Entrepreneur Office Hours - Issue #147

You are your startup's brand

To illustrate the value of branding to a classroom of students, I’ll often ask people to raise their hands if they use any type of phone that’s not an iPhone. In a class of 40 students, I’ll usually have one student raise a hand. Maybe two. (And, for what it’s worth, students with non-iPhones are almost always international students.)

Everyone chuckles at the skewed results, and then I ask them why. After all, despite what we might tell ourselves, all smartphones are incredibly similar. For example, iPhones and Android devices can make calls, send texts, browse the Web, and use whatever social media apps are currently turning us into zombies. In fact, because of the similarities between the devices, the conversation about why my students prefer iPhones ultimately has little to do with core features.

Instead, the most important reasons for using Apple devices always come back to brand identity. This is, of course, a huge reason Apple is so successful. Apple could create a toaster and people would line up for days just to be the first to buy it. People trust the Apple brand so completely that they’ll buy anything Apple produces.

In contrast, when you’re building a startup, you don’t have that same kind of brand power. You’re too new and too small. This matters because, without an established brand, convincing someone to give you money is much harder.

How can founders mitigate this? I’m going to tell you… in this issue’s featured article. In other words, keep reading to find out!

-Aaron

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The Subtle Change Happening in the Startup Ecosystem and How Savvy Entrepreneurs Are Embracing It

It’s the competitive advantage you’re looking for, and it has nothing to do with your product or its features.

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The One Phrase I Wish Startup Investors Would Stop Saying Immediately

Every time I hear it, it’s like nails on a chalkboard, but the consequences of people saying it are much bigger.

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FROM THE ARCHIVES…

The Secret to Finding Your Next Great StarIdea

Yes, I can teach you a strategy for finding your next billion dollar business in a short article, but that doesn’t mean you’re going to like it.

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Office Hours Q&A

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QUESTION:

Hi Aaron,

Thank you for taking the time to answer so many questions. They are really helpful to read because they make me consider things I might not have otherwise thought of. Which brings me to my question.

You previously wrote about failure and how failing with investor money is especially good because someone else was paying for your education.

I was wondering if that is really true. I have not raised investor money yet but am trying to. I wonder about what happens to the money you take from investors when your company fails. Does it really just disappear? Do entrepreneurs owe anything? And is it different depending on if the terms are equity terms versus debt terms?

I guess you make it sound like you just walk away if you fail. Is it really that clean of an exit?

-Anthony (Tony) T.

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That’s a fair question. I admit I was being a little cavalier in my Q&A answer about failure that you’re referencing, but I should add the caveat that I was trying to make the person asking the question feel better while experiencing what’s obviously been a difficult time.

So let’s be clear… shutting down a venture-backed company is never clean or easy. It’s not clean or easy because it doesn’t happen quickly. By that I mean you’re not going to wake up one day with a wildly successful company and, the next day, it’s flatlined.

When companies fail they go into a death spiral of sorts, and that death spiral is almost always long and slow. Even worse, when your company starts to fail, you’re not going to realize it. Heck, chances are you’re going to be close to the end of the death spiral before you really start recognizing what’s happening. Before that you’ll be fighting like crazy to keep the company moving forward because… well… that’s what entrepreneurs do.

However, once the company fails, and once you make the difficult decision to close things down, and once you’ve actually closed the company, that’s pretty much the end of things. Remember, assuming you incorporated properly, your company existed as an independent entity. Any investments or debts belonged to the company, not you personally. Sure, someone could want their money back, but good luck getting money from something that no longer exists.

Investors understand this. Or, rather, they should, otherwise they shouldn’t be investing in startups.

So… yeah… once a company is closed, that’s pretty much it. Life continues (including yours). What you do with that life is up to you, but your company – and whatever debts it had – are functionally dead.

For what it’s worth, I should add a few closing caveats to this answer.

First, the process of shutting down companies depends on the company’s assets. Some companies don’t have saleable assets when they “fail,” so they just shut down. Other failed companies still have things like real estate and equipment and intellectual property that has value. In those cases, the process of shuttering the company includes selling off those assets and will usually involve using the proceeds of those sales to return some money to creditors. Some of those creditors might be your investors depending how terms were structured.

Second, there’s a big difference between being a responsible founder who tries hard before ultimately failing versus, for example, gross negligence. If your company fails because you took all the investor capital and spent it on lavish vacations and new cars rather than attempting to grow your company, there’s a strong argument to be made that you’re personally liable for that behavior and, even though the company is gone, you can still be held accountable in whatever legal systems you’re operating under.

Third, I’ll add my obligatory reminder that nothing I’ve written here constitutes legal advice about taking investment capital. It’s just my opinion. And it’s also a very simplified description of what happens when a company “fails” and how it has to properly shut down. Before taking on investors, please consult with an attorney so you can fully understand the implications of any contracts you’re signing and what kinds of things you are and are not personally liable for.

Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!