How startups should die | Hacker News Reader

How startups should die

blog.42floors.com

159 pointswaratuman66 comments

Absolutely yes to "Pass the Hacker News test". Seneca's letter Epistle XI is one of my favorites and teaches this exact lesson.

It closes with "Cherish some man of high character, and keep him ever before your eyes, living as if he were watching you, and ordering all your actions as if he beheld them." http://www.stoics.com/seneca_epistles_book_1.html#‘XI1

I've found it to be a great technique for making better decisions.

One of the powerful parts of the HN application of this age-old teaching is that it includes lots of super smart hackers, who by their very nature are skeptical and inquisitive. This crew doesn't miss details.

So in those times when your discipline is failing you. It's actually helpful to know that the HN crowd will catch you. For our industry overall, it's a very healthy self-policing mechanism.

There's also the deathbed technique. Imagine you're 91 years old, with a few members of your family around, and you're thinking back over your life. How would you wish you would have made the decision?

Admittedly, this only worked really well for me after I sat with a grandparent at their deathbed.

I think the thing that makes the Seneca/HN approach so effective is that it can be applied to the minutia. No one wants to look bad in front of their mentor, no matter how trivial the act is.

When you're on your deathbed most individual events will be irrelevant. Not to mention that it doesn't really work until you have a visceral appreciation of your mortality, something many younger people lack.

The deathbed concept I had heard frequently with little effect but reading that letter from Seneca had a profound impact on my decision making process.

I recently did sit with my 91-year-old grandfather on his deathbed, and I don't think much in his working life would have even made the list. I'm still working out how to apply that lesson.

My grandfather worked in real estate and owned a number of commercial buildings that he lost during the great depression. It took him sixteen years, but he paid every one of his creditors off with interest.

I always took it as an example of the right way to act. But I have relatives that thought he was a fool not to declare bankruptcy and move on. There will always be people on both sides of that question, but he continues to be my inspiration as an entrepreneur.

Interesting story. Did your grandfather make the money to pay off his creditors through entrepreneurship? How did his career go once he had paid off the debt?

Yes he started a business installing furnaces. He was well respected by the guys who survived in real estate and had no problem finding business. When the war was over he did go back to real estate but never as big as before. He explained that he never would again be comfortable to be so highly leveraged.

I keep this picture of Elon Musk open permanently in one of my Spaces. When feeling unmotivated or risk-adverse, I'll imagine what he would say if I was sitting in the backseat of the Tesla.

http://imgur.com/4tsZOIf

I think keeping a picture is a bit extreme, but there were several times when I thought "Hmmm... what would Elon Musk do..." and pursued that course of action.

I agree, it reminds me about a quote I heared sometime ago (I can't remember where) about corporate (mis)management and its paper trail, and it was something like "Before you send an email, imagine it printed in the front page of the New York Times".

I was once on the other end of this -- witnessing a startup that failed "the wrong way". The unethical way.

I decided to use a startup to raise some money for a non-profit. Their business model was to help fund events / organizations with their platforms, and take a fixed 2-3% commission on the funds raised. I raised $500 using the platform. But I never received the check for the $500.

I knew the founder personally. I e-mailed him and week after week he said, "the check is coming, there has been some sort of accounting error". 2 months passed, and no check. Then 3 months.

So, I e-mailed one of his investors, a mutual friend. He said, "Oh no, I think they are in a very bad place and may not have any money. I have stopped using the service." I e-mailed the founder again. He replied that my money was gone, but that he had committed himself to pay it back.

He was looking for work, though, so he wasn't sure when. Then, the platform's domain name quietly stopped responding to web requests, and the whole platform went offline.

I'm now in this weird position where I'm debating pursuing legal action. I'm still in touch with the founder. He keeps saying that he will pay soon, but doesn't.

The money actually came from over 20 people who had donated to the cause. They are unaware the money never made it to the non-profit. The check I was trying to receive was meant to just be a direct donation to this cause. The founder's mismanagement actually led to $20-$40 being "stolen" from about 20 people. In a way, I acted as a middleman, by encouraging people to donate via this platform. And now, I feel very responsible to get this money back. Do I pursue legal action? I've debated it.

So, here's another piece of advice about how startups should die: "if it's not your money, it's not your money". In other words, if your platform deals with money (e.g. accepts donations, facilitates payments) it is NOT OK to use money you owe your customers to fund operations. That is called theft, plain and simple!

Eeesh. Nothing is more uncomfortable than a friend who owes you money.

A rule my father taught me when I was young.

"Never loan money to a friend with the expectation that you'll get it back, be ready to just let it go."

that's not very good advice. that's called being a chump.

Yes! Except I would phrase it differently: Never loan money to a friend or family member - either give money or don't. Oftentimes, the person you gave money to will later give you as much or more than you gave them, but that isn't a loan repayment, it's just them being kind to you in the same way you were kind to them.

To hnriot, who I can't respond to: No, it's not being a chump to willingly give money to those you are close to. The other side of the "be willing to give money to friends" coin is "be aware and careful of who you consider friends". You may be a chump if you give money to people actively taking advantage of your willingness to do so, but those people aren't friends. You should never give money to people who aren't your friends, and you probably shouldn't loan it to them either, unless you're in the lending business.

@OffTopic You can't normally respond to comments that have been recently made unless you click on the word "link" next to the comment. I would reply to hnriot, but I already see he's being downvoted so hopefully one day he'll understand why.

Also, I agree with everything you said. ^_^

There's a special name for money you loan to friends and family. Gift.

If you lend $20 to a friend and never hear from him again...it was worth it!

eh? but OP didn't LOAN him money.He just used a fundraising platform developed and run by a friend of his. So since everyone donated the money to platform (like kickstarter) and the platform didn't transfer it to OP, the platform became indebted to him.

When I was in business school, I took a class on venture capital from one of the earliest VCs in the valley. (He invested in Intel, for example.)

One of the two founders of Genentech was a good friend of his, and so he had the opportunity to put the first money into what became Genentech. But he refused to do it because they were good friends, and instead helped him find other investors.

Somehow I don't necessarily see something like this happening often in today's funding environment.

> That is called theft, plain and simple!

Not theft, but fraud. Unfortunately, it happens in many startups that don't have a qualified finance/business guy in a senior role.

Off the top of my head there's also breach of trust and possibly trading while insolvent.

If you take money from A in order to give it to B on A's behalf, you are a trustee of the money -- it belongs to you in common law but not in equity and you cannot repurpose it for something else. If the money cannot be conveyed to B, you must return it to A.[1]

Lawyers and accountants typically keep funds held on trust in a completely different bank from their own business accounts, just to avoid even the possibility of error leading to a breach of trust. To avoid even the whiff that funds on trust might be comingled with regular income.

Trusteeship can arise without anyone signing anything and it comes with high legal standards. If you have a business model that involves doing something like this, you need to consult a lawyer in your jurisdiction about the local laws for trusts.

IANAL, TINLA.

[1] As an aside, I suspect this is part of the problem Readability had with their "we have money waiting for you to collect, Mr Webmaster!" growth strategy.

> I remember sitting down with Paul Graham as our startup was failing. I remember how unbelievable difficult it was to get myself to that meeting. The last thing in the world I wanted to do was to tell him my startup was failing. It took him 30 seconds to process the failure and then he moved on. He was so unbelievably supportive and so excited for whatever it was I was going to do next.

And this, my friends, is the fundamental difference between SV and the rest of the world. From my knowledge and experience, something like this simply does not happen outside of America. I haven't decided whether this is universally a good or a bad thing, but one thing is for sure - (us) Americans are very tolerant of failure and that is a good thing for startups.

"is the fundamental difference between SV and the rest of the world. From my knowledge and experience, something like this simply does not happen outside of America."

To state the obvious first SV != America.

And outside of SV there really isn't the sense of "failure is quite ok no biggie".

If you are located in a typical place in america and you lose people's money (I'm not talking about startup shot in the dark funny money) you will be viewed as a failure and less likely to get money again.

If you open up a restaurant or a typical small business (with either your own money or friends and family or a bank loan) and you fail you are thought of as a failure. It's really that simple. Most people won't say "ok he learned something let's take another shot".

Key difference is SV (or with any pooled investment fund) is that they understand that what they are investing in is shot in the dark. And besides it's not their money it's primarily their investors money. OPM. And even if it's their money they are betting on many horses a small amount. Not the ranch.

Had PG been working as an engineer at HP at the time and had put a large sum of his personal money into a venture that failed (money that might be needed for his children's college fund) he might have not been so "unbelievably supportive and so excited for whatever it was I was going to do next."

I think the point that was missed here was that the idea wasn't the investment, investors invest in people. If one idea fails, the person is still capable of other ideas. If the failure was due to poor judgement, then the investor too, made a poor judgement, but there are many reasons why a startup, be it a tech startup or a restaurant might fail that are no "fault" of the management. Also investors are diversified, so while the startup failed, the portfolio as a whole might have still been up, so yet another reason why pg wouldn't get too upset.

> Had PG been working as an engineer at HP at the time and had put a large sum of his personal money into a venture that failed (money that might be needed for his children's college fund)

This is why you never invest more than you are willing to lose. If you do, and the venture fails, the blame for your reduced quality of life rest not on the failed founder, but on the imprudent investor.

The nice thing about SV is not just the big pool of investors, but the big pool of prudent investors who don't behave foolishly.

> This is why you never invest more than you are willing to lose.

Absolutely. It can also skew the decision-making process. People investing more than they can afford to lose are not going to be giving helpful advice or making the right decisions for the business.

I still agree with mbesto's comment. Relative to a lot of places in the world, the US is incredibly tolerant of failure. A French/German friend from school (which was his first time in the US) told me how amazing it was and that you wouldn't see that kind of attitude in Western Europe.

As a Western Europe counter-example, I recently lived through a startup failure and and our creditors are also being extremely supportive, both in the liquidation process and in our next ventures.

That's savvy b/c it's likely. The team, idea and execution can all be in tune but there's still that darn uncertainty of popularity.

Hope the team's still motivated to carry on; good teams are hard to come by.

(VC's are almost obsolete, unless they have mucho value-add: http://wefunder.com/)

I wrote like 10 topic sentences for comments about shutting down a company and then just erased them, because what a horrible set of memories that topic brings out. I like reading about failure from Jason because he's had a win and is on his way to another, so he can talk about it with a pretty even mind. Personally, I've only got like 10% of a kind-of-win since shutting my first company down, and it still makes me absolutely ill.

Jason (OP) here.

Yep, know that feeling. Well.

Would love to have you over to the office to chat. Ping me offline. jason at 42floors

Seriously, no way would I pay a bill that the business owed when it was shutting down out of a personal credit card. It's the business, not you who is liable. Also, if you can pay on a credit card, you can pay the business on a payment plan and it will cost you a lot less.

The good thing about business is that you only need one win.

I liked this article thank you. My theory on dying startups is that if its not working its better to go out with a bang (eg a crazy pivot or a high risk high reward gamble) rather than a bleed out.

FedEx was a good example of this, if I recall correctly the CEO took all the cash they had and went to Vegas with it. Usually wouldn't turn out well, but that time it did. If you need money, and have exhausted all your options you have to take a course of action that gives you a chance, no matter how slim, over the slow bleeding death which would be a long painful and hopeless experience.

Not compromising ethics like you mention is so important in life. Ethical decisions are harder in difficult circumstances (teetering over the cliff of failure) but those moments in life are when your ethics count for the most and mean the most, and as you mention they can also pay off in the long run (but this shouldn't really be a consideration from a purist ethical standpoint). The captain shouldn't go down with that ship.

Yes, this. The worst possible outcome for a startup is a slow, drawn-out death. The second-worst outcome is treading water without clear success.

If the business is sure to fail and you have money left but no clear idea what to do with it, wouldn't simply liquidating and giving partial returns on investment be a reasonable option?

It depends (imo), on the amount of money you have left and who its from. If you've raised $1m from well-to-do-but-not-rich family members and with $500k left you're realized you're totally unqualified to be in your business, or the concept was terrible, no valid pivot, etc., then yeah, give the people back your money.

But if you've raised $1m from professional investors and you have $100k left, for example, you might be better off trying to double down or raise more money.

If you had $100k left and you tried the FedEx gamble, and lost, you could very well get done for reckless trading. I don't think that's worth the risk.

It should be a risky venture for the company (ie a new strategy). I think gambling in Las Vegas would count as fraudulent.

Maybe I should have responded to TomGullen's post since he mentioned the FedEx story.

"back in 2007, we were enabling college students to debate issues on their campus. And in the unfortunate theme of that era, we had lots of people using it but nothing resembling a business model."

Let's all be thankful things have moved on so much since that era!

They really have. When I look around the current batch of YC companies, I find that virtually every one has a built-in business model from the beginning.

I think the craze of 2007 was that you could make something that would become popular. Popular felt so much better than not popular. Max Levchin once called it blowing up a balloon. They get big fast, but they're just full of air.

Why is the founder taking on personal credit card debt to pay the bills of the company? Shouldn't the company just go bankrupt and then that's the end of it?

I am in the process of shutting down my first company and I would like to thank you for sharing your experience because every decision I make right now has huge ethical implications.

Don't pay your debts on credit, that's just idiotic. If you can pay a credit card company monthly, then you can pay your debts the same way as well.

My first startup was a bit of a fad. A fast rise to millions of users, and then a slow peter out -- no matter what we tried. We also didn't know what we were doing, to be fair. Anyway, as we were on our last legs we got a couple offers for our email list of about 6 million users. My co-founder wanted to take them to get some money out of it, but it was an easy "no" for me. We were doing this on the side of day jobs, so failure probably didn't feel quite as catostrophic and we didn't feel as desperate. Still, probably a good thing he would have had no idea how to get at the database (designer).

Basically boils down to an 'honor code'. When you are going down imagine yourself as a great person and that history will remember every action you did. If you keep your respect and dignity people will respect you and you live to fight another day. If not no matter how successful you may or may not be, someone will someday say: "yeah its a great company but he fu*ked so so so over". You don't want to be that person. You want to be: "yeah he put 3 companies under but he always manages to pay his debt".

Yep, this is the lesson of not burning bridges that you worked so hard to create, even if it makes your life harder in the short run, it will work out in the long run.

Recently a guy applied to the current place I am working, and unfortunately I had to explain to my superiors about his history of poor interpersonal skills at another job that we worked together at. This guy wont be getting a job now.

Work hard to make sure that when you leave, it will pay dividends in the future.

This isn't really true. AirBnB got to greatness by using a lot of shady tactics earlier on, and HN was split half-half on whether this was a good thing or not. History essentially forgot those shady tactics, and AirBnB is a gorilla now.

"The secret of great fortunes without apparent cause is a crime forgotten." -- Honoré de Balzac

What were some of those shady tactics?

I can't remember the detail, just the arguments really. I recall things like misrepresenting themselves to people on craigslist and violating things like 'don't send me promotional material' settings.

I'm not a fan of nascent bragging about killing your latest startup, leaving customers out in the cold without a good reason or advanced warning. Find a buyer or pivot, otherwise it's just flushing time, money and credibility down the drain.

For a first bootstrapped startup, a FNAC that doesn't require much overhead / support and can be built slowly for awhile is a starting point. It's not a proper startup, but it's something that puts founders and customers in less jeopardy.

(Startups proper are go big & fast or bust.)

Right after reading the pg essays, any startup founder should read everything Jason has written. Cuts right to the points that many are too uncomfortable to talk about.

Financial transparency FTW. I've worked for two companies that were extremely transparent. It's made me feel like a) the company knows I am a big kid and can take the good & the bad news, and b) views me as a partner in the work, not a cog in the machine. And if declining finances leads some people to leave, that's infinitely easier than having to let them go.

Just curious, but how much would a list of 1-million targeted emails go for? High five figures? Low six figures?

I'm trying to put myself in perspective of his struggle -- was he potentially buying another year of runway? Another month?

Part of the question here is also, "What did you promise (implicitly or explicitly) when you got those email addresses?" That's really where it becomes an ethics issue. Our data gets sold every day.

Another question is, "Did everyone get paid?" He did the right thing and saw to it that everyone got made whole. If the business goes into bankruptcy and some creditors are not being made whole, it's much harder to not sell the email list if you can do so legally.

It's during tough times that you see what people's ethics really are. Great job by the OP addressing some of these.

OP here.

I can't remember what the exact figure was--but it was in the 5 figures. Which for me felt like a potential life-saver.

I don't think what I promised my users was actually that relevant. It would've been super easy to change our terms of service to include the ability to sell or rent user data. I could have written it in a way no one would have understand. Of course, no one would have ever seen the change anyways.

The real issue was that I knew it was wrong. Even if legal.

Thanks for sharing!

In this situation. Do you think your moral obligation to repay your debt outweight the moral obligation to your user's data?

Or compare this to the moral obligation to repay your investor vs that of the user's data.

Exactly. Could you be open for a lawsuit if you didn't pay your creditors in order to respect the privacy of the email holders?

It's a very fine point, against the backdrop of a very good article.

Our entire team is made up of entrepreneurs that have at some point failed their own startup. There are hundreds of companies like us that are always looking to hire awesome entrepreneurs.

Coral Cache link.

http://blog.42floors.com.nyud.net/startups-die/#.UkHADudq0Qm

I love the honesty that always shines through your posts, thank you.

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