Good morning, fellow founder! 👋

Welcome to another edition of FounderForge. Your Europe-focused startup digest - just because we do things a little differently here! 🇺🇸 👀

If you missed our last issue, you can still read it at the link below! 👇

Today's topics are all about the end of a startup:

• The Rise of Startup Shutdowns ⚰️

• When to Shut Down a Startup 😓

We know this topic doesn't sound fun, but we think it's more relevant than ever. Life isn't a fairy tale, so let's get on with it.

📊 Data Dive: Startup Shutdowns

Startup winter is here and everyone is feeling it. 🥶

These are no news: inflation is (still) high, money is tight, and funding is hard to get.

Last year, many VCs advised their startups to make the necessary changes to extend their runway for another 6-12 months.

Now that time has passed. 🕛

Some buy themselves extra time

Time is running out across the board, and over the past few months, many have tried to buy themselves some extra time by raising bridge rounds.

In Q2 2023, a record 38% of all rounds were bridge rounds.

And many of the rounds were emergency down rounds (you don't raise a down round if you don't have to).

The process itself slowed down as well. 🐌

The average time it takes to raise a new round has increased from 9 months in 2022 to 12 months in 2023.

It is clear that investors have become very selective about which companies still deserve some extra capital.

Many will never come out the other side

Founders have been quietly talking about it for a while. 🤫

Money is running out, numbers don't look good, investors are unwilling to step in and M&A doesn't look promising either.

Some companies are nearing their end.

A harsh reality for many at the moment - a bridge round only lasts so long (if you were lucky enough to get one in the first place).

In Q2 2023, the number of shutdowns has more than doubled since 2021. 🤯

What about all that dry powder?

Well, yes and no.

By the end of 2022, we've seen the following chart going around LinkedIn, telling founders they don't need to worry because the capital is here...

While it is true that the capital is still there, there are several reasons for the slower deployment:

• Not only founders but also VCs are feeling the fundraising pinch. They are finding it difficult to raise new funds from their LPs (= the people who actually provide the money), so they will not be raising new funds as quickly as in the past - which means that the current fund will be deployed more slowly.

• VCs are currently concentrating on their existing portfolios and making little or no new investments. At the moment, they are more concerned with getting their existing companies over the line than adding new ones.

• All this capital is still largely on paper. When an LP invests in a VC fund, the LP does not provide the entire investment up front but is called by the VC fund over time. In the past, this was often done in the first two years, but now many LPs are running into liquidity problems themselves - so either they can't or won't provide the funds (what should the VC do? Sue?) or the VCs are spreading the calls more widely over the life of the fund. Some VCs are even returning capital at the moment...

That said, times will get better and there is still plenty of cash out there for great ideas. 💪

P.S. We will have a special issue on how VC works in the future.

So what are we supposed to make of all this?

No sweet talk here.

Times are tough and the dying has only just begun.

The good news is that we may have already reached the bottom.

We hope to see you on the other side.

However, if you don't make it, don't make yourself crazy.

There is nothing wrong with failing - Only with giving up.

If it didn't work, try again.

Good luck out there! ✌️

🛠 Founder's Toolkit: When to Shut Down Your Startup

Founders do not always get to choose to shut down.

However, most of the time, it is the founder’s choice.

The surprising thing is that shutting down is not the easy option.

The easiest thing to do is to let the startup run without growth - in what is called "zombie mode".

It's easy because it doesn't require an active decision, just continuing to do the bare minimum to keep the company alive.

Why shutting down is hard

Often the reason founders keep going is not because of themselves, but because of others.

Shutting down usually means disappointing people who believe in you. Some of this disappointment is real, some is imagined.

Your Investors:

Founders fear disappointing investors, but investors typically understand startup failures.

While everyone hopes for a better outcome, being open and honest with investors will encourage them to invest in you again. Misrepresentation or a prolonged decline without clear communication will do the opposite.

Your investors now know you, you have (hopefully) learned a lot and you are now an even better bet for your next venture.

Nothing to fear here.

Your Customers:

A shutdown is bound to disappoint customers.

But a transparent shutdown is better than a gradual descent into obsolescence.

Your Employees:

Founders have a responsibility to their employees (especially regarding payroll).

The worst thing a founder can do is to tell their team that everything is amazing and then all of a sudden the show is over.

It is much better to make a clean decision to shut down in full transparency, with enough time and money to help employees find new jobs and move on.

Four questions you should ask yourself

The decision to actually shut down an idea can be made through answering the following questions:

Quantitative:

• Do you have any ideas left to grow your startup?

• Can you drive that growth profitably?

Unfortunately, while they're quantitative, there's no way of knowing if you've tried everything. At some point, you have to make a decision based on the accumulated evidence.

Qualitative:

• Do you want to work on the startup that results from that growth?

• Do you want to work with your co-founders on the startup that results from that growth?

Growth is crucial, but the chances of success are low if you end up moving into a space you hate and working with people you hate.

The other side

Even if all the evidence says that shutting down is the right thing to do, it will still be scary as hell.

But staying in a bad situation out of fear is a stupid thing to do.

This may be hard to believe, but shutting down releases so much tension and removes burdensome expectations that it allows for brand-new creative ideas.

Failure is part of the founder's life, and we all need to be more open and rigorous about it.

A startup may fail, but your journey as a founder must not.

We are all playing an infinite game where we can't lose as long as we don't give up.

Let's keep going! 💪

If you are in this situation and need someone to talk to, feel free to contact us. Founders need to support each other and we are here for you! ❤️

🔗 Founder's Library: Curated Resources

A collection of random reads that the FounderForge team enjoyed.

• Where Did the VC “Dry Powder” Go? by Jon Sakoda (interesting data insights)

• State of Private Markets: Q2 2023 by Kevin Dowd and Peter Walker from Carta

• How Superhuman Built an Engine to Find Product Market Fit by Rahul Vohra (CEO of Superhuman)

• A Masterclass on How to Drive SAAS Growth From Miro by Aakash Gupta

• When to Shut Down a Startup by Aaron Harris (an original YC video)

😂 Meme of the Fortnight

The good old times… RIP 2019-2021

🤔 Your Thoughts on Today's Edition

• 🔥 It was great!

• 😒 Meh - it was okay.

• 👎 Not interesting to me.

That's all for now!

If you find this newsletter valuable, share it with a friend!

Cheers,
The Founders Blacksmith 👋

Issue #3 | 5. October 2023