For start-ups, the ghost of failing will be lurking around for some time, at the beginning or for the first few years. It is sad to see how many start-ups founders see themselves in a situation where they have to quit as shareholders and see how their work and investment practically goes to the trash. Well, there are a number of things founders can do like hiring a temporary CEO who has a good record saving companies from distress.  And as many start-up founders know, they don’t start making money until all investors are paid off, and that demotivates the founders into continuing the business. So, when a start-up is struggling nobody really wants to do anything about it and nobody wants to get their hand into muddy situations.

A lot of times this is caused by a failing management who did not know how to pace growth throughout time and did not know how to convince shareholders about the way they were going to be the big company they promised. When this happens, the priority of growth should be analyzed and in that way even benefit from an exit with a good valuation for the company. Here are some tips to manage a distressed start-up into life again or how to benefit from the closing of the company.

Good structures

The real meaning of this topic is that the founders cannot do everything by themselves and they need to know how to delegate responsibilities. Human Resource costs are the ones that go very high when there is no correct delegation causing a big amount of money to be invested in employees that may not be needed.  The idea is to have a good structure to delegate responsibilities and document every little thing that is possible to document. If founders have to be involved in the daily life of the company, something is not going well. Standards and good procedures are needed and an executive group that can manage things without the need of the founders and their presence. Also, if the founders’ ego gets in the way of the hiring process, there will be a very high turn-over and that will make it almost impossible to have good structures within the company.

Having good structures assures the investors that even though the start-up can go through difficult times, it will have the necessary teams and structures to keep floating and recover in time.

Have a plan B for growth

Of course, everybody wants to grow and to be the next General Motors or the next Google. Of course, nobody sets up a company thinking they are not going to grow or they will just reach a certain point and stay there. Of course, and this is very important in order to reach high goals. But you need a plan B, especially for your investors.  Founders should meet with their CFO and design a plan B where growth is big but not as expected or promised. The idea is to show investors and shareholders that the company can run with the minimum staff if it is necessary. Remember we said that HR costs are the ones that go higher in every company, in distress or in success. If this plan B is clear enough, investors will be sure that the company will survive even though the worst case scenario arrives. If there is monetizing, the company can be turned around.

Transparency

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Key Performance Indicators are very important for any company and for any investor.  When you as a founder know and understand your KPIs you will know when customer lifetime value is lower than the cost of customer acquisition. Here, insisting on growing is just not the best idea, but being transparent is.  The founder should openly tell investors about this situation because if he or she does not do so investors tend to get angry at the founders thus leading to another problem to solve. Doing so can save you the trauma of being the guy that allowed everything to down spiral and didn’t even tell people about it. Better yet, investors may even get on the boat of alternative strategies if they are reachable and well communicated. For example, if the Start-up decides to focus more on profitability rather than growth and starts to have good cash flow it will be attractive to small and middle-sized  equity funds

As you can see all these ideas will always be in favor of founders. If the start-up has a strong team and very well designed structures investors will get on board immediately even though there are risks involved. And even better, if you know that in the long run, the business will not need investors it will make it easier for you to sell the idea to people who want to get on board.

Be sure to also read this article about how normal courts and bankruptcy courts differ.

* Featured Image courtesy of Startup Stock Photos at Pexels.com