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When to Shut Down a Startup [video]
- Jasper_ 7y agoThat "zombie startup" that Aaron is describing sounds like a nice, sustainable company that isn't chasing growth but can live for a while, profitably, with the customers you have. Why shut that down? That sounds great!
- ackbar03 7y agoCause the investors are going, "that's not what I'm giving you money for! shut it down! SHUT IT DOWN for the love of god!"
- Jasper_ 7y agoThe investors would prefer to lose their money entirely than get it repaid over a longer period of time?
- koopuluri 7y agoIf an investor bet on a founder that they could produce billion dollar returns in a 10 year time span for their investment, they would much rather have the founder work on another idea / direction that could potentially result in the crazy returns. You can never reach that level returns if a business is sitting at 50k/mo.
- toomuchtodo 7y agoThen sell the business for a reasonable multiple, don’t shut it down.
- nemothekid 7y agoYes, or more specifically, Venture Capitals would.
- decentralizedX 7y agoI actually think so, because of how the vc funds and balance sheets are structured. The only thing they care about is the one or two startups that will return the entire fund.
- robhunter 7y agoThere is a significant time value of money effect at play here - better to get the tax advantages from writing the investment off in Year 5 than getting paid back in Year 12
- karthikb 7y agoThey can always sell the shares back for a dollar and do the write off whenever they want.
- frenchman99 7y agoIf someone wants to buy the shares... even if the company is running well, if the founder has 51%, they might have no incentive to buyback.
- sokoloff 7y agoIs there a founder in the world of a company that's running well who wouldn't buy back 49% (or 9% or 79%) of their shares for a dollar per investor?
- paulsutter 7y agoYes. All their returns come from 1-3 companies, while the other 40 board seats are a headache (founder squabbles, helping to hire a VP of Sales, etc) I’ve been in a VC fund for 10 years and literally all the returns are from three companies, the others make no difference whether they zero out for return 3x
- mlevental 7y agodidn't watch the video but generally the assumption is if you can get to cash flow positive but not hockey stick growth then you're good enough to work at a larger company and you're leaving money on the table (by not drawing a salary).
- jacquesm 7y agoBut then you'd have a boss. Make sure your investors do not turn out being your boss.
- nostrademons 7y agoWhat game do you want to play with your life? Do you want to play the lifestyle business game? The startup game? The consulting game? The climb-the-corporate-ladder game? The just-collect-a-paycheck-and-get-your-fulfillment-elsewhere game? You should decide this before you enter the startup scene, and ideally as you're beginning your career. Because if you think you're playing one sort of game but are playing it according to the rules of another sort of game, you're basically guaranteed to lose. The assumption when you play the startup game is that you're playing for a big, low-probability payoff. There are a couple variations for just how big a payoff (are you looking to play the outsource-R&D-and-get-acquired game? show-I'm-a-good-programmer-and-get-aqhired game? build-a-billion-dollar-company game?), but in general, when people talk about startups, they mean hyper-growth. If you don't find hyper growth, you've lost at the startup game, and should call it and invest your time into either playing again or playing a different game. If you want a lifestyle business, you should play that game from the outset, because it means playing several choices differently. Notably, you should seek a small niche with real customers first, you can afford to pick an area off the cutting edge, you should seek profitability over growth, and you shouldn't take (equity) investment.
- ta1234567890 7y agoThat would be ideal, to be able to make a decision a priori and then stick with it "forever". But as Mike Tyson would say, everyone has a plan until they get punched in the mouth. In reality, you can only make effective decisions once you've had the experience of what you are deciding about. Also, regarding the specific issue of zombie companies, they can always be brought back to life. There is tremendous value in having a fully working organization/team.
- streetcat1 7y agoI am not sure why would you need to take money (behind seed) even for a growth business. Can you just scale with customer money? Also, why not play in a big, HIGH probability payoff. For example, why not compete with Google or Amazon in what they think is their next market? This assures you a big market with at least 100M - 1B annual sale.
- boltzmannbrain 7y agoBecause as a founder the startup is your life. It exhausts you mentally, physically, emotionally, financially. If your startup isn't accelerating, it feels like you are wasting your life away at an accelerating pace.
- criddell 7y agoIs the same true for someone that opens a restaurant or tire store?
- boltzmannbrain 7y agoNo. Apples and oranges. I presume the guy running the local AutoZone doesn't aspire to be acquired by Google or Roche for $2 billion. You could make the case for expert chefs or restaurateurs pursuing Michelin stars and fame -- going through relatable struggles, aspiring global success.
- advertising 7y agoWe entered that zombie phase our 5th year in business. Now we are in our 9th year and have ticked along slowly slowly decling a bit each year. Down to two employees and probably have one year left to go. All investors except for our single biggest have said we should shut down largely so I can personally move on. Our biggest has been happy to see us stay alive being that there’s still a chance for success they believe. It’s largely been depressing coasting as a zombie. Making enough money to pay the bills but not enough to save or do anything for the future, but have been afraid to start something again for fear of going down this same route again.
- jacquesm 7y agoI've seen zombies turn around and amaze everybody involved as well, keep in mind that you have something that you've lost along the way up: agility. You can now make moves that you could not in the past, larger companies are like larger boats, they don't turn quite as nice or fast.
- pmikesell 7y agoIs it possible for you to figure some idea out that could be your last chance moonshot for this company? Maybe it’s better to go out with one last boom or bust push instead of slowly dribbling away? Best of luck to you - sounds like a tough spot.
- cyborgx7 7y agoI'm a hundred percent with you. I've seen the term "Zombie" to describe a company that is sustainable, providing a valuable service and paying their employees a lot on here. And noone was ever able to convince me why that is a bad thing. The fact that this business is only interested in bubbles and thinks sustainability is disease, really goes to show how fundamentally putrid this whole industry is.
- closeparen 7y agoHe literally says, "it might be a good business but it's not a startup." Small businesses and startups (as YC uses the term) are different things. Your neighborhood coffee shop is not a startup that leveled off, it's a small business.
- deleted 7y ago[deleted]
- borski 7y agoThere is a massive difference between: 1) A company that is sustainable and effectively “runs itself,” growing linearly, generating passive income, and default alive, but without much input or massaging from the founders outside of thinking about and implementing strategy, and, 2) A company that intended to be a startup, that still requires heavy support, tons of the founders’ time and effort, and is constantly still trying to figure out how to acquire new users. It’s profitable, but only because of the founders’ active efforts. One of these is depressing and leads to burnout. The other is fine.
- deleted 7y ago[deleted]
- jakozaur 7y agoUnfortunately a lot of startups doesn’t shut down cleanly. Shutting down your own startup can feel for many founders like killing your own baby. However, the alternative such as a messy shutdown by leaving unpaid bills and unrealized contracts is even worse. Bankrupcy laws doesn’t work so smoothly around the world, even after bankcrupcy you can still be liable for taxes as well as unpaid bills/wages get bad reputation which can hurt you in the future.
- going_to_800 7y agoIf that zombie startup gives you freedom and a good salary, why shut it down? This is not for bootstrappers or those who pursue life-style businesses, it's for VC backed startups.
- cheschire 7y agoI suspect the people that feel the way you do probably wouldn't gravitate towards the risk/reward system of the startup lifestyle in the first place.
- jbay808 7y agoInstead, they might gravitate towards the organic growth / bootstrap / lifestyle business lifestyle, which is a distinction that the GP made.
- jacquesm 7y agoLife can change. That 'hot start-up' that morphed into something that employs you and a bunch of others might be less than what you and your investors hoped for but still substantially more than nothing.
- bredren 7y agoIt can change, though if it is obviously a country club your investors may not reinvest in your next thing.
- jacquesm 7y agoSucks to be them if it takes off then. After all, your chances of success on the second time around are substantially larger than the first. But then again, you'll also be a much harder case to take advantage off so that would rule out quite a few investors up front. And accelerators too, for that matter.
- cameronbrown 7y agoOr alternatively: Hire a new C-level and some time training them up to replace you, and go do something else.
- peignoir 7y agoI disagree I would not shut it down I would either sell it or keep it to maintain jobs. As for the investors if a long term plan i would convert to debt and try to get them to flat especially if friends and family. But yep, there are cases when you need to shut down and zombie mode sux if you can’t escape
- apo 7y agoIn a nutshell, the situation is that the startup is: > ... not growing but it's not dying. ... and the founder doesn't really know what to do. Makes me think of Paul Graham's concept of "default alive/dead": > When I talk to a startup that's been operating for more than 8 or 9 months, the first thing I want to know is almost always the same. Assuming their expenses remain constant and their revenue growth is what it has been over the last several months, do they make it to profitability on the money they have left? Or to put it more dramatically, by default do they live or die? http://paulgraham.com/aord.html http://paulgraham.com/aord.html I think this is a much more valuable place to start the conversation. The available options (which may or may not include shutdown) depend strongly on the answer to the question "are you default alive or default dead?"
- situational87 7y agoThis is the old way of thinking, profitability doesn't seem to matter much anymore. The last two startups I worked for were (luckily) profitable and growing, but when the Series A investors found out about this they got very angry and started demanding we increase spending on things we didn't need: more engineers, more AWS, more initiatives for crazy tangents, hire a growth hacker, hire a growth marketer, then some more engineers who have nothing to work on. The demand for perpetual (even artificial, fraudulent) growth is prioritized over all else. The VCs can't get out of their investment unless things have grown. That's all that matters to them. Neither of those startups is around anymore, they were both driven out of business by this demand for more growth. The Series A investors couldn't care less, they exited long before the end and left someone else holding the bag.
- jjeaff 7y agoThere is another reason they want spending to increase. They need you to run out of money before you hit profitability or else you won't need to do another round of financing so that the VCs can take a larger piece of the pie.
- tru3_power 7y ago
- strenholme 7y agoMy startup shutdown horror story: A start up I briefly worked for during the dot-com bubble one day just ran out of money. I could see the writing on the wall, went to another dot-com (which also failed), but kept in touch with the people there. As they described it, the boss came in one day and told everyone “OK, the company has run out of money and is now closed. You will not get paid for the work you did in the last week, all medical and other benefits are now null and void, and good luck finding a new job.”
- jacquesm 7y agoThat's mismanagement to wait until the day you are out of money to inform your employees.
- EliRivers 7y agoIt's disrupting employment norms :)
- nostrademons 7y agoThat's comparatively tame. My two startup shutdown stories (in both cases I left 1-2 years before they totally blew up and heard about it through former coworkers): In one, the VCs came in, ousted all the management, installed their own highly-paid employees, and then promptly ran out of money. The technical cofounder stealth-bid (through an employee friend) against the VC for the company IP at the bankruptcy auction. The auction house messed up and told both parties that they'd won. Lawsuits started flying back and forth. The founder decided that rather than deal with this, he'd move to China with the IP, where they don't enforce IP laws, and start the exact same company with Chinese employees. The company failed for exactly the same reason the first one did, namely the technical founder's complete and utter inability to manage a production-quality project to completion. In the other, the business cofounder quit, ran off with the customer list, contacted all their customers saying "Hey, I'm founding a new startup", a lawsuit was filed, and AFAIK both businesses failed. I've been lucky that with my own startups, I've parted on amicable terms with all the cofounders I've worked with - though this is usually because we only gave up when it was clear neither of us wanted to do it anymore.
- tschellenbach 7y agoIf you have a team you're happy with and your cap table is not messed up, there is always a solution. See Slack, Youtube, Flickr and many others.
- vfc1 7y agoUnpopular opinion, I just don't understand this whole reasoning and this whole startup mythology thing. So what he said is that if its a viable, sustainable business that the founder wants to do, that adds value to society, but there is no exponential growth on the horizon, then it should be shut down. Because (and he said it explicitly), the only thing that makes a startup truly a startup is the exponential growth and nothing more. This is just crazy, exponential growth is extremely rare in business and only happens in situations like the way Facebook grew, by upon sign up getting the whole list of email contacts of the new user, and sending invitations to join Facebook to all of them. Most of the times in business, linear growth is what happens. what's wrong with a 20 employee company that adds a ton of value to society, operates for 30 years and gives the founder and family a comfortable life, isn't that more than enough and worthwhile pursuing? Exponential growth is impossible to predict and only comes by accident, it's like chasing the rainbow. Just focus on building a real business that you really want to dedicate your life to, preferably borrowing as little money as possible if it all, how about that?
- brianwawok 7y agoBuild a sustainable slow growing business. Just don’t take VC money to do so.
- exergy 7y agoSuccinct and ever so apt.
- ska 7y agoI don't think this is an unpopular opinion really, but that you are getting a bit hung up on the semantics. Most businesses that you start, are not "startups". And that's good, for all the reasons you outline. It's ok to look at companies that are trying to find exponential short term growth as a different thing, and talk about when to pull the plug if you aren't going to achieve that. The more interesting question I think is when you should try to initiate that sort of company, vs "a viable, sustainable business the founder wants to do", as you put it.
- EpicEng 7y ago