In Startup Management

Startup and growing companies are fragile.  It’s the sector I work in, so I’m used to this fact, but it was brought home to me this week how strange this can appear from outside.  There has been a lot of chatter online since Blipfoto Ltd went into liquidation, amongst loyal “blippers” such as myself.  Many can’t understand how it could happen – after all, you don’t see this bit on “Dragons Den” or “The Apprentice”

A key fact that doesn’t seem to be widely appreciated is that until a startup achieves “cashflow positive” – the point where more money is coming in each month than is going out – it is dependent on a cycle of investment.

  • Raise money from investors
  • Use it to build and develop the business, usually for about 6-18 months
  • Hit key targets – which enables either
    • More money from investors – so the cycle repeats
    • Positive cashflow – the company is free from needing more money from investors

The last stage of this cycle is where the company is most vulnerable.  It is running out of cash (to pay suppliers, rent wages etc).  To survive it needs more money.  However, if the targets haven’t been hit, the investors won’t supply it.

It seems this is the hole Blipfoto fell into.  Investors had been lined up to put more money into the company in March, and the performance of the company in the early part of the year meant they didn’t do so.  Rebranding with Polaroid as a sponsor in December had been expected to increase the number of new sign ups to the site and new paying subscribers.  It failed to deliver.  As a result, the board had to inform the investors, who pulled out and left them with very little room to manoeuvre.  Knowing the bills they had to pay (not least wages – likely to be the main expense), they had no choice but to act to prevent the company trading while being insolvent.

This is the brutal world of the investment-funded startup in the growth phase.

Once a board has realised the company is insolvent, they must act very fast or face prosecution and/or personal liability for the company’s debts.  The law is complex, with various options for administration (which gives the company time to negotiate with creditors) or liquidation (where the assets of the company are sold and the proceeds distributed to the creditors).

In the case of startups which are a long way from positive cash flow, there is little likelihood of an agreement being reached with creditors and liquidation is often the only option.  A professional liquidator is appointed to sell the assets, and at this point the board and management team of the company have no further say in what happens.  The liquidator may consult them, a buyer of the company’s assets may wish to re-employ them, but it is essentially “game over” for the founders.

It is heartbreaking to watch the founder of Blipfoto lose control of something that started as a personal project more than ten years ago and has grown a huge community of followers around the world.  On top of that, he has had to lay off the staff – a close-knit team – and now he has to watch his “baby” being sold to the highest bidder.  It seems almost inhumane.

Blipfoto is dear to my heart. I have posted a photo on my own journal every day for 6 years, and my wife and I have posted a photo on our son’s page every day since he was born. I love the site, and I remain anxious about its future – as does the rest of the community of blippers.

Particularly unpleasant for me was watching the community in uproar at the silence from the founders and managers.  All sorts of theories emerged, many assuming the team had pulled some sort of fast one and not realising the legal strictures they will have been under.  It was horrible.

This is the deal we all make in startup companies however – as soon as we take investment to grow, employ staff to build and enter into all the other arrangements of a company, a whole new set of rules comes in to play.

In the past ten years of my career in startups, I have been on boards where these decisions are taken.  I have laid off staff, asked others to lay off their teams, and sold cherished business assets to make ends meet.  Three times I have been on a board that was within a whisker of having to declare insolvency, and on one occasion we deferred the decision for little more than 12 hours.  We spent that time putting plans in place for laying off tens of staff, informing suppliers and customers and handling the press.  At the very last possible moment a decision from a funder saved us.  One company wound down to dormancy in a controlled way, but I haven’t lost a company to the liquidators yet.  In this business though, it’s only a matter of time.

If you’re interested in more on the ongoing Blipfoto story, here are some relevant links with more detail (and eloquence) than I can offer here:

My final thought is that all founders are crazy for putting themselves through the process of building a new company.  Few will be able to say, as Joe Tree can with blipfoto, that they have created something which genuinely touched the lives of a huge group of people.  I hope blipfoto continues with the mission, vision and values Joe established for it, even if it has new owners.

Note:  Several people have contacted me to ask for sources.  Although I do know some of the people involved in blipfoto, all the information here is from the public domain – Iain Ritchie’s comments published in the the Scotsman article (linked above) are probably the most telling in terms of what caused the liquidation.

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