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The Problem With Zirtual

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Zirtual is a virtual assistant startup that matches up people with, well, virtual assistants. India has many startups in this sector, and it has largely been popular with entrpreneurs. 

Dan Primack wrote in his blog last week that the reason for the failure was that Zirtual had switched over to give their contractors employee status which included giving them benefits, which added to more of their burn rate.

The reasons that the Founder CEO Maren Kate Donovan gave was that she had outsourced her CFO functions to a consulting group- Keating Consulting Group, and they had missed several pay periods, so their burn projections had largely been inaccurate.

As to those burn rate projections, Keating expressed surprise that Donovan is using them to explain the company’s collapse. Yes, he created Excel spreadsheets that only had two pay periods per month (i.e., 24 pay periods rather than 26). But he insists that the cash projection in each pay period was artificially higher (on a sliding scale) to make up the difference, thus meaning that Zirtual shouldn’t have suddenly had to come up with hundreds of thousands of unexpected dollars. “These are projections and they’re never right on the nose but I can’t imagine that this had a big impact in them getting through August 15,” Keating says.

Here, he admits two things: 1) He did not include all the pay periods 2) He "inflated" the cash projections for each pay period by making them "artificially higher" (although it's not clear how much higher) therefore, these cash projections weren't even remotely accurate.

First of all, what kind of financial services professional can't tell the difference between 2 and 3 pay periods, and what would motivate him not to include several pay periods? Who can say for sure, perhaps Mr. Keating had been inebriated and had a drink or two when he made the excel chart with his projections. I, for one, would not feel comfortable with a guy who says he's a financial services expert and purposely omits pay periods whilst inflating other numbers on a sliding scale.

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Secondly, the problem with Zirtual is not one that is related to switching over their contractors to employees- rather, I think that was a step in the right direction. The fundamental problem with Zirtual was that it only wanted U.S. university graduates to work for $10-11/hour. I remember my first job, when I was 15 years old and worked at bakery at the local mall, and my pay was $8.50/hour, which was about 15+ years ago. If U.S. University graduates in this day and era are only paid $10-11/hour, well it seems quite obvious that this revenue model will be unsustainable- primarily because any smart U.S. university graduate will look for more competitive positions, and there will be a high turnover rate at Zirtual in which a large part of its burn goes to initially training these new employees. That is time and money wasted, right there.

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These U.S. University graduates are better off working for McDonald's and Costco, both companies that give a higher pay rate + benefits than Zirtual; except McDonald's and Costco doesn't expect their employees to have U.S university degrees.

CEO Maren Kate Donovan says that her mistake was that she didn't hire the right CFO. I think she is right. She also should've started fundraising at least 6 months before she ran out of money, and not the weekend before. However, one thing is clear, all the companies that outsource their CFO functions to the Keating Consulting Group  should doublecheck their figures to see if he purposely left out any pay periods whilst inflating other numbers on "a sliding scale." To me, that is pure negligence and completely unacceptable for a financial services group to do.