<http://schema.org/articleBody>
"Maren Kate Donovan so far hasn&amp;#8217;t talked to reporters about what caused her company, Zirtual, to abruptly implode earlier this week. But after the company\u2019s second turn of events\u2014the announcement late Tuesday night that Zirtual would be acquired by a company called Startups.co\u2014she agreed to talk to Fortune. (I am a three-plus-year customer of Zirtual and have written about Donovan and my experience with the service.)\nIt\u2019s \u201Cpretty much been hell, but I\u2019m trying to get through it,\u201D she said. According to the story Donovan tells, the company\u2019s downfall rests in two rather shocking shortfalls: not having a full-time CFO and only having two people on its board of directors.\nHere\u2019s what happened, according to Donovan: Until about a year and a half ago, she and her founding team were handling finances themselves (\u201Cwe were just doing it,\u201D she shrugs). One of her investors recommended she hire an outside consulting firm\u2014a \u201CSilicon Valley CFO firm,\u201D as Donovan describes it\u2014that could provide turnkey CFO support and services.\nDonovan refused to name the firm or say which investor recommended the service, except that it also had done work for some of the investor&amp;#8217;s other portfolio companies. It installed a pointperson who ran Zirtual\u2019s books and did pro forma projections at every board meeting.\n[Update: Fortune has identified the outsourced CFO and spoken with him]\nEarlier this spring, Donovan claims, she suspected there might be a mistake in the projections for the company\u2019s burn rate. She says she dug into the numbers herself and found that the projections missed two additional payroll cycles that fell in May and October due to calendar purposes (the company paid employees every 14 days). Since the company operated with full-time employees, not independent contractors, two extra pay cycles were significant, or in Donovan\u2019s words: \u201Cthe numbers were just completely fucked.\u201D\nShe says she sent a letter to Zirtual\u2019s investors explaining the situation and letting them know the company would need $3 million in bridge funding so it could meet the obligations and also continue to execute on its plans (building out technology and increasing wages to $16 per hour to help retention). She says they got about halfway there and had drawn interest from outside investors that would have completed the round. Last week, Donovan says, those final commitments fell through.\nAbout four weeks ago, Donovan and her co-founders finally hired a professional, full-time controller. \u201CShe dug in and was like, \u2018wow, we\u2019re going to have to rip it up from the ground up,\u2019\u201D Donovan says. It became clear that getting the extra funding was critical.\nDonovan says she wasn\u2019t worried because the company had not had trouble raising money before; the business was on an $11 million run rate, and was burning $400,000 a month\u2014\u201Cwhich in San Francisco terms is nothing,\u201D she says.\nBut when it became clear late last week that the round was not going to come through, she informed her current investors, who, she says, told her they would not let the company fail. Then the company\u2019s HR chief quit abruptly\u2014because, Donovan claims, she felt it was time to cease operations and let employees go at that point, while Donovan and her cofounders wanted to try to secure more funding over the weekend. \u201CWe thought we were going to pull through until Sunday because things kept lining up,\u201D Donovan says. But the current investors didn\u2019t come through\u2014 Donovan says the group had an all-or-none agreement and not all would participate. By the wee hours of Monday morning Donovan and her co-founders prepared to deliver the news to customers and employees. (Fortune has spoken with two investors who confirmed Donovan&amp;#8217;s general account.)\nDonovan says the company wouldn\u2019t have needed much to avoid ceasing operations: \u201CIf we had just had another $500,000, we could have made another two weeks of payroll and found probably an external investor which wouldn\u2019t have been a great deal for us, but it would have kept the company,\u201D she says.\nIn addition to an outsourced CFO, the other perplexing thing about Zirtual is that, according to Donovan, it only had two board members: Donovan and Will Young from Tony Hsieh\u2019s Vegas Tech Fund (the company had five board seats, but only two were filled). Young, too, resigned last weekend.\nLooking back, Donovan says her two big mistakes were not having a full time CFO and not having a proper board. \u201CIf [a board] had actually been in tune, this would have been caught like six months ago,\u201D she says, and they would have advised her to hire a CFO. She says she realizes now she should have come to that conclusion herself, but that she was \u201Cin over my head\u201D in terms of how to even go about doing that. \u201CI blame myself on a lot of this, in not hiring more experienced people, but it wasn\u2019t any maliciousness beyond just naivete.\u201D\nShe also said she was \u201Cpenny wise and pound foolish\u201D in trying to save the company money. \u201CIn retrospect if we had a senior finance person and a senior ops person it would have been a completely different story.\u201D\nInstead, Zirtual became the story. The press descended, and competitors started issuing statements that they were open for business, all while the company\u2019s 400-plus ZAs, still shell-shocked, started support groups on Facebook to process what had happened and to coach each other on how to set up on their own.\nThen came the next twist. According to Donovan, Startups.co CEO Wil Schroter was already a Zirtual client and approached her with interest in coming up with a plan. Under the deal, everyone who owned a piece of Zirtual &amp;#8212; including Donovan, who owned a &amp;#8220;significant stake,&amp;#8221; but less than 50% &amp;#8212; will get stock in Startups.co.\nDonovan says her sole interest in the acquisition was to make employees whole, and she says that has been completed: Final paychecks were issued and mailed out on Wednesday and direct deposits were to hit accounts yesterday. (My former \u201CZA,\u201D Mary Schein, confirms this: she received a direct deposit yesterday for her last weeks\u2019 work, although not for her accrued paid time off; the company said that will come in a separate payment).\nThere will be no severance pay, and the deal did not include any renumeration for clients, like me, who have lost their money. (As of last Friday, I had about 7 hours remaining in my monthly plan, worth roughly $175). It seems obvious that Startups.co will have to offer clients who re-join some kind of incentive or make-good.\nBut will anyone rejoin? I\u2019m not going to. I\u2019m going to work with Mary independently. As I\u2019ve previously written, she is incredible (whatever Donovan\u2019s failings were, she was a good hirer of assistants based on the two ZAs I worked with). Mary already has drawn up a contract and she\u2019s giving me extra hours each month\u2014and will keep a lot more of what I pay her. (Mary is on her husband\u2019s benefits plan, so she is one of the lucky ones).\nOther questions remain: Will Donovan and the rest of the management team remain with the newly-acquired company? How many employees will come back? Those that do will have have to do so as independent contractors, not as employees.\nAnd that is the ultimate irony of this story. In a painful twist, Zirtual had gone out of its way to distinguish itself as a sharing economy company that actually hired full-time employees; Zirtual\u2019s 400-plus assistants were full-time, with benefits. That decision will now be called into question by legions of sharing-economy companies and observers.\nDonovan insists the company\u2019s troubles had less to do with the model itself than the fact that the model \u201Cneeded serious financial chops wrapped around it.\u201D But the full-time labor costs produced lower margins, which Donovan said was one of the reasons the additional finances didn\u2019t come through in the end.\nSo while many questions still remain about Zirtual, and many may dispute Donovan\u2019s portrayal of the story, there may be one painfully ironic lesson from this startup\u2019s saga: Outsource your employees if you must. But don\u2019t outsource your CFO for longer than absolutely necessary.\n\n\t\t\t\t\n\t\t\t\n\t\t\t\n[Note: An earlier version of this story incorrectly said the overlooked pay periods fell in October and November.]"^^<http://www.w3.org/2001/XMLSchema#string>
<http://fortune.com/2015/08/13/zirtual-maren-kate-donovan-2/>