Train Tracks

So the start up world has been abuzz this month with news of the sudden and, to many, shocking closure of Zirtual – a large and obviously financially unsteady virtual assistant employment platform.

I’m not going to take the time to go into the details of why it shut and why it’s unfair to the workers, the customers or any of that.

There are great articles on the situation here and here, and lots of other places – for those interested.

Needless to say, a few things are obvious from reading about their situation, including that the CEO, Maren Kate Donovan, handled the process about as poorly as any corporate meltdown/change/product launch anybody has ever seen.

To an outsider, it was Zune-worthy. It was the Hindenburg of corporate communications.

But I am only an outsider and I’m sure they had some reasons, however bad, for keeping the pending implosion a secret right up until the moment everybody got as screwed as possible.

That’s one issue, and I’m going to leave it aside here.

To me, there is a much bigger issue – and it goes to attitudes to failure, which in start-up land as so artificial as to be almost comical.

If you were the CEO of an $11 million a year company, with 400 employees and many loyal customers relying on you, and you had just steered that ship straight into an iceberg, what would you say?

Sorry is a decent place to start. You probably wouldn’t send an email and then go silent for a day or two, while your employees, customers and stakeholders are left wondering what the hell happens next.

So what did this CEO do, other than the second part?

She did kind of apologize, as part of a very egocentric, saccharine and to me, extremely disingenuous article written for Medium (you can read it here).

Firstly, in making a public mea culpa, your first words are not “Firstly, let me start by telling you a story…”

If I’m one of the many people screwed over in this collapse, I’m probably less likely to want to indulge you and tell your tale of hope, realization loss and hopeful redemption. I don’t care about your problems, because I’ve got many more today than I had yesterday and that is 100% due to your failure to run a business, and subsequent campaign of misinformation about its financial position.

But we move on.

She proceeds to tell us about how her dream was realized; how now “I live in a nice house that my boyfriend owns.” Like how she added those extra four words there? Take that creditors! You want my assets? Good luck!!

If you were writing this letter, you probably wouldn’t continue from this point of moral ascendancy to spout rhetoric about how difficult the last week has been for you – so many late nights in your boyfriend’s pricey Silicon Valley pad.

You probably wouldn’t continue the article by bemoaning the fact that poor you were running a business model that paid out more money than it took in. See, you are really the victim here. Because your topsy-turvy business model should have been embraced by a Silicon Valley investment community keen to flush more cash down the proverbial toilet, right?

And because they chose not to, that’s their fault.

“And at the end of the day… “burn” is what happened to Zirtual.”

I have so many problems with this justification, because OF COURSE Zirtual ran out of money. By definition, it had to be burning money because otherwise it would still be operating as, you know, a business.

But Zirtual wasn’t a business. It was a pyramid scheme. Like most Silicon Valley start ups, Zirtual was a funded gamble, raising more and more money at higher and higher valuations, aimed at maybe one day becoming profitable and repaying bid dividends to its investors. Thus, as it continued to spend more money than it attracted, it required more investment.

This is completely normal for an early-stage company. Jason Calcanis, an investor, has said that he thought the company would be profitable within a year (further, he said, if approached, he would have invested more money).

Companies go broke all the time. Especially in Silicon Valley, where moon shots are more commonplace and get funded at a much greater rate than anywhere else, at least 80% of companies are expected to crash.

Failure is not only accepted these days, it’s in fashion. Many hyper-successful founders had one, two, or more failures on their resume before they hit the big time. Failure is seen, quite rightly, as experience-building and preparing them for future success as you learn and get better.

This is not an article about failure.

This is an article about lies, betrayal and the kind of misinformation that in many industries or sectors of society would land you in jail, but in start ups seems to be commonplace.

I don’t understand it, but it isn’t for a lack of trying.

If you walk into a bank tomorrow and ask for a loan to buy a house, the bank will ask you a series of questions like: “how much do you earn?” “do you have stable employment?”, etc. They will also need to inspect the house, so they can be sure of the value of the asset. For start ups, whatever a pitch deck says is, at that time, the reality. If you can get an investor to believe what you’re saying, you’re most of the way to landing that investment.

Naturally, a bank wants to ensure that its investment is safe. This is why if you lie on a loan application, you can go to jail for fraud.

If a public official lies in order to win an election, that’s called corruption and they can be sent to jail. If a witness lies in court, we call that contempt and send them to jail.

But in the start up world, evidently we expect people to obfuscate, to mislead and to tell half-truths. Not only is it expected, but apparently it’s completely OK – as long as you write a big explanatory post when the whole enterprise blows up in your face.

The Start Up Podcast is a hugely successful weekly narrative-style show that follows a start up business each season, chronicling the ups and downs, in and outs of a funded start up company. In the first season, Alex Blunberg recorded his own journey from journalist to founder, with a warts-and-all journey into the creation, funding and expansion of Gimlet Media, his parent company.

It was an enthralling show, which has drawn audiences in the millions.

The season two follow-up started in the famed Y-Combinator incubator, where hopeful founders vie to accelerate their ideas into bit businesses in the course of a few months, before securing venture capital and following the giants – like AirBnB and DropBox – all the way to mega stardom.

The company selected was ‘Dating Ring’, a New York-based start up that aimed to use technology to match people to go on dates.

Now, the dating business is notoriously difficult to enter against large, entrenched, competitors and it’s no surprise that the company didn’t become the next Match.com, if for no other reason than the founders seemed to spend most of their time on any and all activities other than building the business.

One such time-sink was their incessant focus on raising investment funds. Like Zirtual, Dating Ring had an immense burn rate.

In start up land, it’s much easier to seek and obtain new investment capital than it is to actually try to grow your revenues and become profitable. And this has become a desirable outcome for founders intent not so much on building businesses, but on building things that another profitable business will want to buy.

Instagram had no revenue before Facebook bought it for a billion dollars. YouTube was burning tens of millions of dollars a month before Google picked it up for $1.6 billion.

It’s a touch perverse, but revenues are only one way of valuing an early-stage business. Its value as a strategic asset to another company can be multitudes higher.

So if Dating Ring’s goal was to be acquired by OK Cupid, then maybe – maybe their priorities would have made sense.

Except it wasn’t.

Instead, if you listen to the show all the way through, you will hear many exhortations of how bad the business is performing in terms of declining revenue, stagnant membership numbers, increasing customer dissatisfaction and comments about how difficult it all is.

But then, without even a segue, you’ll hear one of the founders giving an investor pitch that paints a markedly – some would say wildly – different picture.

Even at the very beginning, at the YC Demo Day, one of the founders admits that she didn’t really believe the idea was working, so she was amazed and impressed that the presentation sounded as convincing as it did.

In a later episode, as the bank account is running critically low and once more one of the founders is jetting out to drum up an investment, the sense of relief all around is palpable when they decide to pull the plug and transition into a ‘lifestyle business’.

So the series ends, all ‘hunky-dory’ and wrapped up in a neat little bow, right? They had a go at making a big company, couldn’t make it work so decided to chill out and build a mini business instead. After all, they don’t really want to be Google – they’re just really into matchmaking.

I’m sorry – what?

A few hours later you were going to make yet another misleading, disingenuous, dishonest investor pitch and that’s somehow OK?

Since when did pitching investors become about the sizzle and not the sausage? It’s one thing to convey your story in a positive light, but to out-and-out misinform about where you think the company is going (I’m not saying ‘lie’, but it’s clear they felt morally queasy about it) is a completely different beast.

When does it become no longer OK?

If your company is two weeks from collapse (barring a miracle) and you tell an investor “we just need some additional funds to get to a critical mass of subscribers” is that a lie?

When you inevitably collapse two weeks later and their money evaporates, I imagine they would think so.

When you accept $1000 from a customer for your virtual assistant service hours before it collapses in a heap, are you being dishonest?

Yes.

So back to the ‘lifestyle business’. Dating Ring took at least $350,000 of investors’ money, including from at least one of the founders’ mothers.

Those investors bought into the vision they were sold by the founders of making Dating Ring a big technology company.

The founders, for whatever reason, fell chronically short of this vision – from their first pitch, they knew it wasn’t right.

Yet on the podcast these founders are lauded as exemplars of start up best-practice; perhaps because the producers had come too far to start again with another company, but it’s nonetheless destructive in perpetuating the myth of Silicon Valley that failure is ok, as long as you tried.

Why? Because they didn’t fail fairly and they didn’t fail honestly.

They sold a version of their company that was wildly unrealistic, they let investors put money into the company on the promise of a vision that could not be realized and then one day, they decided to pack up and stop trying to grow.

Those investors will in all likelihood never receive their investment back, yet they are not even mentioned in as victims of the collapse of the company. The show instead focuses on the fighting, the struggles and the emotion that the founders experience – all very real, far more real than the business they were selling in their pitch.

The bottom line is this – they constantly decried the fact that nobody would give them money, while at the same time admitting that they lacked faith in the vision. If they’d admitted that to an investor, I wonder whether they would have opened their checkbook?

There are a lot of commonalities between the approach of founders of Dating Ring and Zirtual. Both demonstrated a tragically poor ability to manage money and understand basic mathematics.

Both were extremely headstrong and unable to adapt their concept to become profitable.

And both thought of themselves, above all, when everything went awry.

So we flash back to the open letter from Maren Kate, where 393 words in we find the first mention of any contrition, where she professes that “[t]his outcome breaks my heart”.

She has “deep sorrow” and cries like “someone whose child has been ripped from her arms”.

Does she say ‘sorry’?

Of course not – why should she?

This is Silicon Valley, after all.