Sink or Swim

Throwing good money after bad is a dumb idea. Investors know that if a startup is failing, you don’t throw more money in. Not unless you like seeing cash burst up into flames. So why is it that startup founders throw good time after bad? As the adage goes, “Time is money.” I’ve made this mistake myself. I knew I should cut and run, but hung out and went down with the ship. It’s hard to pull away. On top of that, we celebrate the spectacular successes that occasionally come from startups that floundered for ages before hitting it big. The time you sink now is lost — you will never get it back. Treat your time as precious. Don’t be careless with it.

Noble Misconceptions

The psychology of “going down with the ship” is fine and good if you’re saving someone else’s life. But when you’re in a sinking startup, you’re more likely doing more harm than good. You’re spending investor’s money. You’re keeping employees or co-founders from looking for better ships to jump on. If you’re on a sinking ship, most of the people around you are spending too much time thinking about backup plans, release valves, and crazy schemes to keep the boat afloat. In some cases — like Air B’nB — you can save a startup with a crazy scheme like selling cereal with silly names. In most cases, you’ll fail and drag your team even farther down with you.

While I love stories about overcoming adversity, I prefer to use them as guides describing what not to do. For example, I would never want to repeat the many mistakes cataloged in “Endurance: Shackleton’s Legendary Antarctic Expedition.” Similarly, I never want to repeat the blunders in “The Hard Thing About Hard Things”, where Ben Horowitz describes the many struggles required to keep a sinking startup afloat during a tech bust.

The goal is to not look at these stories as triumphs, but as guides for making better decisions in the first place. All too many founders hope against hope that they can overcome adversity while their startups continue to sink. It is painful to watch. Don’t assume that just because it sometimes works out, that it will work out for you. That sinking feeling you get when your startup goes from, “OMG this is fun!” to “a stinking bag of poop on your doorstep” exists to tell you when to close up shop. Nineteen times out of twenty, you should pay attention to that feeling.

Protect the Team

When you fail (and most startups do fail), remember to look after your team. You’ll soon be working with another team. They will eventually learn how you ended things with the last team. If you can make their exit any less painful, do so. If you can give them a small severance by ending a few weeks early, then do so. If however, you owe them back pay and have to close shop without telling them, your next team will hear about it.

Protect the Investors

Investors want to get money back if they can. If you know you’ve failed, don’t just blow the rest of the cash. Pay your debts. Close shop and return what you can to investors. They will respect you for saving them cash. They may even invest in you again — if you learned from your mistakes. Nothing will burn bridges with investors faster than wasting their cash. When you see the ship sinking, get what you can out of what you have left.

My Baby

Many entrepreneurs view their startup as their “baby”. They want to protect their “baby”. They want to keep it alive, regardless of the consequences. Who needs that marriage? Why not mortgage the house? The kids’ education fund — hell, Bill Gates never finished college. Investors bank on the insanity of entrepreneurs to overcome insurmountable odds. Many of us throw fuel on the flames of startup obsessions to encourage our founders to achieve more for less. But your startup may be a Frankenbaby, so watch out. Your startup may turn on its master.

Opportunity Cost

The time you’ve already spent on your sinking ship is irrelevant. That time is already sunk. The only issue is what you can do in the future. If you tie your fate to a sinking ship, your opportunities become severely limited. Consider the good you can do by sticking with a sinking ship versus jumping overboard and finding another startup to carry you forward.

Trusted Advisors

One of the most important questions you can ask your advisors is, “Should I throw in the towel?” If there is a consensus, you might consider listening to them. If your advisors like to sugarcoat things, get new advisors. Sugarcoating advisors will watch you sink while happily saying, “Don’t worry, you can turn this thing around.”

Fun BITS:

• Some of the best warning signs that you should jump ship are, when you can’t convince your partners of the logic behind the business model or if you keep sinking more money and time into a venture. –Katherine Lewis
• “The results showed that when entrepreneurs are faced with negative feedback regarding sales growth in the first year, this tendency to escalate investment is greater.” From a study done by Anne McCarthy of Indiana University and David Schoorman and Arnold Cooper of Purdue University on the sunk cost effect.
• From the perspective of investors, these are some of the red flags that they run from when identifying failing startups: very high burn rates, no marketing plan, no momentum, founders not grounded in reality. –Marianna Hudson via Forbes

Originally published on September 29th, 2016 on our previous blog.