Two interconnected questions torment founders. Speaking from experience, the first is am I building a great business? The second is ‘how do I know when it’s time to close a business’?
I have been asked the second question a number of times this year. The angst that usually prompts this question is palpable, as is the fatigue and emotion of the founder.
I know that feeling.
The reality is that if you choose company building as your craft, you will face into this issue multiple times in your career.
In the spirit of dialling down the taboo around this issue, here is the framework I use to answer this question. It begins with understanding that this decision is often complicated but not complex.
Complexity & Complication
These two words are often used interchangeably, making the decision more psychologically taxing.
The punchline is that unlike starting a business, deciding to close a business is a complicated problem to solve, not a complex one.
This distinction is important because it helps the founder to realise that whilst this decision is laced with a cocktail of emotions, it is a problem that can be solved.
I like how Rick Nason explains it. Complicated problems can be hard to solve, but they are addressable with rules and recipes or with systems and processes. However, the solutions to complicated problems don’t work as well with complex problems.
Complex problems involve too many unknowns and too many interrelated factors to reduce to rules and processes. He goes onto explain that a technological disruption like blockchain is a complex problem. A competitor with an innovative business model — an Uber or an Airbnb — is a complex problem. There’s no algorithm that will tell you how to respond. And that’s why experimentation is used to pave ways through complexity to build a business.
Framing the decision to close
Armed with the knowledge that the decision to close a venture is a solvable (i.e complicated) problem, I use four principles to frame the decision.
1. It’s an internal decision
The decision to close a business is one for the Directors of the company. In most startups, the role of Director is synonymous with founders who will often also be significant shareholders. While this interplay between investors, founders and Directors can make for multiple and sometimes confronting conversations, the rule stands that Directors must act in the best interest of shareholders.
This means two things.
First, as compelling as they might be, external voices don’t make the call to close a venture. The views of customers, users, suppliers, the media and the community built around the company are inputs. This is easier said than done given the investment made to bring them along for the journey.
Second, and in the case of smaller startups where Directors and shareholders are one and the same but with unequal ownership, majority shareholders can exercise rights which can be at odds with minority shareholders. Playing by the rules established in the beginning is important.
2. People aren’t using your product or they are criticising it are not reasons to stop
For the record, these are not reasons to close a venture.
All businesses face headwinds. Iterating, learning and coping criticism is par for the course.
Healthy perspective and capital are needed for entrepreneurs to deliver on ambitious visions.
Break down these two ingredients, fatigue compromises perspective. If you are extremely tired and all you can do is think about your business, take longer than a weekend to get some rest and be with people who make you laugh.
On capital, an entrepreneur’s speciality is securing resources and capital to make things happen. The question is: Has everything (and by everything I mean legal and won’t break the business) been done to secure capital to extend your time in market?
If No, then keep trying.
If Yes, entering the conversation to close the business may be needed.
3. How out of ideas are we and are they working?
I don’t often see the first incarnation of a product work well straight out of the gate. In fact, we spend a lot of time iterating and experimenting. This is fine until what you’ve built doesn’t resonate with the intended target audience and you run out of ideas (and/or money) to continue iterating.
What I think happens more often is that the founders and their teams realise, while there is still money in the bank, that their product isn’t working as expected. By definition, they have a little bit of gas left in the tank to course correct or pivot. This sounds good until they realise that their well of ideas is dry. I’ve been here before and it turned out to be a consequence of fatigue compromising perspective. In this case, bring in, if you haven’t already, mentors and investors to help ideate. It can make all the difference.
Three eventualities can arise from this situation. First, investing the remaining capital and resource into the new ideas and it works (no need to close). Second, no ideas result from ideation and the company has residual capital left over. Third, investing remaining capital and resource into new ideas that don’t work. In the latter scenarios, discussing how to close the business and return residual capital could be the next step.
4. Is your heart in it?
This is the issue people talk about least. At some point, founders can hit a threshold where a change in circumstance adjusts their perspective on the problem they set out to solve.
It can be a gradual buildup of signals they receive which leads them to this threshold. Or, they might wake up one morning and know that they’ve had enough. Importantly, the company could be performing poorly or doing quite well.
Either way, this threshold is best recognised by asking one question: Is your heart still in it?
The answer is binary. Good news if the answer is ‘Yes’.
If the answer is ‘No’ and you’re relatively well rested, the two next immediate thoughts are likely to be, ‘what will [Insert Name A, B, C …] think?’ And ‘how will I tell them?’
Not being part of your business might be a good thing, it may complicate the business or it might mean the business needs to close. No matter how this plays out, always adhere to the founders’ cardinal rule. No surprises.
One last thing …
In a post that I wrote called ‘The Rules To Follow When Winding Up A Venture’, I talk about how making decisions comes with the territory of being an entrepreneur.
If you make company building your craft, closing a venture won’t happen once. It’s also important to understand that your ability to start future businesses that require investment and teams to grow largely depends on how your reputation survives the closure of businesses.
When the time comes to call it a day, be radically candid having done everything to make the model work without breaking your family or the law.
Be remembered as that founder.
Live to fight another day. Because as I’ve heard time and time again, being an entrepreneur is a numbers game and all you need to do is get it right once.