How to kill a startup with inexperience

Zirtual’s homepage the day it shut down

I’ve been following the unfolding Zirtual saga which has led to many public and private conversations about the situation. One day this will make an interesting business school case study! Right now, a lot of blame, along with a great deal of anger, is being placed on founder Maren Kate Donovan. As an observer following along through media reports, my take is that some of the blame is deserving but the anger may be misplaced.

We need to put the situation in the context of startup life and what its like to be a founder.

1. Most Startups Fail — the press gives lip service to this reality, which creates a false expectation for the general public and startup employees. Failing is the default option! Successful startups get much more press and attention while the failures fade into the background even though failure happens 90% of the time. We should all expect startups to fail and not be shocked when it happens. If you’re in a startup you should work as hard as you can to prevent failure while being aware that it is still very likely.
2. Overly optimistic founders — much of the anger has been surrounding how Donovan continued to promote the company internally and externally right up until the very end. Yes, she made the Kool-aid and was great at getting everyone to drink it. But she was also drinking it herself, probably even binging on it! Starting a business is hard work. You have to be extremely optimistic to get out of bed every day, to fight the constant battles, weather the ups and downs, build a team, create a product, bring in cash, and keep everything moving forward. I don’t know a single successful startup founder that wasn’t more optimistic about their startup than everyone else. I know lots of unsuccessful ones who weren’t. It’s not a facade; most founders really do believe that their company will make it against all odds. They have to.
3. First time founders — this is perhaps the biggest area where Donovan needs to be cut some slack. Simply put, first time founders don’t know what they don’t know until they’ve already made a mistake. Investors and management should be getting flack for not properly supporting her, monitoring progress, and asking the right questions. If you invest, partner with, or work for a first time founder, you need to understand what you’re getting into. We celebrate the college age wunderkinds but never take a hard look at the knowledge gap and the on the job learning that is needed to support a first time founder.
4. Looking behind the curtain —“radical transparency” is a buzzword being thrown around these days . There are many areas where transparency is fundamental to building trust in your business; however, there are also areas where you don’t want to see how the sausage is made. It’s ugly. It’s messy. There is a lot of blood and tears. I’ll probably get flack for this but the fact is while everyone wants to know everything, most people can’t operate effectively with that level of knowledge (see #2). It would amaze people how quickly a company can go from a $20, $30, $50m valuation to nothing. Literally overnight, one event can set off a chain that changes everything. And it also can happen the other way — we routinely read about companies that were saved at the last hour and went on to great success. It’s a continuous roller coaster ride, minute-by-minute updates create more problems than they solve.
5. Understanding the numbers —Whether the former part-time CFO is to blame or not, Donovan clearly failed in this area. I used to run a CFO consulting practice and the accounting records of every single new client were messy. I’ve heard the same story from colleagues who join startups as the first full-time finance person. Obvious Corporation (the predecessor to Medium) became a client very early in its lifecycle because the experienced founders knew that doing it right would save a lot of headache down the road, and they could afford to hire good talent. In fact, it was so important, they asked me to join full-time. The hardest part of winding down my CFO consulting practice in order to join them was not finding jobs for my employees, it was finding competent firms to take over my other clients! Why does this happen? Startups with few employees and little or no revenue can get by with minimal bookkeeping, and to save money, they do exactly that. Which is what most investors will advise startups to do and it’s perfectly fine when you’re a tiny early stage company. Unfortunately, founders only realize that they’ve outgrown their bookkeeper when something breaks, and by then it takes a really good person to come in and fix it properly. Those experienced, good people are valuable and have lots of opportunities with great startups so they aren’t available and/or most founders can’t or won’t pay for them at earlier stages. That leaves junior people available to work in outsourced accounting departments with little oversight. This may have contributed to Zirtual’s demise but it isn’t a unique failure; it is happening right now in the vast majority of early to mid stage startups!
6. Letting cash burn down to zero — This is inexcusable and closely related to #5. Obviously there are many nuances, especially as it relates to subscription services taking in customer payments for future services; that’s not your money to use unless you can provide the service! Even if you don’t fully understand all the numbers, you can read a bank statement, and should always know how long the cash will last. If you’re a founder, learn about the numbers and know your cash balance— it’s the lifeblood of any business even ones that get occasional infusions of cash/blood from VC’s.
7. Treating employees like family —most founders talk a lot about this, and in many startups it’s true due to the intense work hours and the small team. More often, it’s lip service in the purpose of recruiting new hires and PR spin. Donovan comparing her grief about Zirtual’s implosion to “someone whose child has been ripped from her arms” is stretching things (a former ZA called her out for this). While I don’t advocate for minute-by-minute updates (see #4), founders should provide periodic updates of important news. Everyone could have known in April that the company needed to raise funds sooner than it expected. Everyone could have known a few weeks ago that nothing had been finalized. Zirtual’s management team could have prepared a plan B for employees and clients while pushing to get funding. My last startup was sold at the eleventh hour instead of raising more funding. We were pursuing multiple options simultaneously and I can’t even explain what was necessary to make those deals happen. I worked incredibly hard and at great personal cost to succeed so that the employees would all get severance pay or job offers with an acquirer. And the clients would continue to receive services. They all deserved a soft landing after putting their faith in me and the rest of the management team. The employees weren’t privy to the minute-by-minute craziness, however they knew what to expect and had time to start looking for jobs if we couldn’t get funding or acquired. That’s how you treat “family”. You don’t leave them out of work without a paycheck or health insurance. Donavan failed incredibly in this regard, and I have seen many founders failing in similar circumstances. The primary difference is the sheer number of lower income people affected at Zirtual. The typical Silicon Valley software engineer is highly paid and can get a job very quickly but that’s not true of every employee in a company and for Zirtual it was not true for 90%+ of their employees. Founders need to take care of ALL the people who believed in them and joined their journey.

When putting all of the above in context, what happened with Zirtual is a series of events that happens all the time at startups. Zirtual’s headcount made it larger and more public than others, but it’s not an outlier. The one area where I feel the critics have been most unfair is calling Donovan a bad/unethical/immoral person. Despite all of her failures — which, remember, are all common in startups — I just don’t think she is a bad person. She tried. She made mistakes. She failed. People were hurt. But she didn’t want that to happen and had no ill intent.

Zirtual is not a case of first degree murder, it was an accidental killing.