fbpx
Startups

When to shut down a startup

shut down startup
Assisted Payment Solutions - Africell Airtime

By Aaron Harris

It makes sense that founders and investors spend so much time talking about things that go well. If we spent all of our time dwelling on the companies that failed, we wouldn’t have time for much else.

When people do talk about company failure, they often do so in a way meant to make them seem wise by breaking down all the lessons they’d learned through failing.

I did something like this when we shut Tutorspree down. I think that was a valuable exercise, and maybe it even helped some people. Mostly, though, it was cathartic.

Founders lack a coherent way to think about when to shut down. Founders do not always get to choose to shut down. However, most of the time, it is the founder’s choice.

It’s a personal decision. It’s a hard and painful decision. It’s an emotional, fraught decision. However, shutting down doesn’t have to be a blind decision.

The unintuitive thing about figuring out if you should shut down your company is that it isn’t the path of least resistance.

The “easiest” thing to do for a struggling company is to fall into zombie mode – neither growing nor truly dead.

This is easy because it doesn’t require an active decision, it just involves continuing to do the bare minimum to keep the company alive.

This involves a series of seemingly small compromises that lead to stasis or failure.

Shutting down is hard because it means publicly admitting that you were wrong, unlucky, or incompetent. Because of this difficulty, we’ve evolved a set of terms that often mean “shut down” without saying “shut down.”

In no particular order, these are: pivot, hard pivot, rebrand, strategic shift, change customer focus, and platform switch.

Stakeholders

Shutting down is hard because it generally means disappointing people who believed in you. Some of this disappointment is real, some of it is imagined.

Founders who have raised money are usually most concerned about disappointing or upsetting their investors.

Investors are often upset when a bet fails, generally in proportion to the amount of capital they’ve given you, and in the speed with which things went wrong since they invested.

However, investors know that most bets are going to fail, and will usually get over their emotions.

The thing that bothers investors more than shutting down is when founders either misrepresent the status of a business and suddenly shut down without warning, or slowly bleed out a business over years while taking up a lot of the investor’s time.

Founders often worry that shutting down will disappoint their customers. This is true, but companies that aren’t doing well generally see their products degrade, which also upsets customers.

Unless your product provides a critical, lifesaving purpose, shutting down cleanly and with transparency is much preferred to a slow fade into obsolescence.

Founders should worry about the impact that shutting down has on their employees. The biggest burden a founder has is to meet payroll.

The biggest emotional investment that founders make – especially early on – is convincing great people to take a leap of faith and accept an offer to work their butts off on a long shot.

This dynamic is why transparency around the decision to shutdown and the timeline of it is so important.

The worst thing a founder can do to an employee is to tell them that everything is amazing, and then to one day tell them that she a) no longer has a job and b) that the company cannot pay her what was promised and c) that you’ve known all this for a long time but didn’t want to tell her because you were worried about her feelings.

It is much better to make a clean decision to shut down in full view of your employees with enough time and money left to help employees find new jobs and move on.

Framework for shutting down

The decision to actually shut down an idea can be made through answering the following questions:

1. Do you have any ideas left to grow your startup?

2. Can you drive that growth profitably?

3. Do you want to work on the startup that results from that growth?

4. Do you want to work with your co-founders on the startup that results from that growth?

The first two questions here are quantitative and driven by the experiments that founders are constantly running on their products and users.

Unfortunately, while they are quantitative, there’s no deterministic way to know if you’ve actually tried everything in the right way. At some point, you have to make a call based on accumulated evidence.

The second two are qualitative and introduce the largest challenges around making a decision comes when the answers to these questions are mixed between yes and no.

For instance – if you enjoy working with your co-founders on a business that produces positive cash flows but is not growing, you probably shouldn’t shut down.

However, if you hate the people you’re working with on a business that is growing rapidly, you should either shut it down or find a way to keep going without the team.

These are personal decisions that no one else can make for you, but it is important to separate the different threads of the decision so that you can actually evaluate them as objectively as possible.

The other side

I was terrified to shut my company down, even though all the evidence said it was the right decision. The thing that scared me most was that I had no idea what would happen afterward.

However, I realized that I had exactly one life to live and that staying in a bad situation of my own making out of fear was a dumb thing to do.

Having spoken with many founders who have gone through similar situations, I’ve found that most of them are incredibly depressed after shutting down their startups for a few months.

Afterwards, things start to get better. This may be hard to believe but shutting down releases so much tension and clears away so many burdensome expectations that it allows for brand new creative ideas and approaches.

It’s a necessary part of the startup cycle and one that founders need to approach more openly and rigorously.

Notes

1. Throughout this essay, I use “shut down” interchangeably for ideas and companies. The two differ only slightly.

2. Running out of money unexpectedly, often as a result of a failed fundraise, can force a founder to shut down.

3. Incompetent seems harsh, but it would be strange to believe that you could be competent at all the new things required in building a company on the first or even tenth try.

4. I am sure this is a non-exhaustive list.

5. In this case, shutting down is still critical, but the decision should involve a long timeline, over communication, and a best effort to find alternatives.

6. I could also state this as the inverse. Deciding to work on a startup should come down to these questions all being answered with “yes.”

7. It’s important to make sure that you’ve actually tried a lot of things. Founders often quit far too early on an idea that needs more time.

8. The answers to questions 2,3, and 4, were all “no,” though Ryan, Josh, and I all like each other as humans.

To Top