Stopping a Startup
Ah, we all love entrepreneurship. There’s something exciting and thrilling about bringing the brilliant idea you had in the shower to life and make a multi-billion company out of it. We all like to start new things. But we also know that the majority of startups will fail to turn into a sustainable business (Be honest, I hear it in your mind “Maybe, but mine will succeed ’cause my idea is awesome”). If this is the case then there must be a point in time where you have to decide whether you want to continue with your venture or if you should try something else. Of course, there are some hard facts: If you simply run out of money, it’s obviously time to stop. But do you need to to burn your entire cash until you realize that you currently run a non-business? I don’t think so, but there are some tricks of your mind you should be aware about that will hinder your decision massively.
The magic bullet: Perseverance?
One often reads that one of the most important qualities founders and entrepreneurs should have is perseverance. And this sounds very logical, right? We all know that the initial business model you envision for your new mind blowing company is rarely successful right from the start. You need to pivot. Iterate. Getting from plan A to a plan that works. And I agree totally with that. But perseverance is not a magic bullet. Sticking with your ideas or company is fine, but one should also know when it simply is enough. Yes, there is a possibility that despite all your efforts your business simply will not take off. There is the possibility that even if you pivot like anything else there are simple not enough customers out there to implement a sustainable business. Face it. And know when it is time to move on and try something completely different.
Theory vs. reality
“All right”, you may think, “this sounds logical to me. We all know that there is some point when sticking to an obviously incorrect idea/assumption/business model is just a waste of time. And then we move on. Piece of cake”. That’s the theory. But why is it that in reality sometimes even big companies hang on to a wrong strategy far too long? Founders burning their money by trying to force their product in the market even when all statistics say there’s simply no need for it? We see money down the drain everywhere around us.
One reason is that we simply fall in love with our own ideas too quickly. We believe in them. We want to believe. We have to believe. And yes, you sometimes need to be a visionaire and try something against all odds. But beware of a simple trick of the mind called the confirmation bias. Wikipedia explains it nicely:
“Confirmation bias (also called confirmatory bias or myside bias) is the tendency of people to favor information that confirms their beliefs or hypotheses.” (Source: Wikipedia)
This means that our brain is not operating like a computer, taking in and processing information unbiased. The opposite is the case: When we process information we have the tendency to filter information that do not support our believes. And we give information that supports our believes much more credit than it deserves. I deliberately used the word believe here. Simply because the effect is stronger the more emotionally involved you are. And when it comes to entrepreneurship we all know that there are huge emotions involved. That’s why founders often stick to their idea too long, refuse to pivot or shut down their business.
What should you do about it? Well, first be aware that this effect exists and when looking at your market research or company figures ask yourself: How biased am I regarding this topic? How emotionally involved am I? Do I simply want to avoid the pain of realizing that I was wrong in my assumptions?
Second, talk to people. Talk to people that think your idea is rubbish. And more important than talking is listening. Listen to them and take their opinion serious. Your hardest critics can provide most valuable information if you just forget about your ego for a moment.
Sunk cost fallacy
A second trick of the mind is called the sunk cost fallacy. In simple words, it means that one continues on a hopeless mission because “I’ve already invested so much in this thing, I can’t simply stop now”. Let’s examine what this means. First, sunk costs are costs that occurred in the past and cannot be recovered. Some also call them “retrospective costs”: Let’s say you invested 10K in marketing and ads. After you spent the money, it cannot be retrieved again regardless whether your campaigns were successful or not. The money’s gone.
Now economists argue that retrospective costs must not influence our decision-making, while future (prospective) costs should. Obvious, right? You cannot do anything about money you already spent, but you can freely decide on your future costs, i.e. how, when and where you will spend money.
Unfortunately our brain does not work like expected from the homo economicus. We are particularly averse against losses of any kind. We fear them. We avoid them. That’s the reason for the sunk cost fallacy: As long as we continue our unprofitable idea the money already invested is not lost: Maybe the business starts to take off if we only implement this one more feature, then our investment is saved and we will all walk out of the room as rich men / women (yes, confirmation bias kicks in again). If we would stop our brain (or subconscious mind, whatever you prefer) has no more excuses to make and must admit that the money is simply lost. And that’s what we all fear. And despite the fact that our logical brain knows that more of the same does not lead to success in most cases, we still do it. Sad, isn’t it?
What to do: Well, I’m a big fan of data driven business development. When you start your business, define your KPIs, outline where you want them to be for each subsequent month and then monitor them closely. Set realistic goals: Remember that you define these KPIs for you and only you, not any VC (come on, you know that the figures you present to raise venture capital are all fake). As time goes by you probably will need to adjust your goals. That’s fine. But please also define your stop-loss upfront. Maybe it’s ok if you just sell 100 subscriptions per month for your service instead of 120. But selling only 5 constantly would be a string signal that you probably should forget about the sweat, effort and money you put in and move on to something else.
The confirmation bias and the sunk cost fallacy are treacherous beasts. They blur our ability to make logical decisions based on facts alone. And while they are sometimes useful in our private and/or social life, in business they are a plague. You cannot “remove” these tendencies from your brain, but you can be aware of them.
If you want to read more about this topic I highly recommend: