In October 2014, Wall Street Journal wrote about how, in strong startup markets such as San Francisco, as funding poured in, entrepreneurs were overspending on rents, wages, marketing, design and other functions.
Fast track to now, and the media has been abuzz this week about how virtual assistant company Zirtual, with over 400 employees and an $11 million run rate at its peak, pulled the plug with a 1:34 am email. CEO Maren Kate Donovan cited a “burn” situation where it spent more than what was coming in as the main reason.
Zirtual’s “pausing all operations” sent waves of concern through the startup and funding community. Will there be many others going through a similar situation of growing too fast and not being able to keep up? Will this be similar to the dotcom bubble and its subsequent bust? With US IPOs hitting highs previously only seen when the dotcom era was at its peak, are we going to come crashing down soon?
Thanks to Startups.co’s 11th hour bailout of Zirtual, it will be back in business.
For many other startups, it is not too late to fix what could potentially lead them down the same path. There are hard lessons to be learnt, and this could be the start of reinvention for growth for many on our shores.
A PAGE OUT OF THE CORPORATE HANDBOOK
One of the main reasons big successful corporations have maintained global leadership and success for decades is their adherence to processes and systems. Agility, the fundamental reason startups succeed, is often why they come crashing down too.
While the adoption of a complete corporate style is detrimental to entrepreneurial and startup spirit, constantly trying to “get things done quick” and grow fast is not ideal either. A middle ground has to be established for resource efficiency / alignment and structured growth. Processes and systems are not sexy and are cumbersome. But, it needs to be done – in a manner that suits each organisation.
Back in October 2014, while I was at the Springboard Enterprises’ A Week with Springboard event and the Winners Circle Awards Dinner in New York, the talk of town was scalability – the challenges faced, the pain points most businesses experienced and tips for managing it. The consensus was that how a company scales its product, revenue, people and infrastructure to growth has profound impact on its long-term sustainability and survival.
The five to seven year timeframe is one of the trickiest for most entrepreneurs. If you don’t scale quick enough, your revenue doesn’t match incoming funding and if you do, then it’s too fast and you could potentially burn out like Zirtual.
Finding the middle ground is the key to success. The guys from Atlassian, who have done this really well, recently talked about how in their seventh year, they changed business practises to avoid burning themselves and their staff out.
The hard pace established early on, the never-ending new customer deadlines, and constantly chasing one’s tail is bound to plateau out if the business isn’t reverse-engineered at some level for future growth.
PRICING FOR PROFITS
The pricing strengths that define startups and fuel their success could be the very things bringing them down after a few years. When Zirtual started, it only charged $US99 a month and later, stayed loyal to the plans – costing it revenue.
Zirtual is not alone in this space. 71 per cent of US companies that had their IPO in 2014 were unprofitable. Many tech startups hope for potential buy-outs by the Googles of the world, while biotechs are hoping to cash in with new drugs invented in the future.
A solid pricing and profitability strategy is the only way to survive in the long run. If the company is growing 50, 100 or 200 employees each year, the pricing margins have to be evaluated against this growth.
PEOPLE ARE YOUR FIRST PRIORITY
One of the biggest shocks of Zirtual’s announcement was how even its 400 odd workforce found out on a Monday morning via an email. People took to social media in angst against CEO Donovan who they felt could have given them some indication earlier on.
What most companies who have survived the industrial revolution, dotcom bust, the GFC and startup growing pains all have in common is how well they have treated their people. Very rarely does a startup manage to maintain its culture right through growth to financial exit or IPO.
As money gets raised, there is a danger of teams operating in silos, miscommunication and tougher expectation management. Ultimately, unless it is merely selling its technology, the very foundation the startup is built on and its people will make a big difference to the end game.
We have always lamented how Australia is behind the US in trends and pace of the market. In this instance, I am glad that as community of startups, entrepreneurs and investors, we get a chance to take a step back and learn from Zirtual’s unfortunate circumstances.