Why Did Zirtual Lay Off 400 Employees Via Email Overnight?

Founded in 2011, Zirtual was an online agency that essentially worked as an intermediary between busy entrepreneurs and efficient virtual assistants. For a monthly subscription fee of $399, Zirtual assistants (as they liked to be called) took care of administrative tasks such as booking travel, scheduling meetings, conducting research, answering emails, building social engagement, and more. At its height, the company employed over 400 people based in the US from 39 different states. However, one day in August 2015, all of Zirtual’s employees received an email at midnight. The email announced that despite receiving an investment of $5.5 million, the company was shutting down and laying off its entire staff due to “market circumstances and financial constraints.” The company’s Facebook pages, Twitter feed, and Google+ profiles were deleted, and its website changed to say it was “pausing operations.” All of this happened literally overnight – with no warning and information about benefits and details on the employee’s last week of pay.  Let’s revisit the story behind Zirtual and understand the agency’s mistakes that led to its failure.

Zirtual’s Backstory

The idea for Zirtual came to 21-year-old Maren Donavan when she had a small online business selling jewelry on eBay while also attending school and working other jobs. To stay sane while juggling multiple jobs, she hired virtual assistants from websites such as Craig’s list to help her do parts of the business that she couldn’t do. She fell in love with the model and moved to San Francisco from Nevada to learn the ropes of building a big company.  Within just 2 years, the company was profitable on $50K to $70K in monthly revenue! And when Tony Hsieh, the founder of Zappos and the Vegas Tech Fund, came on board as an early investor, Zirtual was the center of attention in Silicon Valley. With ready capital, growth followed, and Hsieh’s vote of confidence helped them land more venture capital. Over 5 years, Zirtual got 20 investors to contribute a total of $5 million in funding.

3 Reasons Why Zirtual Failed and Shut Down

Donovan and her co-founders, Erik Jensen and Collin Vin, made certain mistakes that later created significant financial problems for Zirtual.

1. Contract Changes

80% of Zirtual’s virtual assistants were stay-at-home moms working remotely. When the company hit nearly $1 million in monthly revenues in January 2015, Donovan thought she could now afford to “do right for her people.” She chose to convert the contracts of 400 virtual assistants from independent contractors to full-time employees, without considering its full impact on Zirtual’s bottom line. Due to the training costs, salaries, and benefits, changes in the contract meant that Zirtual’s workforce cost increased by 20-30%.  With the changes made in their contracts, Donovan failed to understand one crucial element: whether there were enough clients or not, the firm had to continue paying their employees full-time salaries even if there was no revenue to balance it.  To minimize costs, Donovan tried to reduce the hourly wages of her staff, but that made it hard to attract the high-quality assistants that Zirtual’s business model demanded.  Per Donovan, the business was on an $11 million run rate and burning $400,000 monthly.

2. Inaccurate Payroll Projections

When Donovan dug into the company’s financial numbers herself, she discovered that the accounting firm they had contracted had failed to take the additional costs mentioned above into projections. They had even failed to account for 2 full payroll cycles! With Zirtual already suffering financial strains from the new and heavy staffing costs, the failure to predict and calculate payroll expenses worsened the already bad situation. This made it harder to attract more funding and gave cold feet to Zirtual’s existing investors, sending Zirtual into a ‘death spiral.’ 

3. Outsourcing The CFO Role

Instead of hiring a full-time CFO, based on the recommendation of one of Zirtual’s investors, the company chose to outsource its financial management to Ryan Keating.  The miscommunication between Keating and Donovan significantly influenced the company’s payroll-projection confusion. If Donovan had hired an in-house CFO instead, it would have been faster to detect upcoming financial risks and find solutions without destroying Zirtual’s economic foundations in the process. 

Zirtual No Longer

Donovan and her team worked until the 11th hour to secure more funds, and when they couldn’t, they sold the company to Startups.co, the world’s largest startup launch platform. On a positive note, some former clients and their assistants are believed to continue working together.  Having learned from her mistakes. Donovan says, “when you mess up as CEO, hundreds of people can lose their jobs. Have safety mechanisms in place: surround yourself with experienced advisors and don’t be afraid to ask for help — “fake it ‘til you make it” works until it doesn’t.” Donovan is now ready to launch a boutique recruiting firm that works to place employees at startups. Unlike her previous company, she doesn’t plan to take on outside capital.  Zirtual was a successful and highly on-demand service. However, the firm grew faster than it could handle with a suboptimal business model. It became bankrupt due to its cash flow, overbearing payroll, miscommunication, and high burn rate. What are your thoughts on Donovan’s ambitious plan? What else could she have done to save the company? Please share with us in the comment section below.   Closing your business can be a difficult choice to make.  Not only is it emotional, but there are a lot of administrative tasks to take care of and plenty of opportunities to miss essential details. If you’re looking to close your business, contact us to find out how we can help you move on as fast and easy as possible.