How my first startup went bankrupt overnight

How my startup went bankrupt overnight

The story of how my startup went bankrupt starts 21 years ago when I graduated from University with a Physics diploma in my pocket. After searching the job market for 6 months, I finally landed a job as a junior software developer at a software company in The Netherlands. For the next 4 years, I honed my skills and became proficient in Microsoft technologies.

I worked at Vision Software & Services, a small startup in the heart of The Netherlands. It was there that I met my future business partner Menno, the art director who ran the design department. We became friends over many shared projects.

In 1999 we decided to take on the ultimate challenge: we both quit our jobs and started a company of our own: Designstate.

Reach for the stars

screen-shot-2017-01-07-at-18-05-29At the time a lot of companies specialized in offering either IT solutions or design work. If you wanted to have a website built, you’d have to get the design from one company, the hosting and backend programming from another, and hope you could find a competent third party to slice the design into responsive HTML.

Our solution was to put everything under one roof. Menno would head our design department, and I would head our tech team. Our slogan was: we provide top-notch design and technology. On each project, Menno and I would combine designers and software developers, have them work together and learn each other’s language.

The strategy proved to be wildly successful. Our clients loved no longer having to deal with three agencies.

screen-shot-2017-01-07-at-18-15-01

We grew like crazy. From 2000 to 2003 we experienced exponential headcount and revenue growth. At the start of 2003, we were a 12-person team, with a nice office in an upscale town in the heart of the Netherlands, and we were looking at a yearly revenue of over €400,000. Our team was working on 3 large projects. Money was coming in by the truckload.

Menno and I were a genius team and we did loads of amazing work. We built a business dashboard that got rolled out at KLM, the Dutch national airline. We developed a high-tech videophone for Dutch Internet millionaire Eckhard Wintzen, and we collaborated with famed marketing guru Jay Curry, to capture his ‘pyramid’ analysis method in a web application.

Blinded by success

screen-shot-2017-01-07-at-18-43-32Everything seemed to be rosy. But we were blinded by our own success, and we didn’t notice the risk that had crept into our business model.

We had invested heavily in talent, pulling in tech and design heavyweights. This was at the peak of the IT bubble, so we had to entice our team with company cars, company phones, free gas, expense accounts, and more.

Almost all of our revenue came from only 3 sources: the large projects that our entire team was working on. We enticed our clients with competitive prices, but that meant that our income was barely covering our expenses. We were thriving, but not growing a cash reserve to hedge against an economic downturn.

Our accountant warned us that our yearly profit was tiny, and we were basically surfing a knife’s edge. She recommended we reduce headcount or raise prices to boost profit. We refused because raising prices would have killed our competitiveness, and letting people go would disrupt the tight-knit family we had built.

Then terrorists flew their planes into the World Trade Center. One of our large accounts sold exclusively to airlines and their sales exec predicted that their revenue would dry up. I remember him telling me: “this is going to change everything”.

I shrugged it off. We had come so far, we would survive whatever was coming.

I was wrong.

Surprisingly enough it was another project that triggered our demise. The videophone project had been hugely successful, with us developing a fully functional prototype. Unfortunately, demand for the prototype was much smaller than expected.

The videophone company kept ordering more work from us, but with finances quickly drying up, it quickly became clear to us that they would never be able to pay our invoices. Our financial backlog quickly grew to €25k.

We needed the income from this project to pay our team, and we had no sales staff to quickly find new projects. Instead of pulling the plug, we dug our heels in and kept negotiating.

The beginning of the end

fuckup-night-slide-7Things came to a head in early 2003. Our backlog had grown to over €50k with no resolution in sight. Our accountant predicted that we would go bankrupt in 3 months unless we quickly reduced expenses by letting people go.

We refused to disrupt the team. Instead, we cut everyone’s salary a little, then hired a sales manager to get us new projects. We figured we had a rock-solid team of veterans who could easily be placed in other projects. All we needed was good sales staff to sell our expertise to the world.

Our sales guy asked for a generous salary, a performance bonus, and a luxury car. We gave it to him, and he got to work. He made of encouraging noises, but three months later we were still in the same situation, but now with one extra person on the payroll.

fuckup-night-slide-8Then things quickly came to a head. The videophone revenue dried up completely. The airline project switched to an in-house team and gave us a deadline to pull out our team. With only one project left, we had no way to make the next payroll.

We told the pyramid people of our predicament, and shared our plan with them: we would let everyone go except a core team, and dedicate ourselves exclusively to their project.

They politely considered our offer and declined.

Now we had no projects, 1 week til payroll, and 13 employees. We were toast.

The aftermath

fuckup-night-slide-9With €3,000 in the bank and a €25,000 payroll only a few days away, we had run completely out of options. So we filed for bankruptcy. It caused quite a stir because at the time it was unheard of for a company to file for bankruptcy with money in the bank.

The judge assigned a liquidator who started clawing back the €50k. Menno and I got sent home.

So there I was, at home, with absolutely nothing to do. It felt strange after running a business nonstop for 5 years.

Then the phone rang. It was Jay Curry, from the pyramid marketing project.

Jay: “Can you work?”
Me: “Yeah, I think so”
Jay: “Get over here. I want to hire you as my CTO”

This was the guy who had walked away from my ailing company, pushing us firmly over the edge. I had to take a major decision that day. Was I going to hold a grudge?

I took the job. Not holding a grudge has been my rule ever since. The world is small, and you never know where you will be in a couple of years. Don’t burn any bridges and don’t hold any grudges.

Lessons learned

So what did I learn from all this?

Pulling the plug on our company ourselves was hugely empowering. Seeing our liquidator claw back all the money that was owed us was also very nice. It proved we were morally in the right all along. And I was unemployed for only 2 days before starting my new CTO job. The quick turnaround lifted my spirits.

But going through a bankruptcy is hard. I let my people down. I let my business partner down. I identified with my company, and it made me feel like a failure. I did a lot of soul-searching.

The fact that everyone around me kept offering condolences also didn’t help. It made the whole experience feel like a surreal funeral. But I had a nice experience that lifted my spirits. When I went to meet Jay Curry on that fateful day, to talk about the CTO job, he shook my hand.

Jay: “Congratulations, son. You’re a man now”

He is the only person who congratulated me with my bankruptcy and spun it as a positive experience. It made a big impression on me.

So here’s what I have learned.

Don’t grow too quickly. Employee salaries are a massive expense in any company, and my example shows it is very easy to go bankrupt if earnings drop too quickly. Always operate with the absolute minimum team necessary.

Don’t be afraid to fire people. You’re not in the business to build a family. You’re in the business to make a profit, from which all salaries are paid. Frantically hanging on to your team does everyone a disservice.

Don’t add sales as an afterthought. Also don’t turn to sales only when business goes sour. Instead, start out your company with a strong sales plan. Sales should be one of your first hires.

When a customer stops paying, create a contingency plan. Don’t assume that everything will be fine. A delay in payment is a big red flag, and things will almost always get much worse. Cut your losses while you still can.

Always have a backup plan to quickly shrink your workforce. It’s not fun to make this plan, but you’re going to need it when your revenue stream collapses overnight. And it will happen eventually.

Build up a large pile of cash for emergencies. When the unexpected happens, and some or all of your major clients suddenly pull out, it’s nice to have a cash buffer to sustain the company for 3-4 months.

Keep your eye on profit. Don’t ride the razor’s edge like we did, with revenue and expenses almost canceling each other out. You should be making a nice healthy 10-20% profit year on year. Use that money to build a financial buffer.

Recognize when it’s over. Pull the plug yourself. Don’t go deep into debt to try and make a miracle happen.

Don’t hold a grudge. You never know where you will be in a couple of years, and the world is a small place.

And finally….

Going bankrupt is perfectly okay. You are not defined by your company. Your identity consists of much more than just being an entrepreneur. A bankruptcy doesn’t mean you fail at life.

 

This post is an expanded version of a presentation titled ‘Failure Avalanche’ that I gave for Fuckup Night Brussels in 2014. I drew all cartoons myself.


Also published on Medium.