When to kill your startup?

The talk around the water cooler at startups is always around how much runway the startup has, and if the engineering talent will need to be searching for a new job any time soon. But running a startup is about more than money. And the problem gets harder if the people running it are funding it from other, more stable income, and their basic investment is time.

I’ve seen it in non-tech businesses. Imagine a restaurant, a good restaurant. They pay attention to details, they cook with great ingredients, employ a great chef and I couldn’t find many faults, but the restaurant itself is not profitable.

The owner loves the type of cousine served there. He owns several businesses, among which a SPA for up-scale clientele. But the restaurant is a second rate citizen - I can point the finger at the inflexible owner who doesn’t want to increase prices, or re-brand the restaurant in a different light which would attract different or more people.

But that’s not the point.

People think that startups go from nothing, to funding, to building a product with top engineers and sales people, to overnight success. Sure, some, a very small fraction of a fraction make it exactly like that. But for the majority, there are two very real problems that don’t have an easy fix.

  1. Which project/product/service to start working on (qualification)
  2. When to realize that you’ve spent too much and need to shut it down (runway)

Imagine if you will, John Doe. He is a generalist at a software development company, can’t really code on an expert level, but he has skills in marketing and some success with freelancing. He decides to build a product solving a complex issue he is having. But he has 10 other ideas, which vary in complexity and time needed for a MVP.

The first problem is what to create. How to figure out if the problem you’re thinking of building even has customers that are willing to pay you? And more often than not - how will these potential customers even find out about you? There are many horror stories where people just throw money at advertisers (google, facebook, twitter), at a time when they don’t even sell anything. So I’m going to suggest a rule here:

If you’re not selling anything, you have 0% ROI when it comes to advertising. To make money, you have to sell something.

Until you try to sell something, nobody will buy anything from you. You’re a nice product page with an e-mail box, but your subscriber list isn’t worth anything. You can have 10 or 10000 subscribers, but until you attach a price tag and see how many of those are willing to give you money for what you do, all you have is an idea.

So forget about throwing a part of your budget into advertisement. If you want, I would suggest that you buy a nice domain, tweet some tweets and create marketing materials which you can spread around discussion boards, local user group talks, chat rooms, and places like stackexchange. This is called content marketing. The more inventive ways you’ll find to reach larger groups of people while keeping that personal touch, the more success you can have.

If you’re feeling that your idea is going too slow, you can try to validate it faster. A good benchmark for that is Kickstarter, and IndieGoGo. There is some investment you need to make in order to prepare a LLC, and all the materials for your campaign, and you should still do outreach as you normally would, because you might find some loyal supporters in your following. Those kind of power people could mean the difference between your campaign being heavily publicized, or forgotten in a day or two.

When to kill your baby (startup)?

Let’s asume, that you managed to sell some subscriptions for your services. There are only a few metrics that are important here when it comes to the financial stuff - your monthly income, your monthly expenses (burn rate), and your money in the bank (runway).

The rest of the metrics basically deal with increasing monthly income (growth rate, customer LTV, churn,…). Don’t ignore them, but pay attention to cash metrics, not vanity metrics.

Selling one copy if your product is worse than selling none.

I’m reminded of the above quote by a professional colleague of ours, Jan Zorz. He described the problem where most startups fall into in one sentence. If you don’t sell anything, you can decide to scrap the product/idea and move on. If you only sell one copy - you’ll most likely be stuck maintaining it for a while, which might be a commitment you’re not equipped to keep.

Horror story one

You’re running a call center for a high-traffic help desk provider. You’re billing him for telephony services, and some kind of help desk product, which you developed. Let’s say that your monthly costs are about $8,000, while your monthly income is about $10,000. But the problem is that your client is running at capacity, and would need an investment of $30,000 into more performant hardware. You’re risking to lose your only client if you don’t.

It’s a hard deal. We went trough a similar situation, where we invested this money into hardware, solving the problem, only to have the client quit on us 3 months later. We didn’t answer the basic question, is it even a viable business? If you have only one client, and even if the money is good, you’ll have to be very analytical when it comes to investments which can significantly cut into your profits. If there is no growth, investments can’t be justified.

Horror story two

We’re a team of 5 people, we all have jobs in web development, marketing, or whatever. We work full time but we still have free time left for side projects. We started a food delivery service website. We calculated costs to keep the web site up, we set up some POS terminals and are getting restaurants to use our service for a subscription fee. We didn’t do the best calculation on how many of POS terminals we need, or how often they are breaking, so we’re switching to more expensive tablets, and our website needs to be adapted to many devices which we are giving to restaurants for use. We’re still having profits and growth, but our profits are low, and our pool for growth is very limited.

While clients are happy, the income is stable in the sense it can’t dissapear overnight, only significant growth and a higher profit margin could make the business profitable.

When it comes to runway as a hard-cash metric, it’s easy to close your startup and say “Sorry, no more cash in the bank.”. But when it comes to runway as a time metric, even poor profits might keep a business alive for much longer than it should be.

So let’s put it like this. If you manage to invest $10,000 in a startup, which generated only $8,000 in a fixed amount of time (6months, 1 year, 2 years?), do you consider that you should invest the $8,000 back in the startup, and keep doing this until … until when? If you reinvest whatever cash you get back into the same idea, you can do this until you spend your last cent, or until it becomes profitable (if ever).

It seems like our tendencies gravitate towards re-investment, but we ignore our most valuable investment: time. Our time might be better spent on other side projects, which can generate better traction over a shorter time.

So, from what I can figure out:

  1. Every project should have a fixed budget with a cost breakdown
  2. Project income doesn’t automatically mean extending the runway
  3. Pay attention to cash metrics and cash goals (profitability, growth)
  4. If you need to be employed, need to employ people - calculate it in your goals
  5. Deadline, when to evaluate the project performance and kill it off

Deadlines are important. If you buy a new car, trick it with all the whistles and bells so they might have to order it from overseas, you’ll wait for months before your car comes to you. But if you’re building a product or service, it’s in many ways like rushing to catch a train. You might have to wait for the next one.

As the last train departs on midnight, it’s your job to do anything and everything to catch it. But sometimes it’s worth to note, that it’s quite impossible to run 10km, to catch a train that leaves in 5 minutes.

What are your thoughts on the subject? How do you decide, when your startup needs to die?

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