How to tell an investor your business has failed

I was looking at my traffic the other day and saw that a few folks were getting to my blog looking for a guidance on how to tell investors their business had failed. I don’t know if it was a sixth sense or something, but one of the companies that I’m involved in recently failed and I am working on exactly the part of the problem to tell investors the business has failed.

First off – be transparent. Remember, startups are emotional beings that you birth through a long and arduous process. Your identity is wrapped up inside of them and your whole being is tied to the startup through years of hard work, hours of worry, and unimaginable trials and tribulations. When it is said and done though, it is just a company. When the business fails, you are immediately severed from the business and only your personal actions will be remembered.

There are loads of things to think about and issues to balance, here are some insights for what your investors are interested in. Please balance them with everything else you’re balancing. Your investors are not your boss. They’re your business partners and should be treated as partners.

  1. If it’s unexpected… have a clear explanation of why it’s unexpected. Worry not so much about who fucked up – worry more about what got fucked up.
  2. Is everyone walking away a loser? Hopefully not, not all business failures have to mean that the bank accounts are negative. Hopefully you found that the business concept wasn’t viable and are going to return the remaining capital to investors. They’ll probably invest again on the next idea if you do. If everyone is a loser, that’s fine – if there’s a lot of strange reasons why some people are losing and some people aren’t losing as much or at all, this is complicated and the more honest and transparent you can be about why this happened the better. If you made a special provision for an investor because they were adding real specific value that’s ok, but now’s the time to bring this up – if that investor is not losing as much as everyone else, it’s good to remind everyone that they knew this information when the investment was made (because you told them right?)
  3. What are the employees doing? This one may not seem as obvious. Your investors are asked ALL THE TIME for help finding talent. If you’re stuck turning away some great talent, prepare a small dossier of the team and their top talents for your investors. If they”re already spoken for let your investors know. Ensuring more people walk away employed is a win for everyone.
  4. What are the founders doing? This may be different for each founder, but it’s important for investors to know. Similar to #3, they can help with jobs, entrepreneur in residence positions, a co-founder opportunity, or the card of a great psychiatrist or travel agent. Seriously, your investors made a huge bet on you as a team. Give them the opportunity to easily offer assistance to the team even though the business concept didn’t work out. Remember they bet on the team to try out that specific idea. If the idea wasn’t a viable business… that doesn’t mean the team is terrible.
  5. What about the office and equipment leases? This has a lot of reasons, someone has to cover these payments if any still exist. If you’re lucky enough to be able to walk away that’s even easier. If you can’t walk away from your lease… perhaps getting another startup to sub-let until the lease runs out will work. Your investors may know a team looking for just such a deal.
  6. What is being done with the tech? Similar to equipment, can any of the tech be sold? Can the users or traffic be sold? If nothing is sold, what is being done with it? Can it be put into the open source community and add value?
  7. What is being done with the patents? Similar to tech, is there any IP that can be monetized? If not, who is going to be assigned the rights to the patents when the business goes away?
  8. How are all the outstanding legal bills being paid? This one isn’t as rosy as sub-letting past due legal expenses isn’t an easy thing to do. Investors want to know you’ve thought through all outstanding commitments.
  9. Who’s credit cards still aren’t paid off? Same as the one above.
  10. Lastly – stay in touch… you’ve established a business relationship with everyone of your investors. They were just as committed to you as you were to them. Don’t think of your investors like you would an old boss who ‘had’ to support you. They’d be happy to hear about your next project whether it’s yours or another person’s idea.

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