Starting a startup is hard. Not just a little hard. My former business partner used to describe it as “breaking the rules of nature” because startups violate the ancient philosophical dictum that “ex nihilo nihil fit” — nothing comes from nothing. As a startup founder, you’re trying to create value where none currently exists, and that’s supposed to be impossible. However, as difficult as it is to start a startup, there’s something more difficult for entrepreneurs: shutting down their startups.
I witnessed this challenge a few months ago while meeting a young founder working on his first company. He’d already accomplished more than most 21-year-old founders. He’d been grinding away on his B2B SaaS product for four years and had real customers, real revenues, and a real team. Sure, they were all modest, but few startups even get that far, especially the ones launched by teenagers. However, he wasn’t growing fast enough, and he wanted advice about a sales strategy.
“What’s your price point?” I asked him.
“We’re selling for $99 per month,” he answered. I see that price point a lot with young founders. In their minds, $100 is a lot of money to ask from someone, so they struggle to sell things for more.
“Can you charge more than a hundred bucks?” I wondered.
“We’ve tried,” he said. “But our customers have tight budgets and not a lot of money to spend on software.”
“Well, that’s not necessarily bad,” I said. “It depends on the length of your sales cycle. Is it days? Weeks? Months? Years?”
“It takes us about 10 months to close a deal,” he said. I grimaced, so he hastily added, “But our conversion rates are strong. We close about 15% of our leads.”
“Wow, 15% is great,” I admitted, thinking maybe there was still some potential. “But 10 months is a long time for such a low price point. What does your churn look like?”
“We haven’t had a single customer cancel yet,” he proclaimed with a smile.
“And when did you get your first customer?”
His smile faded. “About eight months ago. So I guess we don’t really know churn yet.”
At least he acknowledged that, I thought. Then I asked, “And how big is the market? How many potential customers are we talking about”
“We estimate 5,000 potential customers in the US.”
“Ahhhhh,” I said, understanding the best way to help him. “I see your problem. There’s no business here. It’s just an expensive hobby.”
I couldn’t tell if he looked confused, upset, or unconvinced, so I clarified. “You’re only charging $1,200 per year with a 10 month sales cycle. That’s a long, time-consuming sales process for so little money. You could possibly survive it if you had ridiculously high conversion rates and ridiculously low churn, but it would still be a massive struggle, and you’d need to be tackling a huge market. You maybe have one of those things. Certainly not all three.”
“There’s nothing else out there like what we’re doing,” he replied. “So I think it’s possible we could capture a big chunk of the market.”
“That’s another red flag,” I explained. “Nobody else selling into the market should make you worried. What do they know that you don’t?”
He sighed. “I hadn’t thought of it that way.”
“Let’s do some simple math,” I said. “Let’s imagine you managed an impossible 50% conversion rate on 5,000 potential customers and an equally impossible 0% churn rate. That means your maximum annual revenue — calculated using impossible metrics — is only $3,000,000. That’s 2,500 customers paying $1,200 per year. While $3,000,000 might sound like a lot of money, it’s nothing compared to what you’ll have to pay in salaries to support 2,500 customers for a B2B product with a 10 month, direct sales cycle.
“Plus, assuming you could ever get to 2,500 customers, it would take at least five years. Probably closer to 10. Is that really how you want to be spending the next decade of your life? Scraping and clawing for maybe enough money to barely support a small team managing a product that companies don’t value enough to spend more than $100 on? Remember, most companies spend more than $100 ordering pizzas for their teams on a Friday afternoon.”
The entrepreneur was quiet for a while. I began to worry I’d gone too far and been too honest. I sometimes do that. But, after an uncomfortable moment, he finally spoke.
“You’re right,” he said, leaning forward and putting his forehead into his hands. “This isn’t a business. Whenever I look at the numbers, they don’t make sense. But I’ve been working on this startup most of my adult life. It’s what all my friends and family know me for, it’s where all my professional connections come from, and it’s basically the only thing I do with my time. I don’t have outside hobbies or things like that. If I’m not running this company, what else do I have?”
I shrugged. “I can’t answer that question for you,” I told him. “It’s something you have to figure out for yourself. But whatever you do, it’s better than what you’re doing now. That’s not to say you’ve wasted your time. You’ve learned a ton, and now you’re much better prepared to succeed when you start your next venture. But it sounds like it’s time to move onto a more worthwhile project.”
In that moment, I saw a young founder struggling with something all entrepreneurs face in their careers. At some point, every startup’s journey needs to end, and rarely does it end well. From the outside, quitting time is usually obvious. But, from the inside, the choice isn’t as clear.
People who haven’t built startups don’t understand the challenge of shutting down. The real startups — the ones that are more than just people working side hustles — are all-consuming. They require so much time and mental energy from founders — particularly in the early days — that founders think of their companies as more than their jobs. Their companies become their identities.
That may not be bad when a company is going well. But it’s terrible when a company is failing because it makes shutting down the company much harder than starting it. Starting a company is difficult because it’s like creating something from nothing, but it’s also an exciting and invigorating time filled with potential and optimism. In contrast, shutting down a company means taking everything you are and everything you’ve worked hard on and throwing it away. Nobody enjoys doing that.
For what it’s worth, I recently got an email from that same entrepreneur. He’s shut down his company and begun working for another startup, hoping to get more experience before launching his next venture. Not only was he obviously happier, he was mad at himself for waiting so long to quit.
“If I could change one thing,” he wrote in his email, “I would have shut down the company earlier. But it’s so hard to know when to give up when you’re in the middle of working on your startup. I wish more people would be honest with the entrepreneurs they mentor and help them see when it’s time to quit.”
I couldn’t agree more.