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Hit the Reset Button, Even in Times of IPO Plenty

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It's a good reminder in these times of IPO plenty that while the folks at LinkedIn and Yandex are celebrating, and the folks at Groupon are undoubtedly getting ready to further celebrate, there are thousands of times multiplied that number of entrepreneurs who are struggling.

It's one thing to struggle quietly, on your own, without an audience or investors breathing down your neck. In this situation, you get to suffer quietly and just inflict pain on employees, friends, or family members around you. It's quite another thing when there are folks at the table with a legitimate claim on ownership -- namely, professional investors in the form of venture capital, private equity, and/or angels. They get to ask questions and demand answers.

All ventures start out with great expectations, but the nature of the game is that things won't always work out well. So here's some advice for the more than 90% possibility that your cutting-edge, VC-backed company will at some point hit the wall and run out of money. And remember the one cardinal rule in business is never run out of money. Not ever.

Let's just play this out. Say in fact you are at the eleventh hour and 59th minute and about to run out of money. Even worse, everyone around you knows it. What do you do?

First: Sit down with your investors immediately. Maybe I should first say, don't avoid the inevitable by delaying the pain and agony of having to explain yourself. If you want a chance to come out of this alive (and still in control), hit this square on the head and take the meeting.

I'm talking about you. Yes, I know you're a creative genius and an amazing entrepreneur, but I guarantee that if you don't get in that room right now with your investors, you're dead. Here's why. To be a good founder who already got professional investor money means that you're one smart cookie, but if you are this close to the wall, your time is almost up. The one final thing you don't want to do is burn the remaining investor goodwill bridge by surprising them any more than necessary. So get in that room. We all know what your investors are thinking at this point. They think you are about to beg and plead for mercy, time, money. But you'll surprise them.

Second: No begging. It's just not pretty, and in any event, even if you get more funding after licking their shoes to a high polish, you'll have no more equity left. Sorry to say, but it's human nature and as the predators that we all are, they'll strip you down to the bone. So for entrepreneurs' eyes only: Here's the best thing you can do when you get in the room with your investors. Are you ready for this? Be nice, be respectful, be cool, get past the pleasantries, and then...

Third: Put the keys on the table. What keys? The keys to the office, of course. Throw in the towel, game over, and admit it's your fault. Wait -- you're saying it was your biz dev VP's fault? Or your CTO who wasted money? Well, you are the founder and CEO, correct? So I'm suggesting that it is in fact your fault, no matter what. I'm not saying that you're a bad person. I'm saying you're as good as President Harry Truman (and he was a good president), who had a saying on his desk that read, "The buck stops here."

So let's accept the fact that you really are responsible. As negotiating trainer Jim Camp would coach, mea culpa, mea culpa, mea maxima culpa. Some other founders haven't been in the same spot as you or have still come out alive, but at the moment you aren't looking so good, and the ball's really in your court. The good news is, it's not over yet. Don't worry -- there's still hope.

What happens next? Since you decided to get naked, as business writer Patrick Lencioni would say, and you've owned up that you are human and the cash is gone, a real conversation is now going to take place with your backers. Three good things come from this:

First: You get your authenticity back. If you do this by being a genuine person with authenticity and honesty, you are no longer up against the wall, you are no longer defensive, and you are just one of the truth seekers at the table. If you really believe there's still life left in your startup, your baby, your life's work and prized possession, your lack of defensiveness will now meet one of the most brilliant of human qualities, that of compassion and empathy.

Second: Your options can expand, not contract. Backing that up is the fact that the investor does not want to see your company tank, does not want to lose their investment, and does not want to have to go back to their partners and institutional investors and explain what a boneheaded investment they made. So you've actually added hope into the mix, and that's a powerful combination.

Human compassion is so strong. Let me give you an example of what I'm attempting to sell you on. When President Richard Nixon was about to be indicted for charges related to the Watergate break-in and cover-up, he stayed strong, he stayed resolute... and he lost everything. Have you ever seen the video of him saying "I am not a crook..."? That pretty much cooked him good because he came off as completely defensive and stonewalling. He resigned, and he had to resign because he then realized he faced certain impeachment and near-certain removal from office.

What if instead he'd have said on national television, "I screwed up"? What if he admitted his errors and then said, "If you will allow me to continue, here's what I promise"? What do you think the result would have been? I can't prove this, of course, but I think the American people would have instantly forgiven him, or at least allowed him to continue serving as President. We are compassionate by nature, to both underdogs and people who admit their mistakes, especially if they pledge to do better.

Third: Your investors will see you have integrity. Am I telling you that by admitting your mistakes you'll keep your job, your equity, your company, and your funding? Maybe. But there's a better chance that your investor group, which was about to throw you out, is going to stick by you and in fact defend you. Just like the samurai warriors who were said to be prepared to die on any given day, you have to be prepared to be shown the door. That's the price you pay when you take VC funding and give up preferences and veto power to a special class of shareholders and board of directors (and there's nothing wrong with that). The samurais claimed that by being at peace with their decision, they were in fact far better prepared to live fully and triumph.

Next post I'll tell you what your detailed plan has to include to help your investors follow you back into your startup and reinvest.