What Happened at Votem
June 18, 2019
In the summer of 2018, Votem was doing relatively well.
We had grown from 3 people in 2016 when I joined, to ~20. Our business had grown in parallel to support it. It was organic, real growth.
We were not a wildly profitable company - we were still losing money - but we were generating north of $1mm / year, diversifying our revenue streams, building out our product offering, and solidifying our reputation within the industry.
We had supported UOCAVA (military and citizens abroad) and Voter Registration systems in the State of Montana, Washington DC, and Detroit. Military voters living abroad relayed genuine gratitude for the ability to participate in a democratic process that historically had been prohibitively difficult for them to participate in — this was awesome.
We had run the Rock and Roll Hall of Fame induction vote, the largest private blockchain vote in the world.
We published our technological protocol which detailed the cryptographic nature of how our system works — ensuring that votes were cast as intended and counted as cast (meant to appease the academics, skeptic, and standards communities for satisfying "end-to-end verifiability E2EVV") .
We won our largest deal ever to rebuild the entire election infrastructure for LA County — of the most demographically complicated ballots in the country — a deal which would generate millions for Votem over the course of its lifespan.
We had our shortcomings — as many startups do — but we were doing OK.
At the end of the summer, we were offered the opportunity to buy another company.
Votem was not looking to buy another company. We certainly didn't have the financial capability to support an acquisition even if we were. However, this was a unique opportunity.
The company was Everyone Counts (E1C), and they were on the verge of financial collapse. A combination of managerial shortcomings and levered financial instruments (PIK debt) left E1C in a position of either filing for bankruptcy or finding an operator in the industry to turn the business around. E1C owners had a preference for the latter.
Why would Votem entertain the idea of acquiring a failing business, especially when we were not in a position to do so?
E1C had a strong reputation and track record. Secretaries of State loved working with their team, and for all intents and purposes, they were the largest competitor to Votem domestically with 20 years of experience administering elections online for both substantial political (New Jersey, Alabama, Colorado, etc.) and private customers (Oscars, Emmy's, CALSTRs, etc.).
Reputation is important. That is not news to anyone. However, it is especially important when selling to governments.
Companies — particularly startups — find themselves very quickly in a Catch-22 when selling to governments. Government procurement requires both referrals and a business track-record. If a company is starting from zero, it's a paradoxical hurdle to surmount. In order to ever have customer referrals, you need to have had business and execute well enough to make promoters of your customers. In order to have won business, you would need to have the backing of other customer referrals.
This is the fundamental challenge for startups selling to risk-averse governments. It is very difficult to go from zero to one because reputation begets business which begets reputation.
What comes first — the chicken or the egg?
This was the value of E1C to Votem - it was an opportunity to jumpstart reputational credibility.
Votem was not starting from reputation zero, but this was a lever Votem could pull to accelerate credibility.
E1C had a book of business and customers that loved working with them; Votem had a technologically superior platform that could scale. Together, there was the prospect of fabled synergy.
This wasn't a traditional M&A transaction. Votem would proceed with an Asset Purchase Agreement to take on the assets and liabilities of E1C with a revenue share payback mechanism to E1C owners.
To responsibly handle this acquisition, Votem would need ~ $7mm in additional funding to execute on the acquisition strategy over the course of the next year. The strategy itself involved consolidating the two teams, moving E1C deployments onto the Votem platform, deduplication of vendors, and assignment of all customers to Votem. That $7mm would be used predominantly to cover the additional 50+ E1C employee headcount.
The crux of why Votem failed was that $7mm was never secured, yet we proceeded with the acquisition anyway, under the impression that we had secured this $.
All the problems that transpired stem from this. It is (almost) that simple. Consequently, post-acquisition Votem ran out of cash 6 months after acquiring E1C.
There was an air of furtive opacity shrouding Votem leadership - a clear violation of our ascribed value: "our business is built on trust. Trust is achieved through honesty, transparency and fulfilling our commitments."
Payroll was missed (multiple times), vendor bills remained outstanding, benefits accounts stood unfunded, and there was a dearth of honest communication from our CEO — both in the time leading up to the implosion and at the climax of Votem's transgressions.
Every employee at Votem was effectively laid off on February 15, 2019 via email.
Trust is built in drops, and lost in buckets
The aphorism holds true. Trust that was built over years of working together was lost overnight via dishonesty, opacity, and failure to deliver.
Startups fail - this is part and parcel of the entrepreneurial process. I was less disappointed that Votem failed than how it transpired. I still deeply believe in the future Votem was working towards — a world where everyone who is eligible to vote can easily do so securely, verifiably, and transparently — I wish the best to our competitors and to everyone working to further the mission of enfranchisement.
An aside: there is an enormous opportunity to modernize our government. The chasm between the ubiquity of technology in people's lives and the dearth of it in governments supporting them is crazy. The successful governments of tomorrow will be those that close this gap by developing core digital infrastructure, building robust cybersecurity systems and talent pipelines, and ensuring universal Internet access & universalism in access to online public services. The discrepancy between people's experience with the consumer platform economy and public institutions amplifies these shortcomings of government's inability to adapt to a technology-enabled world. Startups can help.
So what really went wrong? In reflection, I think this question is akin to: Why is it important to tell the truth? I thought a lot about honesty in the aftermath of Votem. Why is it important to be honest?
We're taught the importance of honesty - 'lying is bad' / 'honesty is the best policy' - from a young age. It's childhood wisdom.
As you lie, you become responsible for keeping track of multiple threads of reality in your mind. It necessarily takes you out of the present forcing you to be either future-planning or past-regretting every time you talk to someone (h/t Naval Ravikant).
With deception, you delude yourself into believing what you’re saying. The stronger your conviction grows in the lie, the deeper the idea becomes entrenched in your mind impeding consideration of the alternative threads of reality you've created, the deeper you have to excavate to unearth those fallacies. By lying to others, you lie to yourself, you lose credibility with yourself, and you put yourself in harm. By lying to others, you make it likely they will unknowingly act on your lie — you make a liar out of other people.
Honesty is the right thing to do. Selfishly, it is also the easier thing to do.
"The combination of power, optimism and abstract thinking makes powerful people more certain. The more cut-off they are from others, the more confident they are that they are right...
...We know - intellectually - that confronting an issue is the only way to resolve it. But any resolution will disrupt the status quo. Given the choice between conflict and change on the one hand, and inertia on the other, the ostrich position can seem very attractive...
...Silence is the language of inertia.”
— Margaret Heffernan, "Willful Blindness."
This quote resonates. There was a clear lack of communication, lapse of honesty, and inability to reconcile with reality. Our CEO siloed himself from the rest of the team that was increasingly trying to awaken him to his own willful blindness.
In retrospect, you can see the slide from delusional optimism to something more nefarious.
I've accumulated pithy advice from our CEO over the years:
Avoid deal heat
It's hard to stop the forward momentum of deals in motion. Keep each other honest and make sure proceeding with a deal truly makes sense.
It's easy to get attracted to flashy/sexy opportunities that could pay off. Startups need to focus on reality, what is measurable and what is valuable.
Deals you don't pursue as a company say as much about your strategy and priorities as the deals you do pursue
Hope is not a strategy
Cash is king
#1 rule of staying in business is staying in business
Don't show up and throw up; do what you say you are going to do
I would add, ‘practice what you preach’.
If you've spent years and a substantial portion of your social & financial capital building a team of people to realize your vision, trust those people enough to help you do that.
If you cannot trust those around you, you are around the wrong people.