While there’s always a lot of excitement when a new startup is launched, unfortunately, we don’t talk enough about when a startup is on its last leg and may need to shut down.
One of the key decisions many startup founders and funders need to make is when to pull the plug on a failing startup. This can be an extremely hard decision for multiple reasons. After all, birth is always a moment of celebration – whether it’s that of a new human life or a company. On the other hand, death is always tinged with grief and regret, and this is true for a startup as well.
Because you have invested so much time and money in nurturing it, you start treating your startup like your baby, and then when you see that your baby is dying, there is bound to be a lot of emotional angst.
When A Startup Fails
The entrepreneur struggles to raise money to make ends meet. He feels he is letting his employees, his customers, and his investors down – and it breaks his heart to see all his years of effort and hope go down the drain. This is why his actions border on the edge of desperation when he finds he is running out of money. He feels he knows what the problem is and how to solve it, but he needs more money in order to pivot and doesn’t have any left.
Most startup founders will have many near death experiences. The majority are doomed to succumb, but some of them will be able to hustle and survive their baptism by fire. These will become much stronger as a result of this experience, because they will learn how to pinch pennies, conserve their resources and become frugal. They will understand how to do more with less because constraints spark creativity.
When you’re looking death in the face, you’re much more appreciative of the importance of keeping your customers, employees, and investors happy – after all, what doesn’t kill you, makes you stronger! When you have to fight hard to survive, you become far better at delivering true value.
What To Do When Your Startup Fails
Some founders refuse to read the writing on the wall, and will not accept that their company is going down the tubes. They will try to rationalise their poor performance and will start clutching at straws. This kind of delusional thinking can prove to be very expensive!
When they finally realise that their company is on their last leg, they clam up and start hiding the truth from their investors, because they feel guilty, and don’t want to have to listen to lectures. This just makes a bad situation worse and deprives you of the help and support which your funders may be able to provide in your time of crisis.
The shock can teach you a lot of valuable lessons which you can apply so that you become much more efficient in your next avatar, whether or not your company survives. As Johnson said, “When a man knows he is to be hanged, it concentrates his mind wonderfully.” And this focus will help you become a better entrepreneur.
When Your Startup Runs Out Of Money
Running out of money has consequences, and it’s no fun spending sleepless nights wondering how you are going to be able to pay your faithful employees. This is why we tell all our founders to watch their cash flows like a hawk!
Founders need to remember that Intensive Care Units are expensive, and when you are on life support, it’s hard to negotiate over valuations. You may be forced to accept whatever you can get. Explore all your options aggressively, but remember it’s tough to raise money when you are on your last legs .
Your existing investors may be your best bet because they have a relationship with you, but be prepared to accept a down round. This can give you a second lease on life and an opportunity to can bounce back – oxygen can be priceless when you are suffocating!
There can be a lot of emotional recrimination when you are forced to shut down. The founder is bitter that investors are no longer willing to give him a lifeline; while investors feel that the founder has let them down by not delivering on the promises he made when raising money.
They are reluctant to give him any more money – after all, why throw more good money after bad? Isn’t it better to stop the bleeding and find another entrepreneur to back?
Founders need to learn to be mature and stop playing the blame game. Step up and take responsibility – after all, this is your company, and just like you are happy to accept the laurels when your company is doing well , you should be will make it clear that the buck stops with you if the company fails.
Sometimes it’s kinder to pull the plug rather than allow the startup to continue to lurch from crisis to crisis. False hope can be cruel, and it might be better for everyone to cut their losses and make a fresh start.
If you do need to shut down, please follow an orderly process, and don’t let everything unravel. You need a lawyer to help you make sure that you have complied with all the statutory requirements of winding down the company – please make sure you don’t leave any loose ends, as these can come back to haunt you later on.
Yes, you will grieve when you have to shut down, but you also need to learn to be emotionally resilient. Please pick up the pieces and move on. Remember that life doesn’t end when your startup fails, and many investors are happy to fund failed founders because they believe they have learned a lot by graduating from the School of Hard Knocks.
[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]