Knowing when to shut down your startup
As we discussed in September, startups are tough. A startup is “an organization formed to search for a repeatable and scalable business model” (Blank and Dorf), never before seen or proven. The essence of a startup is high ambition and innovativeness, founded by supremely passionate and talented selfbelievers. Given that innovation enabling new business models is mostly tech-related and requires cash to fund the search, global startup numbers are clustered where seed capital is available around universities and techno-hubs. While USA remains “Startup Central”, countries like India have thousands of tech entrepreneurs.
The failure rate is high, about 90% in USA. In the literature, main post-mortem reasons are:
- Timing – the moment has not arrived or has passed.
- The idea does not solve a market problem – it is not needed. (“Most entrepreneurial ideas are bad and deservedly fail” –Paul Graham).
- The execution is flawed.
- Scaling was premature.
- The venture is unlikely to produce adequate return for investors.
- Milestones are not being met.
These all show in insufficient growth and haemorrhage of cash.
“Optimism is a gift of the entrepreneur, and also an occupational hazard. There’s a very thin line between optimistic and delusional”. (Jay Gotz)
The entrepreneur’s awful dilemma is to persevere, redirect/divest (“pivot”), or shut down. The decision has several elements, which rank somewhat differently for New Zealanders versus Americans: –
The Persevere arguments:
- My baby is beautiful. I will persevere, developing improved prototypes and sales tools towards convincing the market of its need.
- The team is learning – we will develop the execution skills.
- I have an obligation to angels, seed capital providers, FFF and employees. I cannot abandon or betray them.
- Now that we have completed our venture capital round, we cannot quit. It was so hard to get the funding.
- My credit rating and employment prospects will be harmed by this windup.
- We just need time and a bit of luck.
The Pivot argument:
- Flick it before cash runs out.
The Shut Down arguments:
- We made a number of irretrievable mistakes.
- Milestones are not being met.
- The big firms have caught up with our technology and will replicate cheaper and better.
- New or newly discovered roadblocks have emerged.
- I have lost the passion.
- Opportunity cost of my time and talent is great. I could be a “restarter” in a new venture or a corporate executive.
- We have hit the cash wall with slim prospect of new funding in time.
- My Angels tell me to pull the pin.
- It is a dead duck.
Most literature is American. You might find these perspectives useful.
http://rubicon.vc/when-to-quit-your-startup-vs-never-give-up/
Knowing when to call it quits on your startup
http://www.forbes.com/sites/davidteten/2013/04/05/should-your-startup-persevere-pivot-or-shutdown/