When to pull the plug on a dying startup company

The startup scene has exploded on the tech market with good ideas and some not-so-good ideas. Special correspondent Steve Goldbloom examines the process that startups go through to become solid businesses and how unsuccessful business get canned.

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    Behind all the blockbuster success stories out of Silicon Valley, there are scores of ideas that just don't make it. And some die a pretty slow death.

    Special correspondent Steve Goldbloom has our story.

  • ACTOR:

    We have got a great name, we have got a great team, we have got a great logo, and we have got a great name. Now we just need an idea. Let's pivot.


    HBO's comedy "Silicon Valley" lampoons start-up culture in the Bay Area. But for those working in the tech scene, it's like art imitating life. In other words, people really do talk that way.

  • WOMAN:

    Pivot is a great one.

  • NITASHA TIKU, Valleywag:

    Killing it, crushing it.

  • WOMAN:

    Disrupt is the classic one.


    Rock stars, ninjas, Jedi.

  • GARY KREMEN, CapGain Solutions:

    Lean in. Bail fast.


    Growth hacker, which is actually just marketing.

  • JACOB MULLINS, Exitround:

    I think it's "The Social Network" movie that over-romanticized how easy it is for college students to become a hundred-billion-dollar company.

  • ACTOR:

    Relationship status. Interested in.


    There is no shortage of messianic language.


    Nitasha Tiku is an editor at Valleywag, which is owned by Gawker Media. They're like the "Us Weekly" of tech. She explains some of the hyperbole behind start-ups.


    They all want to start a movement. They all want to start a revolution. It's particularly funny because once one person said they were going to change the world, if you present just like a simple app, what are you going to do next to that?


    She says it's no good to have a straightforward idea anymore. It has to be groundbreaking. Entrepreneurs show up here in the Bay Area with dreams of turning their scrappy start-up into the next big thing. But the reality is, most of them don't work out.

  • SAM ALTMAN, Y Combinator:

    We help very early-stage companies get started.


    Sam Altman runs Y Combinator, a Silicon Valley firms that mentors entrepreneurs. It's called as an incubator, which is basically a camp for start-ups. Altman is like a rock star for young entrepreneurs. A Stanford dropout, he launched an app at age 20 and sold it seven years later for nearly $40 million.


    The magnitude of problems that can go wrong is one of the surprising things about young start-ups. One day, the product doesn't work and the next day a patent troll is suing you. The next day, a competitor is taking your users. The day after that, your key employee quits.


    Y Combinator helps young start-ups avoid these pitfalls. The program has graduated some heavy hitters too, like Dropbox and Airbnb, both now valued in the billions. But these are the exceptions. A more common path is the one taken by Yin Yin Wu and Cuwen Cao, from the Y Combinator class of 2013. They created a business that was going to be the uber of dry cleaning.

  • YIN YIN WU, Entrepreneur:

    Where you could push a button and we would pick up your laundry, wash, fold and return in the same day. We found that business model didn't really work.

  • CUWEN CAO, Entrepreneur:

    We were really demoralized. We ask ourselves, is it our problem or is it objectively a market problem?


    We come from a perspective of, oh, we are going to, you know, be really successful if we just work hard. And that's just not true with start-ups.


    Wu and Cao are now developing a phone notification app for Android. They have pivoted. But what if they hadn't thrown in the towel?


    Not every company dies fast.


    Gary Kremen is a veteran entrepreneur and investor in the Valley. Remember that '90s craze of buying domain names? Well, Kremen was pretty much ahead of the curve on that. He made an early fortune registering sites like Jobs.com, Auto.com, and Sex.com.


    Entrepreneurs, they don't like to give up. A company will shrink down when they're almost out of money to six people, getting Internet from Starbucks and them not even ordering from Starbucks, probably bring in a cup of water there in an old Starbucks cup and keep working on it and working on it. They're not dead, but they're not alive, kind of like zombies.


    That's actually what they're called here: start-up zombies. A company that's not succeeding or failing, it's just burning investors' money by staying alive. Here's where Gary Kremen and his partner, Michael McTeigue, come in. They founded the company

    CapGain Solutions, registered privately as Zombie Apocalypse Holdings LLC.

    They buy zombie companies, so that the investor can write off the losses on their tax return. In other words, they kill zombies.


    To make them dead, so you can use the tax losses. You would sell those companies' interest to us and we would allow you to realize your gains.

  • MICHAEL MCTEIGUE, CapGain Solutions:

    We're like the 1-800-Junk. You have some junk, we will come by, we will get it, we will take it out of your house, and we will try to resell it at a later date for more money than we paid.

  • BEN BLACK, Akkadian Ventures:

    In a state with 53 percent tax rates, that loss is worth a lot of money to me.


    Ben Black is a venture capitalist and uses CapGain Solutions.


    I turn to Gary and say, here's the situation. I need you to buy this stock. He buys it. I get my letter, I get my loss.


    Another way out of zombie purgatory is to be acquired by a more established firm. That's what's called an acqui-hire.


    An acqui-hire is an exit for a company, primarily for the team just experience that those people have.


    Jacob Mullins runs Exitround.


    People describe us as either something like an eBay for companies or as like a Match.com or a Tinder for companies.


    As a matchmaker, Mullins has plenty to work with. According to the online tracker CrunchBase, 19,500 companies received venture capital funding last year.

  • ELLEN CUSHING, San Francisco Magazine:

    While it's clear that we're in the middle of a boom, some people might call it a bubble. And what that means for start-ups in particular is a lot of V.C.s are willing to fund 10 companies with the idea that one of them is Twitter.


    But that still leaves nine companies that won't be the next Twitter. Are they doomed to become start-up zombies? And if we are in a bubble, how much longer can that go on?

  • STEVE GERBSMAN, Gerbsman Partners:

    Every two to three years, there's an investment cycle.


    Steve Gerbsman is a crisis management expert for businesses in need of an exit strategy. His forecast isn't so bright.


    You had the investment cycle starting in '11 and '12. We haven't had the bust yet, but it's coming because every two-and-a-half to three years after the investment cycle, our business gets good.


    Meanwhile, entrepreneurs will continue to take big swings and a cottage industry of Valley types will be there to profit when they miss. As for zombies, there's always Halloween.

    For the "NewsHour" in San Francisco, I'm Steve Goldbloom.

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