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Failure Happens. Four Rules for Doing it Well

No one likes to think about shutting down a company. How to emerge with your credibility intact.
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As I wrote in my last column, failure is a fact of start-up life. And sometimes, sadly, it’s the entire company that fails. As much as we don’t like to think about failure, it’s important to prepare yourself mentally for the prospect that your turn in the dunk tank may be right around the corner.

Here are four crucial rules to keep in mind:

1.    Don’t Wait ‘til It’s Too Late

Unless you’ve been through this before, multiple times, it’s almost impossible to know how soon you have to acknowledge your problems and start moving to fix them if you’re going to have a fighting chance of saving the ship. You may think that you can lay people off to stop your cash burn, but it doesn’t quite work that way. Long after your employees are gone, you’ll be shelling out for accrued vacation pay, severance, continued insurance benefits, expense reimbursements and so on.

Then there’s the opposite side of the coin. Every day that you move closer to running out of cash but keep operating the business, you’re adding creditors and obligations. Unpaid employment taxes and deposits can quickly become personal liabilities for management and directors. Trust me; you don’t want to go there.

2.    Don’t Slice the Salami Slowly

If you’re going to try to save the business, the necessary cuts have to be quick and deep and over as soon as possible so the survivors can get back to work. Trying to save a couple of people or a marginal job or two is the worst thing you can do. People do better absorbing one big shock and getting over the loss than they do dealing with the uncertainty of a series of continued small and ineffective cuts.

3.    Start Looking for a Salvage Sale

You may have a great team or a great idea or a cool new approach. But to win, you need all of the above plus a bunch of time and cash.

However, there are lots of companies looking to acquire whole talented teams; to fold in technologies or tools that they haven’t yet built; or even to start an entire division doing what you hoped to do as a stand-alone business. But you’ve got to start looking as soon as you see the handwriting on the wall. Even a fire sale--especially one that provides continuing jobs for the folks who hung in there with you--is a lot better outcome than extending your struggle for a few months and then crashing directly into the concrete wall.

4.  Shoot for a Soft Landing

If you’re never planning to pass by this way again, feel free to just smash into the wall, bail out and shut the place down, leaving waves of unhappy folks in your wake. But most young entrepreneurs are very likely to want to get back up on the horse and try again. The only way you will have the slightest chance of doing this is if you do everything in your power to shoot for a soft landing, leaving as few people holding an empty bag as possible. This goes for vendors, partners, employees, customers, creditors and Uncle Sam.

There may not be enough money to make everyone happy, but careful cash management, full disclosure, good timing, and self-sacrifices will go a long way toward at least generating some understanding. Unlike friends and families, professional investors have seen these scenarios many times and know what the possible outcomes are. Shame on them if they didn’t make their commitments with their eyes wide open.

One amazing way to surprise them is to consider an early shutdown and a partial return of their unspent capital. If you can’t see a clear path and a way to win there’s very little reason to waste time, energy, and money on trying to lose more slowly.

Failing to plan for a possible failure shouldn’t be confused with planning to fail. Failing to plan is worse: It’s failing to honor the faith and belief that people had in you. There’s always more money. Your reputation and credibility are much harder to restore once they’re gone. 

IMAGE: wdstock/getty
Last updated: Oct 30, 2013

HOWARD TULLMAN | Columnist

Howard A. Tullman is the CEO of 1871 ? Where Digital Startups Get Their Start and the General Managing Partner of G2T3V, LLC and of Chicago High Tech Investment Partners. He is a member of the Chicago NEXT & Cultural Affairs Councils and the Illinois Innovation & Arts Councils; an adjunct professor at Kellogg; and an advisor to many start-ups. He is the former Chairman and CEO of Tribeca Flashpoint Media Arts Academy. Over the last 45 years, he has successfully founded more than a dozen high-tech companies. @tullman

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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