Decoding the Deadpool: How to Tell When a Startup Has Failed

As for Crunchbase, they could do a reasonably good job of catching the death of startups by running a check every six months for basic social media updates. While it might be premature to call a quiet startup dead, they could include a line to call a startup "inactive."

Worst case, do consulting or get a day job.

It gets complicated when you've taken outside investment, but I suspect any rational investor will convert to equity rather than liquidate. The real cost is opportunity cost for the people who remain involved (usually founders, although sometimes employees switch from salary with small equity to a much larger equity stake).

Usually this happens when you run out of cash. It's one thing to have a solvent balance sheet where assets handily outweigh liabilities. It's another entirely when bills fall due and you have no cash to pay them.

The classic example, to me, was SiCortex. They had a fantastic future A/R on sales pipeline in a growing segment. But they were also slowly moving from cashflow negative to cashflow positive, which meant they needed regular injections of cash to execute their plan. The GFC struck and cash stopped being invested; and that was that.

This particular example sticks in my mind for two reasons. The first was because it was such a vivid illustration of income vs cashflow. The second because of the amount of beard-stroking BS about how they were a victim of x86 blah blah blah. Seriously, no. They ran out of cash.

And generally that's what happens. The difference now is that lots of startups have short cashflow cycles. If they bill, they bill monthly. If they're on advertising, it's probably paid monthly. They frequently use Pay-As-You-Go services to run their business, and most PAYG providers bill ... monthly.

So when the cash runs down to zero, there's really only a month of obligations to meet. In fact you can bail out a month earlier and never have to go through the very unpleasant and often very public insolvency dance.

Meanwhile, most conventional businesses have lots of long term A/R and long term A/P. Cashflow is locked in months in advance, so if and when a crunch arrives there's very little to be done about it except to go to a bank or investor with a cap in hand. Sometimes they say "no", or worse, "we've already given you $X, and now we want it back no matter what". Boom, you're insolvent and people can see it because your creditors took you to court.

Seems to be becoming a trend in technical blogs.