Is My Startup Failing?
Joining a startup is not a sure bet. In fact, many fail every year. And it’s not just because they weren’t able to get off the ground or raise their first few investment rounds.
Even larger, more established scaleup businesses can also fail. Wonga and Theranos are just two examples which show how spectacular the fall can be. But failure isn’t always down to fraud or poor management. In many cases it is because the business failed to become sustainable early enough and simply ran out of money.
Is it possible to identify potential failure and leave before it is too late?
Many startups are loss-making and may look or sound as if they are doomed to fail, particularly in the early days. At the same time, they are trying to do something new and innovative and because of this investors are willing to back them against the odds. This can make it very hard to figure out whether a business is failing or not. Be aware that as an employee you may not be able to see what investors are demanding and how close to failure a startup is. Of course, big public capital raises add a level of euphoria, but many businesses also keep quiet when they raise investment.
5 things to watch out for
A sharp cut to perks
Most startups will have the ping-pong table, free lunches, beer on a Friday, and a big summer party to entertain the young staff. But if there is a dramatic cut in these benefits, it is likely that a level of company belt-tightening is happening. As the overall cost-savings are small, this can be a sign that things are getting critical.
The office move
Many of us have seen companies move into swanky new offices as the business starts to do well. Moving away from the basement of a soon-to-be condemned building to a glass high-rise in a central location is a sign that there is plenty of money to pay rent that may exceed £1m a year. But once a business starts to struggle, scaling the office back can have a big impact. This does depend on whether it’s possible to get out of the tenancy agreement. And often founders will move only as a last resort, as for many of them success is linked to where the business is located. So if there is talk of moving to a smaller office in a cheaper part of town, things are probably looking bad.
Founders and senior staff leave.
Founders and senior staff will have stock and options that will be under vesting arrangements. If they decide to voluntarily leave, they will often lose their stake in the company, if it hasn’t already vested. Founders and senior staff are unlikely to do this if their shares have significant potential value, so they will only be doing this if they have much better jobs with much better options to go to, or if they have seen the writing on the wall.
Hiring freeze or redundancies
A hiring freeze is not always a bad sign as it may be due to an investment round being slightly late rather than the company running out of money. But if a startup stops hiring people to replace those who have left at a certain point it will stop growing. Similarly, redundancies may not always be a bad sign if the company has grown too fast and taken on more people then it really needed. See what type of hiring freeze happens. If critical roles aren’t being filled and more and more people are leaving, then you may have a problem.
The company takes on debt
If a startup which is loss-making, starts taking out loans rather than raising equity investment, this may be a good indication that it is struggling. Borrowing money is always possible if a business has assets and the lenders will be able to claim those assets if the startup fails. However, if a business is profitable, borrowing money is an expensive way to fund growth, and loans will have to be paid back at some point.
3 tips to help you protect yourself
Check Companies House
Companies House has filing history of accounts, statements of capital, and details of securitization and loans. Some of these documents can be quite hard to understand but if accounts are filed late or there is evidence of significant lending against the business that should help you assess the size of the problem.
Talk to your colleagues
Senior staff are more likely to know what is going on as they probably sit in meetings where financials are discussed. They may also have experience of seeing this kind of thing before so are more aware of some of the red flags. Although we don’t recommend getting involved in office gossip, you’d be surprised what you can find out from colleagues, particularly those who work in the finance or compliance departments, who may be closer to the inner workings of the business.
Start looking early
If you think your startup is failing, then don’t leave it to the last minute to start looking for another job. Towards the end, morale in the company will be at rock bottom and this will affect you when you start looking elsewhere. You may find it hard not to come across as negative in interviews or you may take a job you don’t really want in desperation.