Web-based service companies can slip away like thieves in the night

If you are a Twitter addict, as I am, you will have already heard that Zirtual “paused” operations late last night.  You can read all about it here at Business Insider.  For those of you unfamiliar with Zirtual, I can get you up to speed fairly quickly.   Zirtual was a virtual assistant company.   They had a Software-As-A-Service platform that allowed customers to hire administrative staff on an interim basis.   As a customer you could sign up for certain number of hours per month of administrative help and Zirtual would assign you a dedicated assistant.   One assistant would handle multiple clients .  But it was cheaper and more efficient hiring a virtual assistant than hiring a full-time assistant yourself.  I tried the service back in March of 2013.   My virtual assistant wasn’t good, so I cancelled the service after a month.   That’s just my experience with Zirtual.   By the time they closed their doors last night they had 400 employees servicing clients — so they must have been doing something right.

Then, *poof* they were gone overnight.  That means four hundred employees may not get their final paychecks this week.  Given the Zirtual model was one assistant for multiple clients, I’m guessing this means 800+ clients left in the lurch overnight.

This can be a problem for any business, but it’s a more common problem for venture-backed on-demand platforms.  Most that fail will fail much more gracefully than Zirtual, giving employees and customers more notice of their forthcoming demise.  Homejoy gave customers and employees a two-week notice they were closing their doors.  Customers were not getting any refunds, however, but at least some customers *probably* got their previously scheduled house cleanings prior to the July 31st end date.    There isn’t much to be done when venture investors elect not to fund losses going forward.

What is the lesson to be learned here for customers?

Don’t get too dependent on a venture-backed platform without a clear view on their viability.   Definitely avoid wrapping their platform into your business processes without some exit plan.  And for heaven’s sake – choose the month-by-month payment plan over the pay-a-year-upfront plan.

That’s the difference between most private-equity backed deals and venture-backed deals.  If your supplier is making a profit they are less likely to disappear on short notice.   They can fail, but it’s a longer, slower death.  And this can make all the difference if you’ve made them a core part of your solution.   It’s possible for a PE deal to fail, like debt covenants triggering the seizure of a company.   However, usually this just means that the equity investors get wiped out.  The company is still running and servicing customers.  Remember, this isn’t like Crumbs the cupcake store going out of business overnight.  Sure, some consumers had to scramble to get cupcakes for a kid’s birthday party at the last minute.   (They should buy sheet cakes for a child’s party like any other red-blooded American anyway).  This is way different than having your business processes tied up with a partner that fails.

I am sure that are more than a few busy executives and entrepreneurs will be caught flatfooted by Zirtual’s overnight closing.  Zirtual’s admins were handling core tasks for many of their customers.   It’s not a simple process to find, hire and train support staff overnight.