When the Money Runs Out


As founders, it’s naive to pretend we can always see it coming. Many times we are so blinded by our own furious optimism that we refuse to let the idea enter our minds that it could happen to us. We hear stories of other startups failing and folding, but it’s always softened with word like “we couldn’t get the necessary traction we needed to continue” or “we never found product-market fit” or “we couldn’t secure an additional round of funding”… It’s always trying to soften the harsh truth. We ran out of cash.

Get a couple beers into 90+% of these failed founders and they will open up that they still deeply loved their startup. Wanted to keep fighting for it. Wanted it to thrive. Believed they could make it work if given enough time. Most of all, 100% sure they would keep going if they had another six months of cash in the bank. But, they simply ran out of cash.

We write post-mortems as a cathartic healing exercise, to help other founders know they aren’t alone, and to share with our customers and supporters what happened. In these, we explain in depth the myriad of reasons why the company failed and it was best to lay it to rest. The one that is normally, not always, but normally left out is: our bank account was empty.

What is so odd about this is that hundreds of thousands of startups globally are going to experience this same problem this year. It’s a universal phenomenon of a founder's life. Sometimes you make money, most of the time you go broke. It’s the last remaining part of the failure story that is typically left out. “We burned all of our cash.” Many founders find themselves in a worse situation, where they are now buried in debt and personally broke. That part is never covered. If I can name five founders off the top of my head locally that are broke and in debt post-startup-failure, I can’t even imagine how many there must be out there.


During the course of my previous company, my partner Lev and I, ran out of money twice. The worst of which is covered in this case study Inc Magazine wrote about us. Both times we got last second bailouts from creditors who took late payments, friends who loaned us money, and vendors who owed us money paying early or discounted amounts. The second time we ran out, we got the wire transfer just days before payroll processed, thus preventing 40+ people from bounced paychecks. Nothing says, “Happy Friday!” to your employees like realizing they can’t pay their rent. Disaster averted.

I wonder back on that a lot and what would have happened those two times if we had truly “gone under”. Would I have written a “post-mortem” that would have talked about how we didn’t growth hack well enough or how there is a Series A crunch.

…Or would I have written what I knew had actually happened.

“We ran out of cash because we did some dumb shit. PS — We’re now broke.”

The shortest post-mortem in startup history. Not the most educational, but no matter how many post-mortems you read, it’s almost always the same reasons over and over. I’m not going to cover those here, you can read them for yourself.

Aside from those events, I have had other smaller startups over the years that I have killed because they ran out of cash. It’s the cold brutal truth of entrepreneurship. The financial hardship many failed founders experience is the insult-to-injury, on top of the typical shame felt for having failed in the first place. It’s the extra kick to the stomach when you are already on the ground.


NOTE: The rest of this article speaks to those currently in trouble.

If you too find yourself chasing “Balance: $0.00”, I encourage you to do something that might feel impossible in the moment: Take a step back, breathe, and look at your startup from the most unapologetically objective perspective you muster. Imagine yourself as an outside third party, who is business savvy and a friend, that is advising you on what to do next.

With your objective hat on, the question you need to ask yourself is this…

“Am I out of money because my business model is flawed or my management has been poor or my product/service just isn’t that great… Or … am I out of money because of an acute unforeseen problem or something out of my control?”

If it’s the former, it might be best to shut down. If you are out of cash and that’s compounded by a product or team that is making the problem worse, that is likely an unsolvable situation. The quicker you recognize it and close shop, the better for all involved. This is where I’ll guesstimate 90% of startup failures occur. Business writers publish endlessly about how start, grow, maintain, but rarely about how to shutdown. Knowing when to walk away is one of the traits of great founders. It should be celebrated, because the pain and unnecessary flailing that lays at the other end of the decision tree, is not noble or brave.

As for the latter part of the question, for those experiencing an acute moment of trouble (e.g. a lawsuit, a credit line cut in half, your biggest customer cancels, a fire, a key revenue partner bails, etc…) there may be a sliver of hope. This is for those in my other estimated 9% of troubled startups (I’ll explain the other 1% later). For those 9% where they did find product-market fit, are growing, have good management, and are providing real value, yet find themselves in an immediate cluster-fuck situation.

  1. Assess what has to be paid and what can wait. Do this with the same level of black & white decisiveness you would if I said, “I’m going to put you on an island alone for six months and you can only carry three things with you. Pick them.” You have to immediately decide what is mission critical and what can go. You have to be unapologetic in this process. As for things that are critical, but you can no longer afford, remember the golden rule of the business world: it’s always cheaper to maintain existing customers than find new ones. This applies to your landlord in that it’s more expensive and harder to find a new tenant than take significantly discounted rent from you. It’s easier for your software service providers to give you credits or big discounts temporarily than lose you completely or replace you. You will be shocked by how many of your creditors will take a smaller or very late payment rather than getting $0. All you have to do is ask.
  2. This goes for employees too. It’s typically easier for someone to maintain their current role than it is for them to try to find a new job. Even if it means taking a pay cut for a month or two or more. Software engineers are an exception to that, sorry… You may have to layoff people regardless, but try the pay cut route first. This includes your pay by the way.
  3. Finding new money. In an emergency pinch, you’re either going to get it via one-time new revenues or some sort of not-friendly loan or alternative finance product. No time for grants, new product launches, traditional loans, credit lines, etc… If your product or service is structured in a way where you can get your existing customers to pay you more on a temporary basis (such as make an annual payment instead of monthly, pay a contract early, offer a good discount if they commit to a more expensive offering, etc…) now is the time. If you’re new customer onboarding is both fast and inexpensive, make a major referral push from existing customers.
  4. As for non-revenue sources, these are not going to be sources you would have looked at in good times. 1. Angels and venture capitalists like to invest in healthy companies. No matter what they say to you, the odds of them investing into a distressed company are very low. Some VC/PE firms specialize in distressed, but it’s not the “cool” VC firms you see on TechCrunch all the time. You might be thinking, “Well, VC’s invest in companies that are burning all the time. Of course they will take a look at us.” Those companies are not experiencing an acute unforeseen moment of distress. They are running low on cash because their opportunity for significant growth currently outpaces their existing cash to support and maintain that growth. That’s an ocean of difference from, running low on cash because of XYZ unforeseen disaster. That makes you distressed. 2. Just like it’s cheaper/easier for your creditors to maintain you as a customer than find new ones to replace you, it’s the same for your partners and customers. They picked you for a reason. They fired another product to hire your product. If you are in B2B, this is especially true. If you’re customers love your product, there is a chance they may be willing to loan you money to stay in business. Does this happen regularly? No. Do I know startups that have done this? Absolutely. The more addicted a customer is to utilizing your product, especially if they rely on it for a key function of their business, they are much more likely to try to insure your survival if they can. 3. If you have a track record of solid pre-disaster cash flows, invoice discounting/financing (sometimes called accounts receivable financing) may be a choice of last resort. This is where you get a loan based on what your customers currently owe you, for a pretty big discount on total value of that customer revenue. Not a great option, but it’s there. 4. The final and true last resort, is getting a loan from friends/family (if you even have this option, most won’t). This is the most perilous, as you are risking their money and your relationship with them. Two losses for the price of one.
  5. A random grab bag of other outcomes. 1. Depending on your industry, your employee base, and your customers you may have a random assortment of final options rather than simply failing. If you have very talented employees or employees of extreme value (engineers, designers, or whatever applies to your industry) the route of the acquihire for a soft-landing is potentially there. I’m not going to delude you here; acquihires are both rare and difficult to negotiate in time before your startup collapses. You have to act quickly and you have to reach out to a lot of companies as suitors. This is where having a great advisor/investor makes a huge difference in the chance of success here. 2. Getting acquired solely for your customer base. Expect two things. One, they will most likely terminate everyone on your team with maybe a couple people. Two, expect a massive discount on your revenue/customer value as opposed to if you were a healthy company. For example, if the normal value of your revenue/customer base was a multiple of 10x in good time, expect an offer of a small fraction of that in distress. It will hurt. You’ll cringe. This is the reality though. 3. If you have investors, sometimes these shareholders will be willing to do a down round, normally in exchange for both a majority controlling share (or even 100%) and you stepping down from a leadership role. Painful, but at least your baby survives.
  6. These aren’t all the options by any means. I wanted to cover the more common ones. There are so many other long-shot random situations, involving things like this: A mashup of an acquihire and partnership, where the acquiring entity (normally public traded) for one reason or another doesn’t think they can get an acquisition done in time (or at all). So they invest in another company on the basis that those funds will be utilized to acquire the distressed company. The list goes on and on for one off situations like that, but it would be a waste of time to cover the outliers. It’s nice to be aware of them, but they are rare.

Then there is that final 1% of startups that run out of money and fail for nothing they did inherently wrong (or at least nothing that even a savvy experienced entrepreneur wouldn’t have easily fallen victim to as well). We have all seen these businesses in the news over the years because the stories are so painful, sad, and cringeworthy. The formula is normally nothing more complicated than this: Companies in industry relied upon XYZ to operate and thrive. XYZ went away because of either rapid changes in consumer or business tastes, market collapse, “Act of God” disasters, or new regulations. Reading that I’m sure examples pop to mind right away.

Regardless, after reading this entire article, the first step is to circle back to this question:

“Is my business in the trash right now because it is garbage … Or … is my business in the trash because something dumped garbage all over it?”

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