The majority of companies fail, and I mean the vast majority. It’s a bleak thought, but it’s the truth. The Motley Fool reports that only an estimated 20% of companies survive past their first year – and within five years, half of those “successful” enterprises cease to exist.
If you speak to founders and employees of failed startups, you will soon realize that many of the issues that snowballed and led to the demise of their companies are similar. However, I didn’t know that when I found myself on a sinking ship of my own. It was only after leaving the company and speaking openly with others that I learned how common my startup’s problems were.
Chamath Palihapitiya, a well-known and outspoken Facebook millionaire and Silicon Valley tech investor, has labelled the obsession with mass funding and startup growth a “charade”. In the annual letter of his company, Social Capital, Palihapitiya warned that “the dynamics we’ve entered is, in many ways, creating a dangerous, high stakes Ponzi scheme.”
Take Mu Sigma Inc., a data analytics startup, for example. The company was sued by investor Patrick Ryan (also the founder of Aon plc) for dodgy valuation practices. After Ryan’s confidence in Mu Sigma’s future starting dimming, he sold off his portion. Less than a year later, Mu Sigma raised millions at a much higher company valuation.
Convinced that his portion was sold at an artificially lowered price – a practice enabled by the low level of transparency required of private companies – Ryan demanded the return of 7.6 million shares, or an equivalent payment of damages.
Not to be Debbie Downer here, but if you get into the startup world, you are probably going to live some of these realities firsthand. We definitely did at my previous company.
However, even if we are warned about these dire realities, our eagerness for novelty and a taste of entrepreneurship remain unchanged. Curiosity and fascination with startups often outweigh any thoughts about the risks. Well, at least that was the case for me.
Let me rewind a little – here’s how I got into a startup
Several years ago, as a naive and ambitious twenty-something, fresh out of college, I was lost. Eager for direction and full of enthusiasm, but very lost. I could never seem to connect the dots between what I wanted to do with my life, what I was willing to work at every day, and a workplace environment that embodied and fostered everything I wanted my career to be. But I was sure there had to be a way. (I did say I was naive.)
However, even in my fog, there was something that I knew I was fascinated with: Startups.
America’s startup scene was unparalleled, or at least it seemed that way from thousands of miles away where I grew up. Desperate to experience a bit of that excitement, I decided to take the plunge and live the startup life myself.
I got hunting on the classic startup website, angel.co, and found a co-working/co-living company with several locations around the world. I immediately applied, and after several rounds of interviews with the team, I was in.
In spite of all my expectations, the first six months or so were pretty anticlimactic. I felt very disconnected from the corporate team, and was usually one of the last to find out about situations and decisions.
But then things started moving, and if you are familiar with startups at all, you know that when things move, they move very, very fast.
Unfortunately, in our case, the situation didn’t progress in our favor. People in management were leaving, locations were shutting down, and customers and investors were complaining. Within another six months, our team had shrunk by two-thirds. I was asked to move with the chaos across three different countries, and went from an assistant manager position to a leadership role in a blink.
I scoff when I share my story now, especially when I arrive at the part where I was promoted like a gazillion levels in six months. And let me tell you, in that position and that environment, I saw a lot.
Breakdowns, blackmail, financial crimes, lie after lie… I won’t delve into the particulars, since doing so would compromise my previous teammates, some of whom I still hold in the highest regard.
However, like I said, as shocking as this all sounds, many of my experiences are common realities at a lot of companies. So to help you recognize when trouble is brewing at your own workplace, here are a few of my key takeaways from my time working at a failing startup.
Keep your eyes peeled and listen to your intuition.
This tip might seem obvious for any job, but in my case, it only became so in hindsight.
There were countless times when I agreed to do things that intuitively felt “off”. I committed to agreements that, if exposed, would land me in a lot of trouble. As the situation at my company grew increasingly dire, my boss grew increasingly desperate for help, and so these icky-feeling situations became more frequent.
However, the founder knew just how to hook an eager-to-prove and inexperienced employee. Right after I had to break the news to some of the team that our company could no longer keep them, the founder dangled a promotion in front of me.
It seemed impossible to say no. After all, it was exactly the type of reassurance anyone wants when they’re wondering whether they’re good at their job. I quite vividly remember that something within me was very hesitant about the whole situation, but despite my instincts, I leapt.
In hindsight, it was stupid. I should have seen that I was only getting promoted because the founder didn’t want to become a lone wolf as their pack dwindled. I should have realized that from that day onward, their actions would always implicate me. I was one one of the few left standing, and way too close.
So next time a founder mentions equity or some fancy new job title to you, look around. Are there signs that things are heading south? If so, make sure that you believe in the founder, their capabilities, the company and the direction it’s heading in enough to justify sticking around.
No matter how bright you are, you can never do it alone.
In a startup, there is a LOT to do, all the time, every day. Even when there aren’t any pressing matters that need your attention now, there is always another task on your to-do list.
And in spite of your best efforts to manage the workload, there is a daily barrage of events that are completely beyond your control. There are phone calls and meetings that spike your adrenaline, emails that make your heart pound. That unpredictability and instability are part of the excitement at first, but after a while, it all becomes unbalancing and exhausting.
However, being part of a team, especially one where everyone encourages and supports each other, makes the whole trajectory so much more bearable. These are the people that will see you at your lowest lows, like when an investor threatens to sue. They’ll also be there to share the highs, like when some cash flows in and you can finally pay someone to get off your back.
It isn’t just this support that makes having a solid team so important, either. While working at that startup, I collaborated with some awesome people – team members who helped us dodge bullet after bullet, and came up with brilliant ways to buy us time so we could live to fight another day.
Leo Laporte, the founder of the TWiT network, had something similar to say: “My biggest mistake was trying to do it all myself. After a few years of rapid growth, my company had stalled out, and I was spending more time fighting fires than I was doing the stuff I loved (and that made us money).”
You can have the best people with the brightest minds, but decisions are still made by the person who owns the company.
There were a lot of giant flashing lights back in those days that my naive eyes refused to see. One of the biggest was that the incredible people on our team – the ones I treasured most – were the same people who, one by one, were leaving the company.
I now know that there was nothing they could have done to save the company from its eventual fate. The direction and the decisions were beyond their control, and solely in the hands of the majority shareholder and CEO. Unfortunately, that person couldn’t delineate between the merits of the team’s strategies and their own inflated ego.
Mind you, I’m not saying ego is always a bad thing. It is actually what keeps a lot of entrepreneurs persisting during difficult times. It enables them to take risks and maintain the level of drive that is essential for success.
However, like with most things, too much ego gets people into trouble. It is what drives many ventures into the ground. John Rampton, the #2 ranked online influencer in the world, openly admits that it was “100%” his ego that killed his company, taking everything he owned with it.
After Rampton sold his first successful startup, he let his ego “run his life”, which drove his next company into the ground. His sins ranged from overestimating his capabilities to ignoring how much he needed to learn, leading him to micromanage and waste the talents of his team.
Someone better know how to manage finances – and that person should be the founder, or hold equal power to the founder.
If a person holds all the power to make decisions that matter, they better know how to keep the plane on the runway.
Unfortunately, at my startup, the founder didn’t. Their personal expenses were usually the first thing to come out of any inflow of cash. This was standard practice during the good times, and it continued even when we faced a growing list of lawsuits and debt piling up to our eyeballs.
An estimated 90 percent of small-business failures are caused by poor cash flow management, according to Dunn & Bradstreet. So while the odds are against any startup, you will increase your chances of finding a winner by making sure that someone realistic and responsible is taking control of this aspect of the business.