Venture Capitalists typically classify their investments into these 4 categories:
1. Freakin’ Home RUN: Companies that generate 10x – 1000x returns
2. Modest Success: 2x – 10x returns
3. Outright Failure: Loss of most or all of the principal invested
4. The Living Dead: Companies that are not bad enough to shut down, but not good enough to grow or get to the next level
#1, #2, and #3 all have a finish line, whether good or bad. The Living Dead is an ambiguous category, the twilight zone, the grey area between life and death where things just seem to drag on. One of the startups I did many years ago, Xuqa, was in zone #4. It was a social network focused on casual games with around 2 million users. It was somewhat profitable, small, and had flat-lined growth. Interesting enough to keep it going, but not really going anywhere. Right Smack middle of the twilight zone.
Some of my other friends are in the same place with their startups. They’re making some money, or have a little bit of growth, but not really going anywhere. They have outside investors that want a home run, not a lifestyle business that generates steady returns. They’re stuck with a product that isn’t going anywhere, all the while watching companies that started after theirs getting sold or going IPO.
I believe that the most important asset us entrepreneurs have – one that we must absolutely treasure – is our time. Our golden years, our productive time, is far more limited than we think. One of my co-founders got married last year and had a baby. He effectively no longer works more than a few hours a day. It will be several years before the baby grows up so daddy has time to do another startup. Several college friends failed at a startup, and then no longer had the financial freedom to do another. They ended up getting jobs. It will take significant outside investment, or several years of savings, before they can quit their jobs to do another start-up. Individual circumstances vary, but the general point is true: all our years are not the same, and the ones where we can do a startup with real freedom are preciously few.
Cherish those golden startup years. Cherish them as if they are your greatest treasure. Don’t waste them with the living dead.
If you are running a start-up that is in the twilight zone, here are some things that could work:
1. Spin it off to someone else who can run it, and get whatever value you can for it today. I did this with Xuqa which allowed me to focus on Peanut Labs. Peanut Labs would not have existed had we not done that.
2. Cut expenses to the bone and maximize cash flow. Living-Dead start-ups do make some money, just not enough. They have a lot of fat. If you cut expenses to the bone, fire most of the staff, shut the office and work remotely, you can probably triple or quadruple your free cash flow. This can become the salary you never took, or given as dividends to shareholders, or pivot into something else. If a company has some revenue its often surprising how it can be maintained with very, very few people. Fewer than you think.
3. Raise more capital, and let someone else run it. Raise a bigger financing round based on some new direction that you can take the company. Hire outside experts. Nominate a CEO. Transition out. Ofcourse during this time the new direction you took could suddenly be a hit, and you can choose to stay.
Whatever you do choose to do, do something. Don’t let a zombie suck your brains out. There’s only so much to go around.