The True Costs of a Startup Failing

I read an article in Fortune magazine’s online site this week titled “What Happens When a Startup Goes Bust”. The article focused on vendors who don’t get paid when startup fails. It gives examples of several small businesses owed various amounts of money in the wake of Bay area food delivery startup Munchery failing. And while the article is interesting in its take on vendors losing out on payments and how venture capital firms should have more accountability, it doesn’t even give a single mention to those who end up getting screwed the most when a startup fails: the employees of the startup.

I’m going to tell you about my own experience with a startup I gave the last 4 years of my life to, and how that startup went down in flames, leaving a trail of destruction in its wake. And while that destruction has hurt me, both emotionally and financially, I’m far from the worst one hurt by it. It’s a situation that I’ve kept silent on to this point in the hope that it would eventually have a positive outcome. But I’ve now come to accept that those hopes were vain and futile. So now I’m going to share my story.

Note: Before I get any further, please note that there is another company named Capture Education based in the UK. This isn’t that company. The Capture Education I was a part of was based in New Albany, Ohio, USA.

The History of Capture Education

Capture Education started a number of years back. It was the brain child of a man who was a former high school guidance counselor and football coach. I won’t mention his name. It doesn’t deserve to be spoken aloud. Am I still angry? Damn right I am. But let’s move on.

This person formed Capture Education around an idea for changing how high schools and middle schools in the US do their annual teacher/student scheduling. It was a good idea. It still is. In fact, other companies have since appropriated this concept for their own scheduling software. The idea is to make student scheduling actually focused on – wait for it… – the students!

To understand why this is a revolutionary idea, you have to understand how most schools in the US work. It’s all about the staff. If Mr. Smith has taught 3 sections of Algebra I every year for the last 5 years, you can be damn sure that’s what he’ll be teaching the next year. It doesn’t matter that the needs of the students change from year to year. It doesn’t matter if one year only 30 students need Algebra I and the next year 140 students need it. Mr. Smith teaches 3 sections of Algebra I. That’s just how it goes.

(Note that this is an exaggeration, but only just barely.)

The next problem is guidance counselors. It’s not that they aren’t trying to do their jobs. There just is never enough of them. A report that came out last year reveals that the average ratio of students to counselors is 482 to 1. Given that students generally have about 2-3 weeks to figure out what they want, and need, to take next year, it’s easy to see that these counselors just don’t have the time to give students the help, and dare I say guidance, they need. In the end it’s generally left to the students to just open up the course catalog, figure out what they want to take, then the counselor just has the time for a cursory glance before moving on to the next student.

The last problem is the schedule. At many schools, the schedule is the schedule. It is always the schedule. It does not change from year to year. If Mr. Smith taught those three sections of Algebra I during 1st, 3rd and 4th periods this year, then that’s what it will be next year. Schools have their schedule, then fit the students into that schedule as best they can.

All of this typically leads to a lot of scheduling errors that have to be fixed later (often during the first couple weeks of school next year), a lot of students not getting classes that they want, and even students in danger of not graduating on time because they didn’t get a required class at the right time.

The Capture approach was different. We started by helping the students figure out what they could, should and want to take next year. There were a lot of factors that went in to it, but in the end we presented the student a filtered list of courses. We made sure they got the required courses they needed at the right times. And we showed students options for courses they wouldn’t have known they were eligible to take, such as Honors, AP and College Credit Plus courses.

An example result at one school was a near doubling of students taking Honors classes and a clear need to add multiple new foreign language teachers, among other things. The point was that schools that adopted our workflow learned how to change to meet student needs and wants instead of trying to cram the student needs into “the schedule”.

Where I Come In

I was not there at the start. Capture had been around for a few years. For a number of years, it was just the founder traveling around as a consultant teaching schools their method. Eventually, they decided to turn it into an application. A few people came and went, working on the app, until late 2014, when I was brought in.

The first gen app was OK, but it was dated and in great need of redesign and expansion. I spent the next two years working on the app, rebuilding from the ground up, adding new features, and slowly building up a team around the application.

At the height of our team, I had 4 developers, a PM/BA and a dedicated tester reporting to me. We had moved the app from dedicated hosting to the cloud. We had a full CI/CD across multiple environments. We were deploying fixes and new features several times a week. As a tech team, we were doing everything the right way.

The company was on a growth trend. We were adding staff left and right. We moved from our tiny offices to nice, new, large offices. We grew from less than 7 people at the time I joined to nearly 30. We made the Inc. 5000 list in 2015 and 2016, making #2 in the Education category, just behind Pluralsight. We were in the final stages of a buyout by a major west-coast ed-tech company. And that’s when everything fell apart.

Fire, Fire, Everywhere

Burn it all down, let the accountants sort it out

In June of 2016, we learned that not everything was apparently as it seems. You can read about it in this Inc. magazine post as well as this little blurb here. I’ll say nothing more on the “allegations”.

As a company, we faced a sudden and massive set of hurdles. The acquisition was placed on indefinite hold. A day or two later, we went from nearly 30 employees to about a dozen (a number that would shrink even further over the next few months as some were let go and others left on their own). The day after that, we had to move out of the nice, big, new offices that we had moved into just three weeks prior. A lot of stuff got abandoned, mostly furniture. We, as a company, were suddenly broke and homeless.

As the board tried to re-assemble the pieces and determine if the company had a future, the team that was left chose to work without pay for several weeks. Thankfully, the board eventually determined that we would continue and we received back pay.

One of our original investors, a local startup venue, gave us a big room for a month for free to help us try and get back on our feet. After that, we found a small office space for cheap and started pressing forward. We found a couple of investors who were willing to put in to keep us going to try and get back on our feet. We had hope.

We tried very hard for the next two years to turn things around. We had some great help. Without the help we got from certain individuals, we wouldn’t have lasted months, let alone more than 2 years. But in the end the hole we had been left in was too insurmountable for our team to overcome. We continued to shrink until there were 3 of us left. And that was when our funding vanished without a trace.

How Venture Capital Works

If you don’t know venture capital works, it’s really quite simple. Someone who has money gives it to a business that wants money, in exchange for certain things. Those things could be partial ownership, seats on the board, and so forth. The goal is that when your business grows and becomes successful, they cash out and make a bunch of money.

They go in to these situations knowing that 8 or 9 times out of 10, the startup is going to fail. So, often times, in exchange for their investment they want a certain amount of control. Sometimes they want a LOT of control. After all, it’s their money. They will usually also have other resources available for the business to tap into, like lawyers, educational resources, marketing and so forth.

For the people behind the startup, it’s a difficult position. They need the money to make their idea work. They want access to the resources the investors would provide. But they don’t want to lose control of their “baby”. Unfortunately, if they want to find success, they often have to take that risk. This can often lead to an adversarial culture between the two sides.

You may wonder why VC firms exist, given how often startups fail. The reason is that other 10% of the time when they don’t fail. When a startup is successful, it will often sell for tens or hundreds of millions of dollars. One article I came across states that the average successful startup sells for nearly $$200 million. For a VC that put in an average of about $2 to $5 million, that’s a huge profit that more than makes up for the other 90% failing. That’s why they do it.

When It All Goes Wrong

Though various studies put the number anywhere between 30% and 90%, the fact is that the majority of startups fail. You often hear about the massive company like Microsoft or Google that “started in somebody’s garage”. But those are the rare exceptions. Most startups fail. And what happens when that time arrives is not something that gets talked about much.

The article I referenced at the top mentions other business who never get paid for products or services they sold to the failed startup. That’s part of doing business. When you sell anything, you have to go in knowing a certain percentage will never get paid for. It’s unfortunate, but it’s part of selling anything.

There’s also the customers who no longer have access or support for their product or service. And it’s unfortunate for them because they’ve invested in a product or service and now they have little to nothing to show for it.

When a startup fails, there’s also a tremendous human cost. First, there are those who were there at the beginning. In most cases, the founders with the original idea not only had to watch control of their idea be given away in exchange for investment, but now they have to see their idea completely and utterly fail. They’ve poured years, perhaps decades, of their lives into that idea. And now it is all gone.

Then there are the other employees, those who have joined along the way. Some of them may have been there for years, and some (as happened to a couple people at Capture) may have been there for just a few weeks. These are people who are depending on a job, and all the things that come with it like a paycheck, and health insurance. They’re working one day, then suddenly they’re not.

A lot of families in America live paycheck to paycheck. Sometimes it’s their own fault they’re in that situation, but a lot of the time, it isn’t. They barely make ends meet. They need that paycheck. And now, without warning, it’s suddenly gone.

And when a startup fails, it can mean they never get their last paycheck. If a company is relying on regular funding from an investor, and that investor is suddenly gone, the money for the next payroll may never be available. For me personally, it means more than a month’s salary I will never receive. For certain others, it’s worse.

You see, when a VC decides they are out, they just pull the plug and walk away. It doesn’t matter that your people won’t get their last paycheck or two. It doesn’t matter that people suddenly have no health insurance. It’s a business decision, plain and simple. Depending on how much control of the company they have, they will grab and/or sell what assets they can to try and recoup some of their losses. But that usually isn’t much.

On top of all the financial implications are the emotional ones. There’s a certain kind of culture that often tends to form at startups. When you work for a big corporation, it’s just a job. But when you’re one of a just a few, you tend to invest emotionally in the company and making it a success. You feel like you’re important and that what you do matters (because it is and it does). And when it all goes down the tubes, you’re hurt far more than just financially. It leaves a bit of an emotional scar that takes quite a while to heal.

It’s All Broken

The startup/venture capital system is far from perfect. In fact, it’s largely broken. But there really isn’t a good alternative. Banks don’t lend money to businesses unless they can prove they don’t really need it. Government loans can be found here and there, but they’re often limited in scope and availability. Public and private grants often require so much effort to apply for that it ends up being cost prohibitive. So what else is left to founders besides venture capitalists?

There has to be a solution that can be found that still allows for the investing, but with some accountability for the VC firms and others who contribute to a company. I don’t know what that solution would be. It will take a smarter man than myself to figure it out.

Don’t get me wrong. I’m not entirely down on VC firms. If a certain firm hadn’t stepped up when they did, Capture would have folded two years ago. But the system in general is broken. And something needs to be done. Someone smart come fix it. Please?

Fin

To be honest, the whole point of my writing this post is to help with my own emotional healing. I poured my heart, mind and soul into Capture Education for nearly four years. It was a company I saw myself working for throughout the rest of my career. It was the first time I’d ever felt that way about any company or job. Now it’s all gone, and it’s going to take a while for me to get past that. But I will. And so will everyone else, eventually.