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What I Learned from a Failed Startup

January 29, 20195 min read

"Some of you might have noticed that your paychecks didn't process this last weekend. That's because we missed payroll."

August 21, 2017 was a weird day. I showed up to work to hear from our management team that they'd missed payroll and that I had two options: (1) amicably leave the company with an IOU for my missed paycheck, or (2) stick around and hope things work out. A few hours later I took a long lunch break to watch the moon darken the sun, and then a few hours after that, I left the company. Within about a month's time, the startup had fallen apart permanently (and none of us got to cash in our IOUs).

Being suddenly without work is an interesting place to find yourself; I freelanced here and there, and then eventually found another job with a startup called Neighbor. I was relatively fortunate–I was only financially responsible for myself, I was busy with school full-time, and I was living in an area where software jobs aren't too hard to come by. After experiencing this "low-risk" startup failure, I've thought a lot about what it was that brought the company's demise. Here is a (non-comprehensive) list of what killed the startup:

Note: I'll refer to the company that I worked for as just "The Startup", so I don't accidentally make any enemies with this post.

1. You can't hire or sell your way out of management problems

The Startup was an interesting, incubator-type idea: part-SaaS company, part-contractor organization. The goal was to have the contract projects fund interesting SaaS projects that would (hopefully) turn into viable products.

As The Startup grew and took on new clients, there were organizational challenges with ending old projects and starting new ones. Some of the best engineers were staffed on projects where they had acquired too much domain knowledge and had become too valuable to be moved around; however, those were the very employees needed to get projects across the finish line. Additionally, many projects grew far beyond the original scope and timeline but needed to be finished in order to get the final payment from the customer.

The solution? Hire more people!

As more employees joined The Startup, it drove up costs. Projects were priced on a 50% upfront / 50% upon completion model, which meant that in order to meet rising costs, The Startup needed more money.

The solution? Sell more projects!

This became a vicious cycle, which spun out of control when The Startup ran out of cash and could no longer pay its people. The takeaway? You can't hire or sell your way out of management problems.

2. Don't buy into the wrong type of hype

When I was first looking at joining The Startup, I kept noticing the same thing: all of my peers who worked there had definitely bought into the hype. It seemed like everyone was wanting to work there, with almost-incredulous "you work at The Startup?" comments from non-employees becoming the norm. It felt like my coworkers were almost shouting from the rooftops about their newfound love for The Startup.

Free food! Macbook Pros! Open office layout! Flexible hours! Interesting projects!

To be fair, those are all things that I enjoy too! But the focus on all of those perks kept my peers from seeing the forest for the trees. Perks are great–but they can't fix a broken company. I decided not to jump on the hype bandwagon because the things that really mattered to me–excellent leadership, solid project management, clear execution on a company goal–hadn't yet been proven.

Looking back, I'm glad I at least didn't drink the kool-aid, despite my inaction. A company's hype should be about the vision, not about the perks. Don't buy into the wrong type of hype.

3. Frugality is for companies too

The Startup had a cash shortage problem not just because of the project pricing strategy, but also because of a lack of frugality. They tried to try to provide the same perks of companies that were more mature and that had far deeper pockets. The Startup had some funding, so it wasn't totally out of the question to match some of those perks, but just because you have money doesn't mean that you should spend it.

The Startup spent money on new MacBooks for every hire and frequently catered events. They spent money on nice 70" TVs with an office-wide interconnected Sonos sound system. They were looking to spend a lot of money on new office space shortly before the company fell apart. While I'd argue that some of those things might have been necessary, The Startup certainly wasn't looking to minimize their burn ratio.

Despite having both funding and more cash coming in than your average startup, the company still ran out of money. Turns out that frugality is for companies too.

4. If something smells, see where your nose takes you

When I was onboarded onto my first project and I asked what our client wanted, my project manager listed a couple of things that we were supposed to accomplish over the next few months. I assumed that they were just giving me the cliff-notes about the project, but a few weeks later when a scope question came up, I asked to see the project requirements. It was two lines long.

Two lines.

I asked questions about the lack of detail in the requirements, and about who had worked with the client on signing the contract, and all of my questions were shrugged off with "we needed to get this through the door and we were stretched thin when this deal was signed". The responses I got made it seem like this was a one-off occurrence, and that the other projects had clearer requirements.

Had I done a little bit of digging, I would have found out that it wasn't just my project that had this problem. Many projects that The Startup was participating in had weak or vague contracts that made them difficult to accurately know what "done" looked like. I learned that if something smells, you should see where your nose takes you.

Looking forward

It's easy to look backward and say "I should have seen that coming", but the truth is that at the time, I thought that The Startup was just another startup with growing pains. It's only on looking back do I see some of the differences between successful startups and The Startup.

Successful startups find the balance between growth and revenue despite being stretched thin; The Startup wanted both at the same time. Successful startups try to find the appropriate burn ratio; The Startup spent money like there was plenty to burn. Successful startups lack clear processes but usually do an ok job at contracts; The Startup didn't get those right. Successful startups know that people will work harder for company vision than for free food; The Startup wanted to have all of the "tech company" perks and ride the hype train.

The next time that I join a startup, I'll definitely be looking for some of these signs of success (and I'll be wary of the signs of The Startup). A paycheck is worth a lot more than an empty IOU.