How to Shut Down Your Startup
In Part 1 and Part 2, I discussed some of the challenges we faced in the contractor market and the alternatives we considered. We ultimately decided that returning money to investors was the right choice for our particular situation.
Although shutting down wasn’t the outcome we wanted, we wanted to ensure we did it in the most professional way possible. Sadly, apparently this isn’t the norm when companies shut down; investors have continued to say my transparency and integrity are unusual and greatly appreciated.
So what should you do if you’re thinking of shutting down your startup?
1. Set a defined period of time to consider pivots and full restarts
When it became clear we need to try a different approach, we first brainstormed other areas that we thought were appealing. We then set a period of time to spend researching these, then testing them if we thought there was potential (4–6 weeks in total for both stages).
Some of them stopped after the research phase. Some of them resulted in experiments we ran under different names (though they didn’t have appealing results initially, hence why they didn’t make it under the Zen99 brand).
The key here is having a defined period. People work much better when you have set deadlines. Otherwise, you’ll find yourself wallowing in indecision — which could last a long time depending on how much capital you have left.
2. Over-communicate with investors, both when things are going well and not
Since the beginning, we sent lengthy monthly updates. Not every investor responded each month, but we still sent them the updates regardless. This ensured that all of them could actively follow our progress. These updates included the standard monthly growth and burn stats, but also summaries about what experiments we had run and conclusions we had made, as well as how those had affected our strategy.
When the time came to consider shutting down, I didn’t shy away from continuing to communicate (many founders shut down lines of communication out of embarrassment). I spoke with each investor individually over the phone or in-person to get their advice. Having a baseline of our progress over time helped them understand the situation and give us better advice. And since I had shown transparency and integrity were of utmost importance to me, nearly all investors said they hoped to work with me again in the future.
After making the decision, I sent weekly updates for the first month of the shutdown process to keep investors in the loop. This included things like our current cash, our estimated upcoming cash in and outflows until final shutdown, and estimated capital we’d be returning. When we send the final amounts back to investors, we’ll also be sending our financial statements so that they can see where our money went and know that we didn’t run off to Thailand with it (I’ve heard this also happens sometimes).
3. Prioritize your employees, users, and investors over yourself
Your own concerns about reputation or personal gain should not be put first. This is the responsibility you take on as a founder. I think this should be a given, but sadly is not always the case. But by putting others’ interests before your own, you simultaneously help build your reputation and relationships.
We found our employees new homes as soon as possible to avoid interruption to their lives. We worked out a deal with Intuit so our users had continuity on a new platform. And we ensured that we over-communicated to our investors about everything that was going on both strategically and operationally.
Our employees, users, and investors were the reason we were able to pursue something we were passionate about. We were incredibly fortunate to learn in a year what it takes most people five years to learn (startups are high intensity learning experiences) while also not having to worry about our basic costs of living (rent and food, primarily).
4. Be responsible with your capital instead of burning through it
In a rush to build their brand or expand their user base, most startups burn through their capital quickly. We always kept our burn at a rate to support 2+ years of future operations and adjusted as necessary. There were one or two months where our burn got unnecessarily high, but we were quick to fix the course.
As a result, we ended up returning about 75% of investors’ capital. Financially responsible entrepreneurs are going to be given another chance; financially irresponsible ones are not. Always remember that it’s your investors’ money, not yours.
5. Make a thorough list so you don’t forget anything
Shutting down a company is honestly harder than forming a company. Many outsource it to a professional firm that specializes in shutdowns; that might be best if you have some remaining capital, or if your situation is particularly complex.
Our situation wasn’t very complex, and I wanted to preserve capital instead of continuing to spend it. (I didn’t pay myself during the shut down process, which incentivized me to get it done faster.) Make sure your list includes everything from trying to sell assets, notifying service providers, any tax or legal to do’s (Board approval, closing out payroll system, downloading forms to maintain as proof, final year taxes, etc.), and final steps (returning the capital and dissolving the corporation).
Other entrepreneurs: don’t be discouraged!
The fact is: startups are hard. Finding the right mix of product/market/timing/team is hard. Getting that right plus dedicating your life to the company only means you get a chance to play the game, where you still have a <10% chance of success.
Why do entrepreneurs do it? We do it because we want to create change in the world, not because we expect to get rich. If that was the only goal, most entrepreneurs would stop after their first success. But most entrepreneurs would rather be on the field than in the stands, so they get right back at it.
Zen99 was a phenomenal learning experience. I see our shutdown as an inevitable part of the entrepreneurial journey; as a stepping stone to something greater. There’s no shortage of opportunities out there, and it’s a great time to start a company.
I can’t wait to get back in the game.