It happens all of the time. One minute a company is featured in an article titled, “The Most Promising Startups of the Year”. The next thing you know it is on the brink of insolvency. Going from hero to zero doesn’t happen overnight. Rather, it is often a gradual deterioration with a number of clues left along the way.
It is often during the company’s descent when its CEO is most desperate to salvage the business through an infusion of capital. His first inclination is usually to put a little lipstick on the pig and seek out unwitting investors.
It’s important to look beneath the cosmetics. Below are five obvious and not-so-obvious signs that a startup may be about to fold.
Stale and irrelevant Twitter Feed: In today’s social media driven world, a company’s twitter feed can reveal a great deal about the progression of its business. A sudden decline in retweets can denote diminishing enthusiasm. It is also important to monitor who is doing the retweeting. Be leery of retweets that are only stemming from the company’s employees or its alternate twitter handles. This typically suggests that the company is not only aware of, but also concerned about, the flagging interest in its products. Additionally, it would behoove investors to observe the subject matter of the company’s tweets. Is the company tweeting content related to its own progress? Or is it simply tweeting commentary about the growth and development of peer companies? When a company has nothing new or exciting to report, it tends to either retweet its old press releases or general industry articles. Despite what a CEO would like you to believe, its business won’t magically thrive simply because it plays in a booming industry.
Allies are jumping ship: It’s bad enough when employees, clients or advisors move on, but when paid service providers, such as attorneys or accountants, begin fleeing, you know trouble is afoot. And if a company can’t even hold on to its PR firm, watch out, disaster may be imminent. AiHitdata.com and WayBackMachine are useful resources in determining who has bolted and when.
CEO goes radio silent: If a CEO suddenly becomes unresponsive to shareholders, it is typically a cause for concern. It is NOT that the CEO is too busy creating shareholder value – as much as investors would like to believe. More often than not, an uncommunicative CEO is avoiding you – like a stockbroker on black Monday or the guy who promised he would call after the first date. Not that I would know anything about that.
Strange Bedfellows: I always find it peculiar when a startup begins aligning with companies that have nothing to do with its core business. In a best case scenario it could indicate that the company is preparing to pivot. But it can also be that the company is attempting to feign expansion while it continues to bleed capital and string investors along. Whenever a company goes off course, it certainly warrants an inquiry.
Implausible Explanations: Sometimes a CEO’s excuses simply do not hold water. I remember years ago being on a quarterly earnings call where a now defunct jewelry company blamed a drop in revenues on Mother’s Day falling a week later. I once also heard a retail-focused startup attribute a business lull to Facebook’s botched IPO. Both were invalid arguments as neither justification was even remotely connected to the companies’ failures. A company either has sales or it doesn’t. It is either growing its customer base or it is not. Its products are either in demand or they are not. Far-fetched explanations usually turn out to be falsehoods. And, they often tend to predate debacles.
This article was originally published on LinkedIn Pulse
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