How to fail gracefully

Of course nobody wants their startup to fail, but the fact is that it happens and it’s a completely normal part of company building. Investors understand this and realize that failure is often a part of the process.

If your company has failed, make sure you go out of your way to let all of your investors know what’s going on. At Techstars, part of our Code of Conduct is to communicate with your investors at least every six months. Even if the news is bad, it’s important to keep the lines of communication open. Your investors have poured time, money and energy into your company, so they’ll appreciate your transparency—and be more likely to work with you again in the future. Ideally you’ll let them know how it’s going well before you let them know you’ve failed, as they might be able to help.

Many companies that aren’t working never formally get shut down. The founders go on to do other things, their email addresses change, and the failed business is never officially declared dead. They stop communicating with their investors and never give them any notice of the company’s outcome. Investors then eventually have to spend even more time and energy trying to track you down, and that’s not something you want either.

Instead of just going silent, it’s best to let your investors know exactly what happened. That way they can take the write-off and move on, rather than continue to carry something on their records with an uncertain status that appears to have little or no value.

In some cases, founders might feel like they’ve closed the loop because they reached out to someone in the investor’s organization to let them know the company failed. However, if that person is no longer with the organization the message will probably never get relayed. So it’s really important when you’re failing that you make sure you’re talking to the current leadership at the investor organization. You never know what might happen – some organizations, like Techstars, have entire teams of people that can help find a soft landing in some cases.

Failing is a normal part of startups. When it happens, the key is to shut down gracefully and communicate well with your investors. Not only is it the right thing to do, but you’ll also be leaving the door open for future interactions.

Let me know your experiences with failure and dealing with it in the comments.

Thanks to Don Loeb and Laura Kennedy in the Techstars corporate development team for reviewing this post. Laura chimed in that “The message is easier to deliver when you’re saying ‘thank you for walking with me’ rather than ‘I’m sorry I failed.’ It goes a long way in garnering support for the next venture.” Exactamundo.

file under: Startups

18 responses to “How to fail gracefully

  1. If something is not going well, I actually tell my investors first since they help me figure out a solution! One example that comes to mind: My board meeting materials were terrible before. I remember telling one of my investors this is a growth area for me and asked him how I could fix the problem. He helped me by sending me his board meeting template, which I used – my next board meeting materials were received so much better! As you know, you were that board member 🙂 Thank you, David!

  2. Love this topic. It’s a favorite of mine. I’ve learned so much from failing. A lot of success, in my mind, comes from failure. A lot of falling on your butt, practicing, practicing to get it right. I love being coached for that same reason.

    Success doesn’t always create introspection and so there’s missed opportunity for iteration. But failure requires introspection, learning and change.

    If something is a surprise to an investor – and it’s material – it’s too late for them to make an impact. But if an investor or a board member or a mentor are a partner with you along the way, there’s opportunity to learn and iterate and less of a chance for either crisis or being alone.

  3. I know failure hurts, you want to crawl under a rock and not talk to anyone (and I know you know this, since you were there), but communicating openly about it is not only the right thing to do; it actually is an important part of the healing process.

  4. An observation that I’ve made on my own communication patterns is that the more time that passes between interactions the “heavier” the interaction feels. In other words if it’s only been a few days or a week since the last time I gave an update then the next update feels pretty casual, but if it’s been a month or a quarter or a year all of the sudden the tone of the update becomes very formal. As that length of silence increases, the implied formality or perfection of the response increases as well, and a side effect is that the “activation hurdle” to break the silence also increases.

    The logical antidote is to make your updates bite size and frequent, and in an ideal world your investors feel like they are always current.

    1. great point. i love it when i get frequent small updates, and i feel like i can help more as well.

  5. The entrepreneurial journey is different for every entrepreneur. Some have great financial success on their first try. But for many (most?) founders, they get a bit better every time they do it. That inevitably means that their first attempt or two may not be successful in terms of financial outcomes…but that doesn’t mean that their investors will abandon them for lack of success. In fact, quite the opposite…if an entrepreneur puts in the work, acts ethically, is a good leader, and has strong interactions with investors, then in many cases this is all an investor needs to be very eager to have their back and invest in that founder again in the future.

  6. When I knew we were doomed, after talking to leadership we immediately contacted our investors with whom I sat with face-to-face. (They were willing to put in more money, however that wouldn’t have helped.)

    Then another face-to-face with investors and a co-founder to talk, answer questions, look for lessons, explain what’s next.

    Communicated to the team.

    Blog post went up.

    After a few weeks I even went on a podcast and had a 45m discussion on the whole process of “failing” and shutting it down:

    All the while I kept my attention on my own mindset thanks to @rebootHQ’s self guided courses and chatting with @FAKEGRIMLOCK.

    After 8 weeks of official mourning I started writing code again.

    I help one co-founder with his new project, have lunch and dinner with our investors, and chat with the rest of our team still even though it’s only been handful of months.

    Why? Because my mission still has not changed: I want to retire with these people.

    1. i bet that was super cathartic and you probably learned from doing these things too. did any of those investors fund you again in the future?

      1. Cathartic to say the least. Attack the challenge head on and all, not letting anything fester, and identifying clear failures/misses/etc.

        The investors *will* fund in the future, and, until then, one asked me to be a part of *her* startup as Advisor/CTO-in-the-interim.

        Biggest key for me/us was recognizing trust as the key currency to, well, everything.

        Yes, the money is tangible, too no doubt, yet being able to go to dinner and still laugh with each other — even being asked to work with one of ’em — keeps our streak of growing together unblemished.

        Because of this, I/we/they don’t have to forge another set of relationships from scratch to get to where we *still* are, even after failing.

        Now, though, it’s time for the goddamned winning adventure!

  7. Thanks David! Another point is that if you reach out before it’s too late, you might actually get help from your VCs in terms of changing your path, helping with an acquisition, etc. Give people time and you never know what might happen. Also, if you share your struggles publicly, sometimes good things happen – see this post from Palleter and read the update at the bottom!

  8. Difficult conversations are anxiety-inducing. Avoidance does not diminish the fear but often fuels it. Action cultivates courage. Through acts of courage, we emerge as stronger, more resilient leaders.

  9. I know a founder whose first 2 companies failed. He’s on his 3rd startup now, and investors from his first and second company are funding the 3rd. The primary reason is because he’s a great communicator and he respects the investors’ money. Good communication habits should develop when the company is healthy, but when it’s not doing well, communication should double, and even include 1:1 conversations with your investors to let them know exactly what’s going on and what your plan is. Waiting until after the fact will burn bridges. The other thing this founder did was respect the investors’ money. As soon as he figured out it wasn’t going to work, he stopped taking a salary, laid off all the employees, and got out of his lease. The idea is to return as much capital as you can to the investors before you burn in down to zero. This shows respect for their investment and their belief in you as a founder. Failing is tough, but great entrepreneurs can maintain a great reputation through tough times by respecting the investor.

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