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Wednesday, January 25, 2012

Now You See it, Now you Do Not!

One of the most difficult of topics to discuss is the demise of your startup.  There is nothing to say in advance or after it happens to make you feel any better.  No words exist that will take away the sting of the failure and you will relive aspects of the process the rest of your life.  Many serial entrepreneurs have lived through at least one failure and  some, more than one.  There are a few that have not experienced it and if lucky never will.

The purpose of this article is to alert you that many startups just do not make it.  The reasons are wide-ranging and sometimes just strange. Sometimes, you cannot prepare in advance.  When possible, planning an orderly shutdown is preferable over hitting the wall at 100 miles per hour!  At least in an orderly shutdown, you have a chance to manage creditors, staff, and operations to protect as many as possible and as much of the assets as possible. 

The following is a short list of reasons for demise: 1) Product failures, 2) Commercial failures, 3) Development failures, 4) Management failures, 5) Financial failures, and 6) other.  Experienced executives can sometimes manage these events and turn a business around.  The less seasoned professionals may face more challenges than experience allows for effective management.  Many times, it does not matter how good the manager is, the company will be doomed. 

As an example, I ran into a friend a few weeks back.  This person is a great manager. He was developing a company for a VC group.  After much planning and having a deal done for the next financing, he received a call saying the fund was not going to go through the deal.  The news came about a week before the business would run out of funds.  There were no other prospects for investment and the time was too short.  My last discussion with the friend was along the lines that he would be closing the company in about 5 days!

In the biotechnology space, clinical trials are required to demonstrate effectiveness of a product and gain FDA approval.  Two Phase III trials are generally required to demonstrate safety and effectiveness of the product.  Many early stage biotechnologies have experienced break of the code and analysis of the Phase III data to find their product did not work.  This typically makes all investors run for the hills!  If the company is not well capitalized, it will be gone in days. This has taken place numerous times and it is not something you can plan for.  Companies having received in excess of $300MM have failed over night for just this type of event.

The point of this article is to alert you that FAILURE happens.  You can learn from it, you may be able to manage it, but more often than not, the company disappears quickly.  Just be aware that the streets of “Startup Land” are not paved with “Gold”. You will put in long hard hours and experience many great things, but sometimes the magic catches up to you and poof, “Now you see it, Now you don’t”!