Jeffrey Faustin, Chief Investment Officer at Jenson Funding Partners explores…
Starting a business is no easy task. The effort required to get an idea off the ground and all the decisions to make along the way can be a challenging endeavour for even the most seasoned entrepreneurs. But it’s when things start to go poorly for businesses that owners will tend to face some of the most difficult decisions of their tenures.
When things just aren’t working out and losses are mounting, the question of ‘When is it time to call it a day?’ becomes a pivotal one to consider before moving forward.
Factors of failure
With today’s economic turbulence, this question is especially one that startups may begin considering in the months ahead, if not already. In times like these, the purse strings can really start to tighten, from customers all the way to investors and, if those circumstances lead to a situation where the business becomes or continues to be not profitable or scalable, then it’s time to consider the best course of action.
Despite the current climate, the number one reason why things go bad for startups is the product market fit just not being there. If your product was designed for a specific market, but the demand is lacking, your business is left in a tricky situation.
The logical next step would be to listen to the market and pivot, but some founders just don’t know how to do so. Too many think they’ve got a great idea for a business and then go straight into building the product before conducting the due diligence needed to see if anyone would even like or need what they’re creating.
Scalability is another main promise made by companies that we invest in at this stage and I consider this to be the key question around whether to continue or not. The evidence of scalability, or even the lack of it, can present itself long before cash flow issues arise, but this is often a much tougher call particularly when there is significant runway still available.
Losing energy and enthusiasm for running things can also play into a business entering a decline and lead to the big question of calling it quits. Everyone reacts differently to the circumstances at hand and if the decision is made to wind things down, the next step is to ensure things are handled appropriately.
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Closing down considerations
For businesses that received funding via EIS or SEIS investments, there are some nuances to keep in mind. A provision in those types of investments allows for loss relief, so specifically in the case of SEIS, if a founder is thinking of closing down their business, it’s more beneficial for those investors to go ahead and close that down because then they’ll be in play for somewhat of a return.
When you’re taking on debt in early stage companies, understanding how that sits next to your equity investors is important because when a business shuts down, any remaining value left goes to any debt holders first.
Timing is another factor to keep in mind. Some investors expect that they’ll be involved in a business for a set period of time, in many cases between five to ten years. After the first several years of operating, it’s then up to the founder to consider whether or not the next few years of effort will generate any kind of return for investors.
Sometimes they’ll realise that the business isn’t performing as expected and that there’s still enough value where it can be sold. That’s the preferable path to go down as opposed to spending more money and driving the business off a cliff. In that scenario, no money is returned to investors, and that’s not how you apply your fiduciary duties as a director of a business.
To be successful at anything, you need to learn from any previous failures or mistakes. In entrepreneurship, experiencing a failed venture firsthand can actually be turned into a positive with the right mindset.
If you can show investors that you gave it your all and there are specific reasons why it didn’t work, you’ll be in a much better position for the next try. Especially in the funding department, investors like to see founders with scars because then they can trust that they’re tough enough to go to battle and be experienced enough to overcome any pitfalls.
Understanding and knowing when to stop if things aren’t going right is such a positive characteristic for a founder to have. In my experience, I’ve seen many founders in their early careers admit they didn’t really get it during their first try.
Some will leave the entrepreneurial game completely while others will find a way to pivot into another business or idea. Sometimes it’s just a matter of the market not being ready. The ESG movement is now at the forefront of so many businesses and provides avenues for ideas to succeed, but that may not have been the case if it was implemented a decade ago.
Starting and running a business isn’t for everyone and that’s okay. The startup scene can be difficult to navigate for even the most seasoned entrepreneurs. As difficult as the decision may be, having the right mindset and knowing when to call it a day on a startup is an important skill for any entrepreneur to have and can help set you up for a greater chance of success moving forward.