What I Learned When My Company Almost Went Bankrupt
It was 2010, and we were desperate. I was trying to pivot my startup, PerformLine, from a media company to a software company. The timing wasn’t great. I’d underestimated how much time we’d need to accomplish the transition and our out-of-cash date was fast approaching. Much like today, the funding environment for a turnaround story was bleak. I must have pitched over 30 venture capitalists; all of them passed.
But worse than all of those rejections was the idea that the one thing I’d vowed to never allow as founder and CEO seemed like a serious possibility: I might miss a payroll. I took that as a life or death edict. If talented hardworking people were going to choose to work for my company, the least I could do, even in the darkest of days, was honor their commitment by paying them what I’d promised. But we only had $11,000 in cash, were down to a skeleton staff and and bankruptcy was a real possibility.
It was a difficult time, but it taught me some important lessons about staying afloat in the direst of straits. Here are five takeaways:
1. Forget outside funding. Instead, fund yourself through sales.
When you are in your darkest hour as a founder and CEO, understand there is no white knight coming to the rescue. Nobody will invest in you. It’s not necessarily because your product is bad or because you aren’t going after a large enough market, but because from an outsider’s perspective, the road looks close to impossible. You’re the only person who knows the situation is fixable. And the only way you can fix it is through sales. So get to work selling the products and services you have already built. And then do it again. And again. Soon enough you will have the cash flow you need to sustain your business.
It took a while, but we sold and sold until we had enough cash flow to build the team back up and develop new product offerings. Because we never stopped selling, we reached sustainable profitability (and learned we didn’t need no stinking white knight in the process).
2. Be transparent with your team.
There comes a point where the odds are truly not in your favor and, as CEO, it’s your responsibility to be self-aware. This doesn’t mean quitting; it means being honest with your core team about all possible outcomes, including shutting down. It’s not an easy thing to do. You will be terrified that as soon as you tell them the reality of the situation, they will lose faith in you – and the company – and leave. Some may indeed go; but by being honest with employees, you will foster a loyalty and passion in those that remain. If you do manage to turn things around, these individuals will be the backbone of your culture.
3. Don’t forget your existing clients are your biggest fans.
Too many early-stage CEOs forget about an obvious source of capital: clients. If you find yourself in a cash crunch because your latest financing round is not materializing as you planned, go to your clients. Start by asking if they would be interested in a discount — typically somewhere between 5% and 10% — in exchange for an annual pre-payment. Many companies are likely to accept this offer.
This is also a good time to take a look at the new features clients have been requesting. A few clients may be willing to pay a custom-development fee to move their requests to the top of the list. If this means you have to make the feature exclusive to the sponsor client for a period of time, so be it. It’s a small give when the alternative is not making payroll. Lastly, you may find a strategic investor in your client portfolio. That has it’s own set of pros and cons that I’ll cover in a future post.
4. Tell your family to expect the worst.
Nobody likes negative surprises. Not your employees, not your investors and least of all your spouse or partner. Let him or her know you are working as hard as possible to save the company, but the outcome is not 100% in your control and there’s a real possibility it could shut down. This does a few things: It helps explain the anxiety and stress you have been carrying around with you, it shows your partner you can be honest and transparent even with the hard stuff, and it helps everyone in the family make belt-tightening adjustments to the family budget. I never missed payroll for an employee, but there were plenty of payrolls when I didn’t get paid. It comes with the territory.
5. Realize your business partners show their true colors when the going gets tough.
You see pretty quickly who has your back when it’s up against the wall. Your vendors will notice late payments right away, so I advise calling them to let them know the situation. Be honest. Don’t be afraid to ask for a few free months of their services or, at the very least, if you can defer payment until you get the cash flow situation back on track via new business sales. You’ll be surprised how many of your partners come through for you. The smart ones realize helping you is in their best interest — if your company fails, they lose a client for good. And if the worst happens and your company does go under, they’ve still cemented a relationship that may bear fruit when you start your next venture.
Just don’t forget about these favors. In PerformLine’s early days, we had a debt partner that allowed us to forgo servicing our loan payments for six months in tough times. Fast forward five years and we accessed debt again, this time for a very different reason — to help fuel our fast growth. Not only had we reached profitability, but we had stellar metrics to boot. With dozens of competing term sheets to choose from, I bet you can guess which debt partner I choose!
The bottom line is this: No founder likes going through tough times. But as I’ve learned, getting through these experiences makes you a stronger leader when the tide finally turns and your hard work starts to pay off.
Because, hey. If entrepreneurship was easy, everyone would do it.