My Hard-Earned Lessons From Negative Exits

The emotions we feel when “turning out the lights.”

Several times in my investing life, as the final board member making the arrangements to dispose of remaining assets, I have literally been the one to turn out the lights, carry out the documents, books and records to my car, and become the only remaining contact between the failed business and the investors, bankruptcy court, or creditors.  I volunteered to do this several times when there was no-one else, even the founders, to do this.  And these were emotional experiences to say the least.

We ask ourselves “what if?”

In aviation circles, we read in our pilot magazines about “Never again!” or “I learned about flying from that.”  Pilot-authors tell their stories in the first person, and all of us readers slow down to think while reading of these events, wondering “what if” or whether this could happen to me.  And if it did, would I have reacted differently?  Most importantly, we think: ‘Now that I know this, would I behave differently if it did happen to me?’

How about the entrepreneur -founder?

Professional investors rarely attach a red letter upon a failed entrepreneur.  In fact, if that person can tell their story and relate the lessons learned clearly, there is a positive response many of us will make to the next pitch from that person.

Investor pattern match

We who invest look for patterns from previous experience.  Some of those patterns help us to spot and avoid problems we have seen play out in the past, often to disastrous conclusion.  We learn to worry over obsolete inventory, too rapid hiring, failure to spot industry trends that make an offering less attractive, and so much more.  Most of us can tell specific stories of losses that led to these expensive and gut-wrenching lessons.

Here’s a near miss that just happened

I just helped an entrepreneur to consider reorganizing his young business from being a value-added reseller into a software and consulting company.  It would not be handling the expensive hardware that is part of its required sale at all, other than to recommend alternatives and charge for coordinating the purchases of differing supplier products, oversee the installation. It could then charge for setting up, integrating, and training the company’s software, all because its customers would not know how to do any of these important tasks.

This follows from my previous insight: “Where there’s mystery, there’s margin.”

Asa result, the entrepreneur could avoid a fundraising effort, reduce working capital, make friends with the salespersons of multiple companies that could supply leads and references, and become instantly profitable.

Some fatal elements that might become only a near miss

So, what if that startup could not have raised funds? What if it had a hiccup in collection of payment from a large hardware order?  What if the hardware manufacturer had serious problems with product quality on site?  All these things which could have driven the company out of business when betting very large amounts on other companies’ hardware would be avoided.

Why do we tell this story?

Turning out the lights from a company following an existing business plan to extinction teaches us lessons.  Pre-thinking alternatives to the events causing the negative exit might just prevent it.  Which would you rather do?