A Bridge to Nowhere

This is the story of how we came to realize it was time to throw in the towel sell our startup, Distil.

When the financial markets collapsed Fall of 2008, it hit Distil pretty hard. As management we had known that a collapse would impact our business. We didn’t have a mitigating strategy other than hoping such a disaster didn’t happen. So when Lehman Brothers filed for bankruptcy in September 2008 we, like many other businesses, were faced with uncertainty.

Not knowing what the future would hold, we focused on extending runway. Our customers could continue buying or they could stop. No one knew. Rather than finding ourselves with no customers and no runway, we approached our investors about doing a bridge round.

A little bit of background about bridges. Bridges span a gap. Each end of the bridge must be solidly anchored. A bridge takes you somewhere. Building a bridge to nowhere is rather pointless.

We had a very specific destination in mind for our bridge round — buy time for management to assess the changed landscape and present a new strategy. Our ask was three months of working capital. After the three month period we could then assess the new plan, it’s potential, and decide next steps.

Our investors liked this plan and agreed to put up the funds. The bridge was structured as a convertible debenture against future tax credits (in Canada research and development costs can be recovered as refundable tax credits — you get a nice check at the end of every fiscal year). This means that initially it is a short term loan collateralized by the companies tax credit assets. After the three months we could agree to convert the loan into equity or pay it back. If we are unable to pay back the loan at that time, then the investors will be paid back at the end of the fiscal year when the tax credits became available.

It was a good thing that we negotiated the bridge financing. Within 6 weeks most of our prospects in the pipe had postponed their purchase decision, all of them citing the frozen budgets due to economic uncertainty. Over $2M in deals fell through.

We looked at alternative markets and found that government and military organizations were still spending. Their budges, which are fixed annually, were still intact and liquid. Knowing that the sales cycles for these organizations are long and very complex, we forged partnerships with organizations already selling in this space. We did everything we could to completely re-vector our organization to this new market in the three months we had.

At the end we still didn’t have a solid plan. While we had a new market identified, we had little traction in the market. We had no idea how long it would take to close any of these new deal. It was like starting over again from square one.

Still we persevered. We created a business plan that we presented to our board and investors. Basically we needed another round to fund, essentially, a new business. To fund 12 months of learning and iteration in a new market space. But that was off the table. Our investors had troubles of their own stemming from the financial uncertainty.

So we pitched it as another bridge. Another 3 months to close some deals. To rebuild our pipe to pre-collapse levels. The final destination was uncertain, shrouded in fog. I imagined myself standing on the shore, looking out across the expanse, unable to see the other side. We could start building our bridge only to discover the gap had no end.

In the end we didn’t get the bridge round. We looked at our cash on hand and tax credit assets. We drew up plans to conserve cash and ride out the financial storm. None of our plans had a clear destination in site. Maybe all we needed was three more months and things would pick up. But it could just as well be six, or twelve. We had no idea. We were building a bridge to nowhere.

That was when our course of action became clear. We should not venture into the unknown. Instead we should look into selling the business. If successful our employees would retain their jobs and our investors would get back some of their money. This was a plan everyone could get behind. Our board signed off and our investors agreed to provide cash, if needed, to get through the sales process.

It was a painful decision. Yes, I wanted to keep going, to give it a few more months. Any one deal could pop and we’d be set. I kept that hope in the back of my mind as we worked towards the sale. It was a false hope. Eventually we ran through the cash we had while closing the sale. Just before the sale finalized, our investors were writing weekly checks to cover payroll and expenses.

And then it was over. Distil was done. I take solace that we made the right decision. That we forged a path somewhere safe and stable rather than leading everyone on a journey with no destination. We resisted the temptation of building a bridge to nowhere.

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