This Is What Happens When a Startup Fails
Three weeks ago, the Canvas team had returned from winter holidays, hunkering back into work at the company's Union Square office in New York City. Just weeks earlier, the company--seven people, including its 26-year-old founder, Chris Poole--had a major success in launching its first iPhone app, called DrawQuest. It took off in the iTunes store, exceeding expectations vastly. Revenue was growing, and three-quarters of a million people downloaded DrawQuest. It was encouraging.
But it wasn't enough.
"One of our investors came to me and said, 'I think we might want to be honest with ourselves here. You tried really hard. But you're likely not going to be able to return the capital,'" Poole says.
On Tuesday, Poole announced Canvas was shutting down. On Wednesday, packing up started at the office, and the company's television was hauled away. Some of the employees are already transitioning to new jobs.
Most startups fail. Seriously--it's about 90 percent, by some estimates. But despite this, and despite the fact Silicon Valley glorifies failure with upstart mantras such as "fail fast, fail early, fail often," it's really unusual to hear about how the collapse of a venture-funded company actually plays out.
The case of Canvas gives you a rare glimpse into what happens when a startup runs out of money and shuts down. That's thanks to a founder who is deliberately contronting the failure with a level head and great maturity. He is taking two weeks to properly wind down the company, and he's vowed to write about the process.
I spoke with Poole--who is perhaps best known as the creator of 4chan, a website he bootstrapped--Wednesday, a day after he posted on his personal blog a straightforward explanation of what was happening with Canvas. It was shutting its doors despite having 1.4 million users. "Although we arguably found product/market fit, we couldn’t quite crack the business side of things," he wrote.
By "business side of things," he means something universal to every company: revenue. But he also means something particular to companies with venture-capital funding, of which Canvas had $3.6 million: "returning value to shareholders." In the case of a tech startup, doing so typically means finding a business model that's rapidly scalable, and can bring about growth in users and revenue that looks like the proverbial hockey-stick. Thanks to both an iPad and iPhone app of DrawQuest, both launched as part of the company's 2013 pivot, Canvas was growing. But this was two years into the company's existence. Canvas just wasn't growing fast enough.
"If the odds are stacked against you in any venture-backed company, the odds are extra stacked against you if you pivot, especially as late as we did," Poole says. "It was pretty obvious to me that we would have had to knock it out of the park in order to raise capital. I just knew we weren't there."
He says he knew within a few weeks of the December iPhone app launch that the company still wasn't on a growth trajectory that would be able to provide a great return to his investors, which include Lerer Ventures, Union Square Ventures, Andreessen Horowitz, and SV Angel.
He says he didn't even ask the investors--several of whom Poole counts as trusted mentors--to reinvest.
"There's no way I could imagine in my mind how we could use that money--yes we could keep the service running--but we spent a year on the business and have seen how it's grown and how it has done in revenue, and it's obvious it just wasn't going to be this huge thing," he says. "It wasn't a $25 million company."
He did, however, speak to a few companies for which Canvas might have been an acquisition target. But with just six employees, and "nothing really revolutionary" in intellectual property powering the apps, it wasn't a natural sell. "We didn't have much interest," Poole says.
About two weeks ago, Poole says he woke up one morning and saw the future. There wouldn't be a happy ending in the form of an acquisition. There wouldn't even be much of a future for the strong community of 1.4 million DrawQuest fans. He decided, based on advice he recieved from an investor, to not allow Canvas to just bleed money until the company ground to a halt. Instead, he decided to actively spend time winding down the company, helping employees move on, and making plans for his own future. He'd salvage what he could.
First, he met with partners and investors.
"I debriefed everyone I could in the last couple of weeks. When I couldn't meet them in person, we'd talk over the phone," he says. "People were extremely supportive, and just understood the state of the world and the reality we found ourselves in."
Next, employees. "I turned my attention to trying to help the employees find new opportunities--amazing opportunities--having conversations about what is their dream job and putting out feelers for them and making intros," he says. An adviser suggested to Poole that, when the company only had a couple months of financial runway left, to consider employee severance packages as part of his costs.
Finally, Poole turned to customers and the press: He drafted the blog post, which promising to keep the servers running long enough to allow DrawQuest users to download their favorite images. He had explanations posted on Canvas and DrawQuest.
Poole says he's still in the process of wrapping his head around the concept of "what to do next." Turns out, he says, spinning down a company is a lot of work.
But it's work he credits his investors with supporting--just like they supported him in building Canvas and DrawQuest. He says he feels fortunate to have worked with investors who, for him, passed the "airport test," meaning, if you had a layover together, you'd actually enjoy each others' company. And he says he'd advise any startup founder to, when seeking venture capital, understand that there could be bad times as well as good.
"If you're in a position where your best foot isn't forward, how are they going to react? Consider how they will help you navigate rough waters," Poole says. And, statistically, it's very likely you're going to go through these rough waters when starting a company. "I'm very, very, very lucky to have had such a great roster of investors, and they helped me thorough what was a very agonizing few months."
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