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When A Startup Shuts Down

When A Startup Shuts Down

Every time a startup starts and gets funded it gets a lot of publicity. Founders are very interested in making sure they get coverage, and the news media is happy to pick up these stories, which is why they celebrate every time a startup is launched. However, the reality is that lots of startups will shut down, but startup failures, for some reason, never get the coverage they deserve. After all, that’s the natural history of the beast. Every startup is an experiment and lots of them are going to shut down, and the failures need to be featured as prominently as when they get funded, so that both founders and angels have realistic expectations. Painting an excessively rosy picture does not help anyone.

The problem is that we think of a startup shutting down as being a matter of shame, and we tend to sweep failures under the carpet. However, unless we highlight these, we will never learn from them. In fact, I think it’s possible to learn much more from the failures because we can catalog their mistakes and make sure that founders and angels don’t repeat the same mistakes.

Here’s a story of a startup which I funded, which shut down within 16 months after burning INR 50 lakhs. The reason I put in the money was because the founding team was introduced to me by a respected name in the startup ecosystem, someone whom I trusted, which is why I didn’t do any due diligence. They had an excellent brand name because they were incubated at IIT, Mumbai , which is why I signed the check without thinking twice. Perhaps I was extremely naïve, but it’s always easy to be wise after the event. It’s turned out to be an expensive error, but hopefully I will be smarter in the future. One of the things I’ve learned is that while it’s okay to say no quickly, I should say yes much more slowly, and that even if someone makes an introduction with well-meaning intent, it’s still my money and I need to be careful what I do with it.

Where did these INR 50 lakhs go over a few months? Was I cheated? Was the money wasted? I still prefer believing that it wasn’t; that the stars didn’t align, and that even though the founder did his best, things didn’t work out, but I’ll never know. In retrospect, there were lots of red flags, which we ignored. For example, the founding team broke up within the first three months of the startup being funded by me, and we never got to meet any of the other co-founders. However, my philosophy is you live and learn, and while I do learn a lot from my successful startups, the reality is it’s very hard to clone them. On the other hand, it’s much easier to avoid mistakes, and this is following Charlie Munger’s famous inversion rule, so that at least I don’t  repeat the same mistakes.

I was disappointed by the founder, and I was disappointed by my friend as well, because when the company started going downhill, he seemed to disappear and refused to step in or provide any guidance or mentorship to the founder, who was floundering and didn’t know what to do. I was unhappy with the founder  as well, to say the least, because he refused to remain in touch; didn’t send updates or remain in contact, which meant was very hard to guide him , or to provide him with any feedback because he never asked for it. I guess he could see the writing on the wall and was very worried, which is why he started clamming up and hiding things from me, which just made a bad situation even worse; thus, there were no monthly reports, very little documentation and it was very hard to know how much money there was in the bank because of a complete lack of transparency.

I have put this down as learning experience, and while these were steep tuition fees to pay, I haven’t stopped angel investing and, hopefully, thanks to this experience, I will become a savvier investor and will do a better job next time. Even though this startup has ended up costing me a lot of money, the lessons this particular founder has taught me will stand me in good stead for the future because I hope not to repeat the same mistakes.

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.