The Autopsy of a Start-up bankruptcy (case study)

In autumn 2014 another promising and emergent Swiss Start-up filed for bankruptcy.

Sadly, this is rather the rule than the exception. As out of every 11 serious ideas, only one succeeds. This delivers an attrition rate of approximately 90%.

Screen Shot 2017-05-02 at 15.23.54From the investor’s perspective the numbers are even more frustrating, as “survival” is something significant different than a “great exit”. The attrition rate for a feasible return on investment is considered rather in a region of 99%.

Bankruptcy is only the terminal conclusion of a cumulative of wrong decisions, missed out chances and failed assessments behind the scenes.  Statistical numbers lack any new information in this regard, the actual reasons for going out of business normally remain unknown.

The case study

The CEO of “Start Up TV Co”, published a comprehensive blog on the “Whys” and “Hows” of the bankruptcy of his company. To make use of this rare example of the anatomy of a bankruptcy, I am publishing the text and also analyse the various stages and the causes of the bankruptcy of the firm.

To protect the various stakeholders, names have been changed, but the actual text remained in its original version. Comments and analyses are marked in colour and font.

From the point of view of an industry veteran, the team of founders was very typical in the best sense. Young entrepreneurs, just out of university, ready to change the world. If enthusiasm could be compensating for business acumen and liquidity, success would not have been at stake at any point of time.


Music was our first love, and it will be our last

30 Sep 2014 | Posted by: CEO of Start Up TV Co | In: Start Up TV Co

Start Up TV Co switches to standby.

Since April 2012 Start Up TV Co is live as a personalized music TV. During this time, we have worked hard to offer you the best music TV in the world.

Unfortunately, even the most beautiful times once come to an end. Comment1At the end of August, our start-up has come to serious financial turmoil, which has finally broken our neck. With a heavy heart, we are forced to put Start Up TV Co on standby tonight. In concrete terms, this means that Start Up TV Co will no longer be available from the beginning of October 2014.

How does it go from here?Comment2

In short: Most probably not. We will take Start Up TV Co offline tonight (30.09.2014) and no more streaming videos and submit bankruptcy in the next days.

A brief review

Pretty much four years ago – in the summer of 2010 – we had the first idea for personalized music TV. (…) Comment3With great enthusiasm, we built a prototype, presented to investors, negotiated with the music industry. In November 2011, we had received enough money from seed investors to officially start our start-up, and to go live at the beginning of April 2012.

In a temporary office at the University, we stared at our analytics tool with a glass of Prosecco and we were delighted to see the user numbers increase with every minute, immediately after the big news about the launch was reported in the evening Increased. I remember how I had driven through town at late in the evening to get at least a few copies of the newspaper.Comment4.png

Shortly after the launch, we were among the winners of the prestigious “Venture” Business Plan competition organized by McKinsey (et al.). On the roof of the university, we were talking to the VCs of the local bank, who decided to invest a large amount in Start Up TV Co in the summer of 2012.

An established Web TV platform joined later. The investors thoroughly tested our licensing agreements with the labels and found passages, which we had to negotiate.Comment5.pngThese negotiations have been very long;

The Series A financing round could not be completed until the new label contracts were signed. During this time, the money went out for the first time, we founders could not pay us a salary for almost a year. That was the reason why our co-founder and my good friend had to get off as a family father.Comment6.png

On a beautiful August day in the summer of 2013, I finally got the redeeming mail from a big label: The license agreements are available for signature! The conclusion of our large financing round was therefore nothing more in the way. A Co-Founder and I toasted with a can of beer in a small circle including our then Chairman of the Board and our lawyer. It was almost kitschy, as the golden evening sun reflected in the lake

Comment7.pngOne month later, on 17 September 2013, it was official: The VC arm of a local bank, an established Web TV platform and Business Angels invest a total of CHF 2 million in Start Up TV Co!

In the new office, we gave full throttle and were quickly ready to distribute the content of Start Up TV Co through our investor, the Web TV platform; and to start a big advertising campaign on TV shortly before Christmas. Our user numbers have risen to 100,000 unique users per month, we have launched new versions of our Android and iOS apps and redesigned our website.Comment8

Nevertheless, it did not work out. What was the issue?

The reasons

It is certainly too early to know all the reasons why we have failed with Start Up TV Co in the end. I try to roughly sketch the most important points.

At the end of August we did not receive a loan, which we had clearly expected.Comment9.png

This is certainly the main trigger, which is why the end of Start Up TV Co has come so quickly and not planned. In the remaining time, we have been struggling to find a bridge financing to make it to the planned Series B financing. This unfortunately did not work, we had to dismiss all the employees, the contracts with the labels announce and Start Up TV Co completely altogether.Comment10.png

Two million may sound like a lot of money. In fact, there are few Internet start-ups in Switzerland that have received a larger investment in recent years. In international comparison it is nevertheless a small amount. In the Looking back, we know we needed significantly more money.Comment11.png

Our label contracts were very cost intensive – but to renounce them would not have been possible, otherwise we would have had no contents.

Programmers are more expensive in Zurich than elsewhere – but we wanted to build Start Up TV Co from Switzerland,Comment12.png

and we realized that outsourcing of the development works less well with us.Comment13.png

We have invested a lot of money in marketing, mainly in the TV campaign. Was this a mistake? Through the TV campaign, our popularity has grown massively, but was it the value? Comment14.pngPerhaps we would have tried other forms of advertising first.

Per month we have reached 100,000 unique users. Many of them using our investor’s well-known TV streaming platform. 100’000 users per month are much for a young startup in a small country, as it is Switzerland. As free, advertising-financed music television, we were however dependent on our users as much advertising to show in order to cover the expensive content costs.Comment15.png

Start Up TV Co, however, did not make use of it for too long, for example, on Sunday evening at 20.13h, we had a lot of viewers who watched two minutes of music TV and then switched to the crime scene. We probably took care of the monetarization too early – because we had raised too little money – and perhaps we could not take care of our users. Overall, there are probably several reasons that have worked together.Comment16.png

I will, as soon as I have gained a little distance, analyze everything in the retrospective again to learn from our mistakes. I would like to thank all those who have supported us in the last four years. I was able to get to know great people, work with them and work together to achieve a common vision. A very big thanks goes to all the staff: Anim, Annina, Beni, Chris, Eugénie, David, Georgi, Liliane, Maxim, Miguel, Piotr, Ray, Roger, Ronny, Sebastian, Simao, Tim, Tobias and Yannick. But also to all our investors who have always believed in us, our partners, our attorneys, our friends. Fritz Friendly, CEO & Co-Founder, 30.09.2014


Conclusion

It takes a lot of enthusiasm to start a company. Opportunity costs and risk are high. Success is always also built on sound management skills.

Specifically for Start-ups, investors and the board have to make up for a lack of business acumen of the management.

In the presented case, multiple elements have been identified, where challenging, reviewing and correcting the lack of experience of the management could have raised attention for critical elements of the business case already in an early stage. Potentially this could have helped, to avoid a bankruptcy.

The entrepreneurial team is running the operations, the board is (according to Swiss legislation), the ultimate decision making body. Being appointed by the shareholders, asset protection, securing going concern, is the core responsibility.

Investors and non executive directors have a fair share of the responsibility for the company.

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