When Should I Shut Down My Startup?

“When you run out of money” is the easy answer to when to shut down your business. However, it does not make the process of shutting down any easier; on the contrary. It is likely that, by then, you might owe money to your employees for severance, HMRC or some suppliers and will be pushed into compulsory liquidation. This is not trivial — compulsory liquidation is a significant action with lasting impacts on the company’s directors, including potential investigations into their conduct. At this point, you might no longer have the option to go “dormant” either. (for more information)

However, shutting down is not an easy option either. The easiest thing to do is to let the startup run without growth and become what we call a “zombie company” (more on that in a future post). Why is it easy? Because it doesn’t require an active decision; just continuing to do the bare minimum to keep the company alive.

Deciding if and when to shut down a startup is a profound and often distressing question for founders. Here, we propose a 3-steps approach to guide you through this challenging decision.

1. Recognising the Signs

Shutting down a startup is never a straightforward decision. It’s a process laden with emotion and significant implications for your team, investors, and yourself. Here’s what to consider:

1. Can you and your company afford it?

One of the most clear-cut signs that it may be time to consider shutting down is financial sustainability. If your startup is running out of money and you are unable to secure additional funding, it’s essential to consider closure before you reach a zero bank balance. It is generally advisable to have 3 to 6 months of runway in front of you. This foresight allows you to wrap up operations responsibly, ensuring all obligations and final paychecks are met, which is not just a legal obligation but a moral one, too. By the time you get there, you will probably have decreased your burn, and as “founders eat last,” you will probably decrease your salary to little to nothing. We see countless founders putting themselves in financial distress to keep going. Pause for a second and ask yourself if this is worth it.

2. Has the market changed sharply?

Market dynamics play a crucial role in a startup’s success or failure. A downturn in the market or a lack of demand for your product can be critical indicators. If market conditions are continuously unfavourable and show little sign of recovery or change, it might be a sign to draw things to a close rather than persist in vain. Hopin is a good example of this — they shot to fame during COVID but failed to find their market once the pandemic was over and entered liquidation a month ago. Another recent UK example is Fronted, founded by executives from Apple, Monzo, and open banking fintech Bud. It closed last summer as “it was hit by rising capital costs which went ‘through the roof’ late last year” [Fronted CEO Jamie Campbell].

3. Do you still have the energy and drive to keep going?

This is a very personal question that only you can answer. As a founder, you need to recognise that your passion is a driving force for your startup. Losing this drive can diminish your effectiveness and may signal that it’s time to consider other paths. Continuing out of obligation to others, like investors or employees, rather than a genuine desire to persevere can lead to burnout and diminish the chances of success. Don’t keep going for other people, and don’t feel guilty about your decision. Your only responsibility to your employees, investors, customers, etc., is to close down your business in an orderly fashion.

4. Is there still enough growth and potential to grow?

Evaluate whether your business is growing or at least has the potential to grow. If your startup has hit a plateau and all attempts at pivoting or finding new growth avenues have failed, this stagnation can be a strong indicator that it’s time to reassess the viability of continuing the business. Of course, this is a tough one. There are countless companies that pivoted years in and experienced a few near-death experiences but became insanely successful, as reported by Michal Friedland.

2. UNWIND simple Decision-Making Flowchart

To aid in this difficult decision, UNWIND Ventures created a simple decision-making flowchart that serves as a practical guide to evaluating whether to shut down your startup.

• Do I want to keep going? Start by asking yourself if you still want to continue. If the motivation is no longer there, it’s crucial to recognise this early. If you do, ask yourself, “Why.” Remember that it is a very personal decision, and you should make it for yourself, not for others. As founder, you are the fire behind your company’s success.
• Do I have a plan? Do you have a feasible plan for pivoting, or can you realistically raise more funds?
• Next, ask yourself the right questions: Don’t wait until funds are depleted. Assess your financial runway and determine if you can sustain the business until it turns around or find additional investment. Assess your available resources — financial, human, and emotional — and make sure your investors are aligned with your plan.
• Ask yourself again, “Am I really sure I want to keep going for the right reasons?” Make sure you have the stamina to make it to the other side without completely burning yourself out.

3. Exploring Alternatives Before Closing

Before you decide to shut down:

• Consider Selling: Look into selling your company or its assets. This can provide some returns to your investors and might be a viable option if the core business or its assets hold value. It is also a more graceful way to end things (for more information)
• Return Capital: If possible, returning some capital to investors can help preserve relationships and maintain your reputation for future ventures. However, be aware that some investors are quite ambivalent about this. Here are two sides of the same coins:

“It’s often obvious when it’s time to return capital and move on. Burning money for the sake of it is silly, and most founders are talented people just working on the wrong thing.”

Pat Matthews, Founder and CEO of Active Capital

“I think my LPs don’t pay me to avoid mistakes but for how right I am when I’m right. So if the founder/s want to keep going, I’m usually ride or die.” The key here is the founder wants to keep going — many of the investors in the thread said the same thing, they’ll back the founder until the end, if the founder has conviction.”

Rodrigo Mallo, GP at Outsized VC

It is critical to communicate with your investors during tough times and align with them on the path forward (for more information)

If shutting down is the only viable option, handle the process transparently and proactively. Communicating openly with your team and stakeholders will help maintain relationships and respect throughout the industry. It’s also essential to manage the legal and financial aspects meticulously to ensure a smooth transition and closure.

Final Thoughts

Shutting down a startup is never easy, but sometimes it’s the right decision. It allows you to apply the lessons learned to future endeavours and prevents prolonged difficulties. Remember, every end is a new beginning. Embrace the lessons, protect your relationships, and prepare for the next chapter with the wisdom gained from this experience.

At UNWIND Ventures, we understand the complexities of this decision and are here to support you, whether it’s finding the right way to wind down or exploring options to pivot or sell. We are with you every step of the way, ensuring that you can move forward with confidence and clarity.