Do Bankruptcy and Startup Go Together?

I just left my old company, Pay By Touch, after 2 1/3 years there. You may have heard about it. The biometric identity company that raised $270 million (or so) and subsequently filed bankruptcy. If you need a refresher, check out the Valleywag coverage. Some glaring inaccuracies, but a decent accounting of the company’s woes.

One thing Pay By Touch is endeavoring to do is emerge from bankruptcy, right the ship and move forward in its business. It’s an interesting process.

Some companies have done the bankruptcy thing, and were able to achieve a certain level of success. United Airlines is a somewhat recent example of such a company. However, is it possible for a startup to pull the rabbit out of the hat?

Having just been through it, let’s examine the effects of bankruptcy on an early-stage company:

• Customers stop dealing with you
• Vendors stop dealing with you
• Existing employees spend a lot of time looking for new jobs
• Employees leave in droves, voluntarily or through layoffs
• New employees won’t come near the company
• Senior management can no longer focus on execution, which filters down to everyone
• Creditors, investors and management shift, sell or shut down company priorities and businesses, paralyzing most initiatives

An essential element of an early stage company, especially one in technology, is progressing forward on something the team believes in. A friend from college used to say that if you’re not moving forward, you’re moving backward. He’s right.

Bankruptcy robs a startup of the oxygen it needs to live and grow. Not money (although that is important). Rather, the esprit de corps and belief in the big future.

I’ve got a number of friends still there, and I hope Pay By Touch pulls through. What they’re trying to do ain’t easy.