Virtual assistant firm Zirtual went from a Silicon Valley darling to a financial disaster in less than a year. The company was forced to halt operations and lay off 400 employees literally overnight. Understanding how such a catastrophe could occur can help keep other businesses from suffering Zirtual’s fate. Rather than just revisit the story behind Zirtual, let’s dig into the mistakes on all sides that led to the company’s failure. In the final analysis, both the leadership team and their financial advisor created problems that combined to sink the company.
Understanding Zirtual’s business modelZirtual positioned itself as a provider of “high-end” virtual assistant services — the Nordstrom’s of VA providers. By providing top-tier services, Zirtual hoped to be able to charge enough to afford the necessary high caliber of staff and still keep its profit margins relatively strong. As founder Maren Kate Donovan put it, “…at Zirtual I realized, people buy a story that resonates with the person they want to be, not necessarily who they are at that moment. And that’s part of how we built our brand.” The core of this “story” was the virtual assistants themselves. Only great people have great assistants, and Zirtual could provide you with a great assistant. Donovan insisted on hiring only virtual assistants with specific qualifications: they had to be U.S.-based; possess a college degree; and complete a rigorous training program. These requirements allowed Zirtual to provide a higher caliber of VA than clients could find elsewhere, and this is how it built its brand and fueled its initial spurt of growth. In pursuit of their chosen business model and vision of the company’s future, Donovan and her co-founders made certain mistakes that later created major financial problems for Zirtual:
- They transitioned their over 400 VAs from contractors to employees without understanding the consequences.
- They failed to grasp the ramifications of the company’s payroll projections.
- They chose to outsource their financial management role to Ryan Keating rather than hiring a full-time CFO.
Mistake #1: Zirtual didn’t anticipate the cost of its staffing changeZirtual launched in 2011. By January 2015, with Zirtual hitting nearly $1 million in monthly revenues, Donovan decided that she could now afford to “do right by her people” and convert her entire workforce of virtual assistants from contractors to full-time employees. This was part of her vision for the company, but the team neglected to take into consideration the full impact on Zirtual’s bottom line. Consider how different the financial picture becomes if you have 400 employees versus 400 contractors. Let’s say you’re paying your contractor workforce $15 per hour. Assuming they all work full-time, your wage expense will come to $240,000 per week, which works out to $1,040,000 per month. But this is at peak efficiency. If you lose a few clients, your contractors won’t work full-time, or not all 400 will work. You can match supply with demand with this fluid workforce. That means you only have to pay wages to your contractors if you have a revenue stream to cover those expenses. Now compare that to a staffing force of 400 employees. You have two considerations with employees:
- Donovan estimated that as employees, Zirtual’s workforce cost roughly 20% to 30% more than they did as contractors because of benefits, training costs, and other employee expenses. If staffing costs go up by 25%, your $15-per-hour workforce will now cost you $300,000 per week, or $1,300,000 per month – which means you are eating a $260,000-per-month hole in your profit margins.
- You can’t quit paying an employee if you lose the client he’s working for; you have to keep on paying his wages and other expenses even when you no longer have revenues coming in to balance it.