A bunch of us techie geek startup junkies were sitting around swapping war stories when I offered up that I had just backed off on a venture I’d co-founded. One of the other guys said he’d recently done the same thing. This brought up the obvious question, by another one of us still deep in the trenches: “When do you give up? How can you tell when to throw in the towel?”
As always, in business, the answer is: “it depends”. In my case, I did a quick back of the envelope calculation of end state operating expenses and compared that to our sale price and conversion rates. Since that scared the crap out of me, I put together a spreadsheet with a little more detail (and more reliable mathematics). That’s when I realized I wasn’t going to get there from here. For me, the issue was timing. I personally didn’t have an unlimited runway for multiple pivots. And our last one, though a great improvement, wasn’t a rainmaker.
You’re An Investor Too
At the end of the day, you have to look at your venture as an investment, just like any other. Especially before you ask other investors to join you. In the beginning only you can assess if the returns justify the costs. If you’ve got nothing better to do, are having fun and paying your bills, that might be just fine. However, if your goal is a retirement nest egg or some significant payout, or you have limited cash to burn before you need a real job, then you need to be a little more objective. But how do you objectively evaluate something that has never existed before (and might not even exist yet)?
Show Me The Money
There’s nothing like looking at the money to give you a brisk reality check. For example, if you think about a near term outcome of a team of people all getting paid, with benefits, and some estimate of what operating expenses are likely to be you can quickly come up with an “Operating Break Even Point”. This isn’t the number that makes investors salivate, it’s the one that keeps you in business. In fact you should come up with a couple of values, one based on optimistic (read: lean) head count and expenses, and one that’s about double that. Reality will likely fall within that range. Now look at your average selling price or transaction value e.g. monthly subscription fee, unit sale price, transaction/click through fee or however you plan to eventually generate revenue. A simple division will tell you how many paid subscribers, unit sales or new customers you need to have to stay afloat. Sometimes that sobering fact is enough to take the wind out of the sails. Yet sometimes hope springs eternal and the distant goal seems achievable…in the abstract. The next challenge is extrapolate your current growth rate to see if it supports those numbers and when.
If The Numbers Don’t Fit, Don’t Force Them
Watch out for the common knee jerk response to unflattering results. The urge to tweak pricing or cut expense projections is not the path out of the pit your in. Private Equity guys can pull that off with old fat companies, but you haven’t even reached critical mass – you’re not even sure what you’ll need. The only solution is improved sales volume and ramp. That’s where you need to drive changes if you’re still hoping to make this work and that’s where you need a full court press. The good news is now you have a rough model to act as goal posts.
In Search Of An Honest Opinion
Frankly, sometimes fellow startups are not helpful. In the interest of being supportive they may downplay your risks and overplay your potential. If you want an objective opinion, look to an outside advisor that works with established companies, not just startups. Or go to a bank and look at a line of credit application (at some point you WILL need to get one of these). That will give you an idea of where you are versus where you need to be. Note that none of this has anything to do with evaluating the validity of the idea, or vetting the need for your solution. This is about whether you can make a credible business out of what you’ve come up with.
You may decide to keep going just for the learning experience.
You may shift your focus from building a business to selling the IP.
Or, you may just shrug your shoulders, look back with no regrets… and bail.