With fall in the air and the sun setting earlier one might logically think that being outside would be the source of the chills, but in a festive twist all the spine tingling occurred indoors at the October meeting of Denver Founders. For the second straight year, the October meeting focused on start up horror stories.
M.C. for the evening, Chris Franks, stressed that while the start up community excels at exchanging high-fives for major (and minor) milestones, the scales of fate are not in favor of most startups. The overwhelming majority of startups fail, but how and why that happens is not widely known. In an effort to provide perspective for founders at all stages of the process, sharing the bad in concert with the good injects a dose of reality.
What the hell just happened?
Jay Zeschin of Ello
Jay Zeschin and his co-founders launched Ello, a next generation social network for creative, in 2014. After launching everything seemed to be progressing well. One day, however, the team noticed that their traffic numbers were off; they were higher than normal. The change was enough to raise an eyebrow, but not enough to blow your hair back.
Things got interesting the following day when their traffic doubled. The next day the same thing happened. At first the numbers were manageable, but there was a growing concern about how they would handle growth if it continued at that pace.
In a little more than a heartbeat, Ello’s server costs jumped from about $350 per month to $35,000 per month, and from 4 or 5 server requests per minute to 75,000. The result of this massive surge was the first horror for Zeschin and company; the system broke and they ended up doing damage control for an extended period. Their time horizon was a matter of hours. Panic lasts for a few moments, but this was a level of panic and exhaustion that has to be experienced to be believed (and Zeschin doesn’t recommend it).
What was the impetus for this spike in users? Turns out that in 2014, Facebook implemented a real name policy that did not go over well with members of the LGBT community, who flocked to the Ello platform in the wake of the policy.
Data storage surfaced as a concomitant issue of the user spike so Zeschin and company elected to do a massive data backup. They tested the process and changeover multiple times in their test environment. Like a pyrotechnics scene in a Michael Bay film, they only had one shot because the change was irreversible and there was no rollback plan. Remember, this is a team working around the clock to simply keep the site operational.
Enter horror #2: after the cutover the site didn’t come back.
A procedure that was supposed to take the site offline for under 30 seconds ended up lasting for hours. Here is where Zeschin shared his “The More You Know” moment: being in the thick of things, and unable to see the forest for the trees, after a couple of hours they called in outside reinforcements and were able to get the site back up. The lesson? Don’t be afraid to ask for help, especially when you’re up to your knees in shit.
Interestingly, Zeschin’s story was the only one that actually extolled the virtues of relying on others. All of the other speakers had cautionary tales about getting into business with the wrong type of people.
Be wary of the lazy man
The stars at night are big and bright, deep in the heart of Texas. That’s where our next story takes place. Dobbertin and his co-founders started a company in south Texas in 2007 that did Google AdWords campaigns for HVAC companies. The company had some success, but around 2010–2011 the founders had a decision to make. Faced with increased competition in the digital sphere, should they raise another round of funding, or close up shop and move on to their next project?
The other detail of backstory here is that between 2007 and 2011, when the company wound down, there been several different CEOs. Dobbertin was the first one, but he only held that post for a year or so. They did, however, have the same controller throughout the entire life of the company.
Fast forward to 2013, a full two years after winding the company down, and Dobbertin receives a phone call from his parents. There was a sheriff at their house looking for him in order to serve his legal papers. As if that wasn’t enough, the sheriff tried his in-law’s house as well. Needless to say this was cause for concern.
Eventually Dobbertin gets in contact with the sheriff to figure out what’s going on. It turned out that after filing the initial paperwork to found the company, their controller never filed any more paper work. Ever. This meant that the company owed thousands of dollars in back taxes.
Why were they looking for Dobbertin? After all, he hadn’t been CEO since 2008. Any paperwork that needed to be filed to indicate a change of CEO never got filed, so he remained on the hook as company CEO. “He was just lazy,” Dobbertin said.
As if the county pursuing him wasn’t bad enough, the federal government got involved too, and the IRS came calling for back taxes as well.
Fortunately, Dobbertin had some very generous investors, many of whom stepped up to help bail them out of this predicament.
The moral of this tale of terror is that the chances of winding a company down are much greater than selling it for a big payday. Therefore, make sure to get an attorney to over see the wind down process to ensure it’s done correctly.
Krista Paul, Using Miles
The evening’s night cap came from Krista Paul, who’s story was so terrifying audience members sat transfixed with mouths agape in disbelief.
Paul founded a company in San Francisco called Using Miles. The company devised a way to aggregate frequent flyer, credit card, and other bonus miles in one place. The idea caught on very quickly and scored Paul a place in the 2008 Tech Stars class.
She also added a college friend, someone she knew for over a decade, as a co-founder in charge of fundraising and finance. Paul oversaw marketing and sales while her partner took care of the money. They had everything in a single account that they both had access to. About two years into the company they also relocated to Denver and added another co-founder, John Nordmark.
Around this same time they set their eyes on raising a Series A round of funding. As that process unfolded a few red flags emerged with the finance guy. They were a few minor instances of co-mingling of business and personal funds. These were satisfactorily explained to the A round investors so as not to jeopardize the $3 million being raised.
And yet… days before the deal was supposed to close, Paul got a call from a lawyer about more investors. So she called her partner and he wanted to give them equity before investing. Well there was no way that was going to happen, so then he lied and said that they already did invest.
It turned out that three investors invested a combined total of $175k in the company, gave him the money and he took it, but he didn’t tell anyone. Naturally, the Series A investors got concerned and wanted to meet with her co-founder. He was currently living in New York City. In a penthouse. (That’s called foreshadowing)
Now the finance guy wouldn’t give a straight answer about the money. He claimed he could get it back and that it was simply a case of co-mingled funds. He was given an ultimatum: come up with the money or else. Needless to say, he didn’t pay back the money. The Using Miles board called an emergency meeting and kicked him out.
Apparently he had been doing this for some time. Even going to far as to introduce investor to the company after they had invested, but imploring both sides not to discuss the deal.
If only that were the end of this saga.
It turns out that her former partner had been convicted of a felony involving some $20k when they were still in Tech stars. So this new development was a major step up the ladder. It was also strike two and a major investigation kicked off.
Even though the problem was out of the company, Paul still had to run the company and cooperate with an on-going criminal investigation. And remember that single, shared account that the company had? It turned out that her partner had over twelve accounts he was using to funnel money to himself.
All the while, he had a penthouse in New York, throwing parties, and living the high life. Because of the money at his disposal, he was considered a flight risk. The authorities ended up arresting him before he could leave the country. He’s now serving time in prison.
Now for the gut-wrenching part. If her partner hadn’t stolen money from the company they would have had a year’s worth of money.
There is a silver lining; Paul was able to sell the company, even after everything that transpired (hey, a good idea is a good idea!), and they honored all investments when they sold. This included $500-600k that never turned up.
Krista Paul’s two take-aways from this ordeal?
1. If you have or are considering a co-founder, draft an agreement. If you’re not sure what to include in said agreement, start from the possibility that one of you ends up in jail and work backwards from there.
2. If you’re not the money person don’t just hand over the financial reins blindly. Keep yourself in the loop about what is going on financially with your company.
Fortunately, dear reader, others have erred and lived to tell about it. These tales of terror and woe help are intended to prevent similar situations from happening to others. If nothing else, be careful who you trust!