounts receivable, plus ad ops -- not to mention sales and biz dev folks.

I have no idea where they spent their money - from the article it sounds like some of it may have gone towards misguided inventory purchases, but why would a company like this need its own technology infrastructure? It seems very well-suited for operating on someone else's sales platform (Shopify, or something similar). Let the third-party focus on uptime and scaling while you worry about marketing, promotion, and order-fulfillment of your site and its products.

  from the article it sounds like some of it may have gone 
  towards misguided inventory purchases, but why would a 
  company like this need its own technology infrastructure?

They're a retail company; by inventory, perhaps it means they spent all their cash on a big shipment of diapers and sippy cups.

At the date of his death, I was wondering what the financial status of his company was. Now we know, unfortunately.

You'd burn through $5M scarily fast with a staff of 28.

They raised $4.7M last August:

http://pandodaily.com/2012/08/14/a-4-7-million-injection-in-...

They would have had to pay their 28 employees an average of about $300k a year to burn through all that by now.

But they're reported to have ~$1 million in debt right now (plus perhaps that much or more cash still in the bank). And it's possible they had another $1 million or more in debt around the time of the financing, in vendor AP or bridge loans, which the financing paid-down. And there are other expenses beyond employee overhead in growing an ecommerce brand.

They were apparently burning cash too fast but a simple ($4.7M / 28 people / 0.5 year) isn't going to give a fair estimate ("paying $300K/year") of what they were burning it on.

Sure. My point was just that the head count alone probably can't account for the apparent burn rate. There must have been something else going on.

Assuming you have zero revenue. If you have zero revenue in a retail business, wtf.

Something seems off about this. I think we need to learn more details about what happened at the company rather than just accept some vague idea that there was a bad purchasing decision. Should a bad purchase really be able to sink a company? At an e-commerce company, shouldn't there be systems in place to make sure that this doesn't happen? I hope a another journalist digs into this.

Is everything on ecomom marked down to liquidate it? Because it looks like they are heavily subsidizing the prices on this stuff.

I see prices that are half or 2/3rds what amazon charges for the same thing. Plus they give free shipping as well for not-that-large orders.

I don't believe anything is priced down due to this news. If I'm not mistaken the free shipping threshold was actually raised to $100 in the last week or two.

I think that inventory liquidation is typically done by a 3rd party in situations like this.

Fraud by employee(s)? Never heard of startups going down on this reason before though...

and PandoDaily turned off comments and hid the existing comments... interesting, pandodaily...

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