The Hidden Treasure of Failed Startups

There is a ton of hidden treasure in failed startups — you just have to know how to look for it, and ultimately, how to capture it.

After my first (not last) venture-funded startup tanked, everyone pretty much ran for the hills. Investors bailed, the team got other jobs, and customers found better solutions. But I kept thinking "We just spent a ton of money to build all of this, can't I capture this value back?"

Then it occurred to me — the same thing is happening for countless other failed startups. All of the assets that they spent millions to build just get buried. Everyone tries to make a last-ditch effort to sell them off, but in most cases, it never works and they just evaporate.

But what if we were the ones looking to dig up that buried treasure and use it for ourselves?

The Price Tag of Failure

Let's start from here — when a funded startup runs out of money, investors pretty much walk away. There's a minute of everyone suggesting the asset has lots of value to someone else (it doesn't), but that's more just wishful thinking that never materializes.

A year ago when the company had money in the bank, it was valued at $20 million by investors. Now when the money is gone, it's valued at $0 by pretty much everyone, especially because no one can afford to operate the asset anymore. The "price tag of failure" is somewhere just above $0 in most cases.

That's the first aspect of the hidden value. When the team and investors have agreed the value is zero, then it's zero. But what they are really saying is "Based on what we thought it was worth (by the way, a number we all made up), it's worth considerably less now, and therefore we're not interested in funding it or growing it." That sentiment sets the price, regardless of the potential value.

One Man's Trash, That's Another Man's Come Up

Macklemore said it best — "One man's trash, that's another man's come up." While he was talking about thrift store shopping, the same applies to shopping for startups. Think about it like this — a startup making $30k per month in revenue is useless if they just raised $10 million. But to a single Founder operating the same business (assuming it can be run that lean), it's a solid full-time salary with room for some contract help.

Just because a startup couldn't hit insane revenue growth doesn't mean it's worthless. It means it's just worthless in comparison to the value that was expected. Yes, it's not worth a $20 million valuation, but $30k per month is great money. If a Founder could purchase those assets for $100k, which would likely just help the previous startup cover wind-down expenses that no one wants to pay for, it's a good deal for everyone.

Often the person trying to buy that defunct asset is the original Founders. They know better than anyone exactly what investment was made, or how the asset could be improved with a second wind. However, sometimes the Founders are either burnt out or are in an awkward position to negotiate against the very people who just funded them and lost all of their money, which is when a 3rd party could be helpful.

A New Life

We've been on the buy side at Startups.com of many of these situations. We've met with over 100 venture-funded startups at varying stages of the selling process and purchased 5 including LaunchRock, Clarity.fm, and Zirtual. Over the past decade, we've made close to a 50x return on our investments.

We didn't care about the current state of the startup we bought (Zirtual famously went out of business overnight when we bought it). We cared about the future value of what those hard-working teams had built and all of that venture money had underwritten (Zirtual went on to make tens of millions of dollars).

In each and every case, we came away with highly profitable, fantastic assets that have helped countless startups. Any one of those would have been a net loss to everyone involved if they had just "died." Our ability (along with the Founders we purchased from) to see past the present state and focus entirely on future value has been some of the best time and monetary investments we've ever made.

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In Case You Missed It

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