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.

Knowing when to call it quits on your startup