The Zirtual fiasco

As a former part time CFO I’ve been following the sudden demise of Zirtual with great interest. If you haven’t been following along, the company shut down last weekend with no warning. The founder blames her part time CFO, Ryan Keating. Here’s my take:

Whether you hire someone full time or part time, you can delegate but should never abdicate responsibility. Zirtual’s founder says her company failed because her part time CFO failed to forecast 3 payroll periods instead of 2 in a month. That’s BS.

I will say that if you take on the CFO title, even part time, then you have a fiduciary duty to the company. So you have accountability. I certainly felt like I was a part of all the companies I served when I was doing this work. So, if he screwed this up, that is unfortunate and should not have happened. Payroll is always a company’s largest expense. And it’s the most predictable. No excuse to screw that up.

But, even if he did make that mistake the CEO and the board should never have allowed the company to run so tight on it’s cash that this mistake would cause them to fail. That is irresponsible management and governance. And even with a part time CFO, the CEO has the ultimate responsibility for managing cash.

I think the failure here is a bigger story. If Zirtual’s investors believed in the business they would have bridged the company. So, the business itself was likely not working.

One final cautionary note: Zirtual raised it’s one and only funding round from a group of 13 investors. So, likely no single investor had enough of a stake to bother keeping close tabs on the company. And similarly, no single investor stood to lose much from its failure. Always better to have committed investors with a meaningful stake than a party round with a bunch of shiny names (Zirtual’s investors included Jason Calcanis and Tony Hsieh).

Definitely some cautionary lessons for us to all to learn from this one.

  • Steve Johnson

    Mark, I agree with your article and all the comments that have been made so far. However, I would add a few caveats to it. To start, if the CEO is a first-timer at the helm, which it seems like in this case given she did not accept blame for the company’s failure, I would take additional precautions to make sure each month the CEO fully understood how much fuel is left in the tank and when it will run out based on current projections or burn rate. Additionally, I would establish a minimum # of months of cash on hand as
    a requirement to maintaining sustainability with adequate time to raise more capital. (Note – I realize that for early stage companies that may not always be possible. Therefore, they should always be looking to raise more capital until there is enough runway.) Lastly, as a part-time CFO, I always want to make sure that I have met (even if just virtually) the board and have built up some communication with them. As
    cash falls below pre-determined levels and becomes critical, I would alert both
    the board and the CEO to insure that everyone is completely aware of the situation and there are no surprises or misinterpretations.

  • SJ Choe

    Great article? No one wants to take the blame of the company’s failure. Pointing fingers to maintain reputation huh.

  • schraderrr

    Thanks very much Mark for writing this article. I think that, if anything, the case with Zirtual highlights the need for transparency in an organisation. I understand that Maren probably had the best intentions in keeping information from her employees, however, my guess is that probably put additional strain on her CFO, investors, etc… and may have created a “hear no evil, see no evil” culture.

    I also agree that at the end of the day, the founder(s) has total culpability. Being a company founder can present great rewards, but de facto requires bearing a lot of responsibility. The way her CFO acted (and her Board etc…) began and ended with her own decisions and actions…

    Gave you a shout on my blog! Thanks again!

  • Vince Surette

    I always find it funny how a CFO is to blame for company’s business model not working. Just push the treasury responsibility aside and it magically disappears as the main killer of startups. THAT math doesn’t add up. I always tell my CEOs that they are responsible for the company and make sure that they see every inflow, outflow and projection, to keep them grounded, as they are ultimately responsible for the decisions that drive the cash flow/burn. With such great startup resources around (particularly your writing), I continue to be surprised that founders still too often miss that. Mind boggling.

    Also agree with the “skin in the game” comment as party rounds tend to be just that and not “mentor” rounds – often more admin work than value-add.

    • Thanks for the kind words Vince.

      And totally agreed no CFO will make up for a flawed business model

  • Dan Primack spoke with Ryan Keating, the outsourced CFO, and has his side of the story here:

    Agree with you completely Mark that this in no way can be blamed on a faulty cash flow projection. The business model simply didn’t work and there was no plan to stay in business other than raising more money to cover the burn.

    • billy_punk

      LOL, the co-founder was a complete moron and blamed everyone else for her own stupidity. Even Keating still praises her today despite how she tried to back stab the stupid SOB. What a moron.

  • marc faucher

    100% agree. “Cash out date” is the virtual freight train that everyone can see coming straight at you. Whether it’s 12 months away, 6 months away, or 2 weeks away. There is NO excusable reason to be “caught off guard” by this. That is what I call absolute incompetence.

    • Well said. Cash is like blood. If you’re bleeding, you’re dying. Probably something that should be central in your mind as a startup leader