10 ms·
The financial mistakes behind why a startup laid off 400 employees overnight
- emeraldd 8y agoDonovan “dug into the numbers herself” and discovered that Keating’s payroll projections assumed two pay periods a month for a total of 24 pay periods a year. In reality, since Zirtual was on a two-week pay cycle, the company had 26 pay periods a year. Umm, that's pretty dang fundamental. How the heck do the people keeping the books not know the payroll schedule !?!
- duxup 8y agoSeems like valid issues noted in the article they point out but they really didn't say why revenues declined so much... sure they made choices that made that harder to deal with but the cause of "that" (the revenue decline) isn't really addressed.
- e3b0c 8y agoAs the article points out, the company's turnover rate surged and the quality of employees went down. What the article does not address seems to be the changes to the incentive structure after the transition. Which I believe contribute to the failure to an extent.
- duxup 8y agoYeah the article seems to reference what might have been a bigger issue... but rather just blames making people full time and some other dork ups. I think this was a larger systematic thing.
- otterley 8y agoMods: Can you please update the title? It should be "The 3 Mistakes That Crushed Zirtual Overnight"
- shawn 8y agoIf the original title begins with a number or number + gratuitous adjective, we'd appreciate it if you'd crop it. E.g. translate "10 Ways To Do X" to "How To Do X," and "14 Amazing Ys" to "Ys." Exception: when the number is meaningful, e.g. "The 5 Platonic Solids."
- cdubzzz 8y agoThe edited title is arguably more clickbaity in that it replaces the actual company name with “this startup”. I also think the exception applies here because the number is more meaningful, not just an “X things that Y” list.
- TeMPOraL 8y agoI strongly second editing at least the "this startup" part; it's plain clickbait.
- jessaustin 8y ago...discovered that Keating’s payroll projections assumed two pay periods a month for a total of 24 pay periods a year. In reality, since Zirtual was on a two-week pay cycle, the company had 26 pay periods a year. ZOMG. Who is this "Ryan Keating", a high school intern?
- scarejunba 8y agoFor whatever reason, instead of counting the extra pay periods in the specific months he raised the per-pay-period cost to compensate. An odd way to do it, but there we are. There's also a "his side of the story": http://fortune.com/2015/08/13/zirtuals-outsourced-cfo-gives-his-side-of-the-shutdown-story/ http://fortune.com/2015/08/13/zirtuals-outsourced-cfo-gives-...
- carbocation 8y agoI am surprised that (if) he is allowed to disclose this type of detail about a client to the press...
- deleted 8y ago[deleted]
- jessaustin 8y agoHe's very polite, and really that is admirable after getting thrown under this particular bus, but nothing he said here or there really explains why he would have done this. The CEO needed projections she could use without deep analysis on her part. Instead he gave her some riddles in spreadsheet form. There are probably some SV CEOs who enjoy that sort of thing...
- scarface74 8y agoWhat’s a riddle about that? You would calculate a monthly budget and 10 months out of the year your salary budget would be higher based on 2 pay periods a year and 2 months it would be lower. Most other expenses besides salary would be monthly. You would accrue a monthly liability for salaries even though you wouldn’t pay them out evenly. On the months with 3 pay periods, you would deduct from your “salary account”. I’m probably using the words wrong, but I would understand the concept from two courses of accounting I took over 20 years ago. What business does anyone have being a CEO that doesn’t understand simple accounting?
- Karrot_Kream 8y agoSo many of these postmortems end in "we should have hired an expert". I don't really understand what drives people to not hire experts.
- emeraldd 8y ago* Money. * Not knowing the difference between ignorance and knowledge. Most probably both at the same time.
- Whitestrake 8y ago>Not knowing the difference between ignorance and knowledge. Like the Dunning-Kruger Effect? https://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect https://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect
- autocorr 8y agoI think your statement is rhetorical, but it is obviously the compensation that experts require along with short term thinking.
- technofiend 8y agoExperts are expensive. And there's hubris or what I jokingly like to call the maxim of management myopia: "Anything I don't understand must be easy."
- edoceo 8y agoThis needs a t-shirt
- geezerjay 8y ago> And there's hubris or what I jokingly like to call the maxim of management myopia: "Anything I don't understand must be easy." So much this. I know of a case where a company hired a junior java dev for a desktop project and after his second week on the job the manager posted a ticket instructing the newbie to implement a component to receive a video stream from a drone, stitch the video stream into a 3D model, and render the 3D model in real time. "How many days do you need to finish this?"
- newbie912 8y agoThese mistakes and the ending advice are pretty distracting tangents to a fundamental flaw: The business model can't afford employee overhead at even poverty salary levels. Everything else is just noise. The best take away is yet another damning piece of evidence against the "gig" economy.
- jessaustin 8y agoThat wouldn't be "poverty" in the rural South and Midwest, but one does wonder how much recruiting Zirtual would have done in those regions...
- driverdan 8y ago$11-12/hr is poverty everywhere in the US.
- gnicholas 8y ago$12/hr is about $24k/yr, which appears to be double the poverty level for one person: https://aspe.hhs.gov/poverty-guidelines https://aspe.hhs.gov/poverty-guidelines Not saying $24k is a lot of money, just pointing out how low the poverty line actually is in government regulations.
- StudentStuff 8y agoAustin may be skewing your perspective due to the recent run up in rent, I know more than one person who lives on $11/hr. Most don't live on the coasts or in a major city though! Housing is really cheap in some parts of the US, though it isn't a great life to earn that little after getting a college degree.
- rayiner 8y agoI don’t think you realize how cheap most of the US is. If you get 40 hours a week, that’s $2,100 per month. You can rent a 2BR in Des Moines for $700 per month; split that with a roommate and your rent is $350. That probably leaves about $1,300-1,400 which is totally doable for a single person. (I spent less than that after rent while I was in law school, and I went out all the time, etc.)
- tarr11 8y agoYou can’t quit paying an employee if you lose the client he’s working for; you have to keep on paying his wages and other expenses even when you no longer have revenues coming in to balance it. This isn't quite true if said employee is not salaried. You can still have an hourly employee and then cut their hours if there is no work for them. Employees may not like it, but businesses do this all the time. There are some minimum hours according to each states wage laws, however.
- ryandrake 8y agoI worked for a startup that hit hard times, as a salaried employee. They cut us all to 1/2 paychecks for months, then down to 1/4 paychecks. So it’s definitely possible. Probably nobody ended up below minimum wage so legal too? Some people left and others accepted IOUs.
- rgbrenner 8y agothe minimum for a salary is currently $913/wk (~$47k/yr).. otherwise they have to pay for overtime. From 2004-2016 it was only $455/wk though (~$23k/yr).
- dragonwriter 8y agoThe minimum depends on the justifying job function (exemption is based on past and job function), and states like California often have much higher minimums than the federal minimum.
- driverdan 8y agoWhy would you continue working there for 1/2 cut pay?
- ryandrake 8y agoThe founders were genuinely good people and I was young enough to risk that we’d be made whole. Also the dot com bubble was just recently obliterated so I was lucky to have any job at all.
- ryandrake 8y agoUggh, these kinds of stories send me into a rage. Here’s someone who evidently knew little about technology, Silicon Valley, or running a business, and yet, she had access to incubators, co-founders, and business-starting capital that many of us (who are actually competent) only dream of. So jealous! More evidence that life is not fair and it’s all about connections and schmoozing.
- walrus01 8y agoJust proving that whoever is the best bullshit artist can raise money. Look at theranos and 99% of "blockchain" vc funded startups.
- deleted 8y ago[deleted]
- manigandham 8y ago>> that life is not fair Yes, this shouldn't be a surprise. >> it’s all about connections Getting anything done requires the help of others. That's how society works. The best way to get what you want is to help others get what they want. Focus on the people and you will be 100x better equipped to deal with anything than any amount of technical or operational knowledge.
- chii 8y ago> Focus on the people and you will be 100x better equipped to deal with anything than any amount of technical or operational knowledge. this is only true if what you're doing isn't innovation, but just making business.
- deleted 8y ago[deleted]
- golemiprague 8y agoMy conclusion is, think twice before you invest in another blond good looking woman, they seem to screw up too many times lately. I got a feeling people now invest in women just to over compensate without real merit, it is kind of mix between old and new sexism. I won't be surprised if most of the women founders who get investment are better looking than the average. I am not sure whether it is a new policy to invest in women just because they are women or it is the more old falling in a trap of a beautiful woman. Although, at least this one actually made money and had a successful business model at some stage unlike the blood test con woman so maybe my theory is not even right, but i got a feeling it is.
- sulam 8y agoThis whole story doesn’t hold water. It sounds much more like what happens when you have pushed your funding round right to the limit and then suddenly it evaporates.
- kayhi 8y agoWhat was wild to me was watching the founder being interviewed, getting praise for a potential billion dollar valuation then going out of business the next week. https://thisweekinstartups.com/maren-kate-donovan-zirtual/ https://thisweekinstartups.com/maren-kate-donovan-zirtual/
- jpatokal 8y agoThought of the day: in the same way that Uber succeeds by exploiting the depreciation of its "driver-partners" cars, Zirtual failed because people value a larger paycheck but no benefits over a pay package with benefits but a smaller cash component, even when the package costs the company more to provide and (at least on paper) has more value.
- prolikewh0a 8y ago>people value a larger paycheck but no benefits over a pay package with benefits but a smaller cash component How did you arrive at this conclusion?
- dannyw 8y agoThe increased churn that Zirtual faced after moving to employees, keeping total cost around the same and making up for it the difference by reducing pay.
- prolikewh0a 8y agoThat doesn't really answer my question. What shows that these employees preferred $15 over $12 with presumably employer subsidized health care (they wouldn't have it on contract, I assure you), 401k, and other standard benefits?
- scarface74 8y agoA lot of startups don’t have 401K matching.
- stale2002 8y agoThe thing that "showed" that they valued the wages more was the fact that they quit over it, and that it was more difficult to hire people. That's literally what the article says. That people started quiting because of it.
- 8y ago
- poulsbohemian 8y agoThis, plus Keating's Fortune rebuttal, is fascinating stuff. Fundamentally, she was the CEO so the buck stops with her; if the company folds because she didn't understand the financials or the practical operations of the business, then the blame is on her. But, you also have to wonder why Keating didn't offer any guidance about the iceberg at which she was steering the ship. It almost sounds like he wrote up some kind of simplified model, not something meant as an actual operating document. She wanted to convert people to employee status and took the doc as justification, rather than understanding the actual data presented. Keating was not employed as CFO or similar role, so apparently decided he was under no real obligation to provide further guidance. I think what's most interesting about this is that I recall doing case studies on basics like this 20 years ago as an undergrad; because it's just that basic. One is left wondering if there's a deeper story that would make these seemingly obvious mistakes (IE: there is no way they could afford to make those people employees) less obvious. Or, was it just hubris that they could keep growing the business / an investor would come along and rescue them.
- lovich 8y agoI imagine that convincing a CEO of important details of finance when she won't even hire someone as a CFO goes about as well as convincing the CEO of important details of technology when they don't think it's worth hiring a CTO.
- sanderjd 8y agoPerhaps I'm misunderstanding, but isn't the outsourced CFO company's entire business model based on providing services to CEOs who "won't even hire a CFO"? If so, it would be extremely odd for them to scoff about how it's hard to explain finance stuff to their core target customers.
- lovich 8y agoI don't know if you ever worked in large companies that outsource critical pieces of their company to contractors. I have routinely seen contracting companies who were ostensibly there to provide service X, but in practice they were there to make the management think that they were making all the right choices
- _drimzy 8y agoIf they didn’t have work for all the employees for all the hours, couldn’t they have reduced the employee count? And only bring full time contractors that had full cycles in the past? And work with a mix of full timers and contractors to take care of variable load? It seems like the actual reason they had to go down was because they didn’t have enough customers as opposed to the 20% extra employee costs. Plus every where in the industry the hourly rate of contractors is higher than the the employees because of the benefits. Was the CEO a high schooler?
- whatsstolat 8y agoGood question. Maybe they buried their heads in the sand until they went broke and had to fire everyone. Rather than make a tough decision earlier. Another theory if they cut staff they'd have to cut clients and therefore revenue would take a hit which would be bad for their image raising most more money. Might as well go "all in" hope to raise some more. If you go bust start another startup.
- deleted 8y ago[deleted]
- dabockster 8y ago> You can’t quit paying an employee if you lose the client he’s working for Yeah you can. It's called firing them under right-to-work.
- sowbug 8y ago> It's called firing them under right-to-work. You probably mean "at-will employment." "Right to work" is related to union membership. Each of these concepts is applicable in some U.S. states.
- Communitivity 8y agoI read this and then the comments. A fundamental take away of many is that switching from contractors to employees was wrong. I think it was right, but the way they did it was wrong. They could have done the shift slower, planned better, and not have had as many problems. The gig economy done right is a great idea. Right being fair to both the contractor and the employer. Problem is, I almost never see it done right. Instead, I see gig economy workers being taken advantage of left and right. Let's take the middle of the pay, $13 per hour. For comparison, median pay for plumbers in 2017 was $20.17 per hour[1]. Figure 2080 paid hours in a year for a contractor for our purposes (that's no vacation). That's $27,040 per year gross. Now let's adjust that to reality (i.e., net spendable income). For ease, I'll round to the nearest whole dollar. First, taxes. $27,040 puts the person squarely in the 12% federal income tax bracket. Remember we are assuming fresh out of college, not married. Social security self-employment tax was 12.4% is 2017. Medicare self-employment tax was 2.9% in 2017. Let's assume they live in a state that levies income tax (excludes WA, NV, WY, SD, TX, AK, FL), but they live in PA, one of the lowest tax rates at 3.07% in 2018. Let's also assume no deductions for ease (unrealistic, but I am not a tax accountant). So that's a total tax levy of 12%+12.4%+2.9%+3.07%=30.37%, bringing us down to $18,828. Second, healthcare. You can't say that this is for people with insured spouses, so healthcare is hand-waived. Instead, healthcare.gov defines affordable health care at 9.56% of salary. Typically an employer pays two-thirds the cost of the health care plan, so let's say 28.68% and round up to 30% because insurance companies charge more for individuals (could easily be more than ~2% extra, but lets go with that). That's 30% of the initial gross, not our after taxes figure, so a cost of $8112, bringing us down to $10,715. That's $206 a week, or $893 a month, to cover rent, food, transportation, internet costs (digital remote worker), and clothing. To put that into perspective, it's $1425 below the 2018 Federal Poverty Level for an individual: $12,140. Some agencies compare the FPL to before taxes, some after taxes, but it's still almost $1500 below the FPL. Another thing is that gig economy workers are often asked to shoulder costs that would have been the responsibility of an employer, forcing some gig workers to work crazy hours or in crazy conditions[2]. In Zirtual's case, gig workers could have been paying for their computers, internet, and any software when they were contractors. When you are a contractor you need to be making 160% of what you would if you were an employee, to cover insurance, increased taxes, and expenditures that now come out of your pocket. You also shouldn't be charging at a dollar rate, as it's an accounting nightmare and lends itself to some clients (or gig economy startups) nickel & diming you or micromanaging your time. Instead, charge a flat weekly fee based on assuming each week you'll work 36 hours on client work, 10+ hours on business marketing and administration, and that you'll take a two week vacation. So let's say as a fresh college grad I want to make the equivalent of if I was an employee making $45k per year. That means I need to gross $72k. Dividing that by 2000 hours to allow for two weeks vacation, I need to make $36 per hour. Remember that you have to assume you are only going to get 36 billed hours, so multiply that by 40/36, which handily works out to $40 per hour (I swear I did not plan that). Now multiply that by 40 to get a rate of $1600 per week. That's not contributing anything to your retirement or emergency fund (yes, you should start right out of college - I didn't and regret it mightily). Especially if you are a contractor, you must have a enough in an emergency fund to last you 2 months without pay. So add %10 to your emergency fund, taking it to a weekly charged rate of $1760, until your emergency fund is 2 months. Put any windfalls (tax refunds, gift checks, etc.) into that emergency fund until it is up to two months of pay, and hopefully it will be there by the end of a year. Two years is more realistic. If you are a more experienced contractor, things get wonky at the $128k level, because social security not longer applies and retirement stuff is different. If you are a contractor on the side (make sure your employer's IPR agreement allows this, or get a explicit written statement allowing it), you can probably charge 120-140% of what you want to make from your contracting work. Make sure your employer's work comes first though, or you will find yourself out of a job. That also assumes you work for 'Big Corp', not a startup at the ground floor. If you work for a startup and you have non-trivial equity, you are working for yourself and should be pouring everything into the startup. The cost of living comfortably relative to the average income in the U.S. seems to me to be higher now than it's ever been in my lifetime (50 years). One estimate in 2012 says it took $150k to live comfortably in the U.S. then, and it seems to have gotten worse since[3]. I am not an accountant, a lawyer, a doctor, and you should not construe any of the above as legal, accounting, or medical advice. [1] https://www.payscale.com/research/US/Job=Plumber/Hourly_Rate https://www.payscale.com/research/US/Job=Plumber/Hourly_Rate [2] https://philadelphiapartisan.com/2018/05/17/the-perilous-gig-economy-why-caviar-must-pay-for-bike-couriers-death/ https://philadelphiapartisan.com/2018/05/17/the-perilous-gig... [3] https://www.businessinsider.com/the-basic-annual-income-every-american-would-need-is-150000-2012-3 https://www.businessinsider.com/the-basic-annual-income-ever...