New website, new models, new Foresight. Save $30 with code THANKYOU.  See all models
  +1.646.770.0052         hello@foresight.is

The Zirtual Shutdown

What happened with Zirtual?

Why did Zirtual shut down so suddenly this past Monday? Many people were asking that question this week, and amid the questions about fundraising strategy (a failure to close a new round) and operational strategy, Zirtual’s CEO laid the blame on two “shortfalls”: not having a full-time CFO and only having two people on its board of directors.

That’s quite a claim, laying the blame on the company’s outsourced CFO and mistakes in the company’s burn rate projections, missing two extra pay periods in two months and creating an unexpected cash crunch. Like Mark MacLeod, I’ll call BS. In an interview with Fortune, the outsourced CFO owned up to creating projections that didn’t account for the extra two pay periods in May and October, but asserted that the cash projections adjusted for it and that it was not the reason why the company shut down on short notice.

And he’s right. There’s no reason why the CEO and the board shouldn’t have realized the cash need earlier and planned for it accordingly. The CEO noted that they hired a full-time controller 4 weeks ago and realized that “getting the extra funding was critical”, but the the part-time CFO also mentioned that they had always known they needed to raise a round in the summer of 2015.

And at a $400k monthly burn, as the CEO states in Fortune, the difference in pay period accounting (from 24 to 26 pay periods, annually) should never have have forced enough of a cash crunch to force the company to shut down without warning. If the company operated at a $400k burn in months without the extra pay periods, that would mean there was an extra $200k of expenses. There is no reason why an extra 1/2 month of burn should have caused the company to shut down unexpectedly, that’s running far too tight on cash. And the extra pay periods occurs in May and October: so how it could have caused the company to run out of cash on August 7th?

As Mark notes,

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.

The small board and diffused investor base (13 investors in a single funding round) may not have killed Zirtual, but it certainly didn’t help. A committed lead investor may have played a different role in managing and planning cash, and could have stepped in to provide bridge funding to keep the company alive to a future fundraising round.

The takeaway from this is not “do not outsource your CFO”, as Fortune notes. The takeaway is that execution matters. Financial mismanagement and poor fundraising strategy killed this iteration of Zirtual. I hope the next stage will fare better.

DON’T MISS OUT

In 5 free lessons I share what I’ve learned from helping 18,050+ early-stage entrepreneurs from 98+ countries learn financial modeling.

+ Get a free template cap table model detailing how investment rounds and exits work for founders and investors.