The responsibility of an entrepreneur: when to shut down early?

Jason Calacanis has written a lengthy post with a lot of good advice for entrepreneurs who are facing the potential failure of their business. It has good tips for extending the runway and making do with less. It also has advice on orderly shutdowns, something which often distinguishes thoughtful, realistic and proactive entrepreneurs from the rest.

Jason, however, doesn’t address one important topic–when is it responsible for an entrepreneur to shut down well ahead of their runway ending?

This is a tough question that goes against the core entrepreneurial mentality of winning against all odds. So let me try this analogy… Imagine you are the commanding general of the Zugbar army. The Kleets outnumber you five to one. Your force is smarter, nimbler and more experienced. Your strategy is better. You can see how this battle and even the war are winnable if only a couple of things go your way. But they haven’t been going your way recently. In the latest battle, you are taking heavy casualties and can see the real possibility of a good portion of your force disappearing. Do you consider surrender to protect the lives of your soldiers? Do you hope for a Pyrrhic victory? How do you decide?

One of the core points of Jason’s post is that entrepreneurs learn the most from trying times and few times are more trying than when your business is about to die. I’m in complete agreement with this but I’d also argue that different stakeholders in a startup derive different amounts of learning and value from that experience. Overly focusing on the benefits to the entrepreneur is a selfish, one-sided way to look at things. A startup CEO has the responsibility to balance the various trade-offs.

Many startup employees take lower pay in hopes of getting some value out of the equity they hold. At a point at which the value of the equity is essentially close to zero, a CEO should think about whether these people are better served by having a job (an argument for the current times where there is a general shortage of jobs) or perhaps better served by being released of their loyalty obligation to the startup and enabled to seek employment elsewhere. This is not easy to communicate and explore while keeping the team motivated. As Jason points out, a CEO needs to have frank conversations with people at the company to understand what drives them.

Entrepreneurs’ responsibility to their investors is to be good stewards of the invested capital. This doesn’t always mean trying to figure out how much longer one can keep the company running. Sometimes, it involves realizing that the company doesn’t stand a chance and doing an orderly sale or shutdown + returning some of the invested capital, if any is left over.

This isn’t easy to do. It requires vision, humility, clarity and honesty which are not common. It’s much more common to hear an entrepreneur say something like “well, in retrospect, it should have been clear to me 12mos ago that we didn’t stand a chance due to the following macro-level issues in the market but I drank my own kool-aid and didn’t have my eyes and ears open to all the negative signs from the market”. This is a common problem. By definition, entrepreneurs are optimists. Add to that the basic psychological fact that humans tend to notice things that reinforce their pre-existing beliefs (and ignore those that challenge them) and you have one of the most common reasons for startups taking too long to fail. (Board members and investors are not at all immune.)

One of the hardest positions for a entrepreneur to be in is when they have to push a company forward in an attempt to generate some return for investors, knowing that there will be little to no return left for common shareholders after the exec team gets its carve out. I have talked to a couple of folks who’ve done this. They didn’t sleep well for a long time.

The economic and fundraising environments are very tough right now. When the going gets tough, it is especially important for entrepreneurs to think broadly about their responsibilities to the various startup stakeholders.

About Simeon Simeonov

Entrepreneur. Investor. Trusted advisor.
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7 Responses to The responsibility of an entrepreneur: when to shut down early?

  1. Sanjay says:

    Nice article. Though I would say it requires more than vision, humility, clarity and honesty to make that decision. The very trait that makes entreprenuers take up almost seemingly impossible tasks is this strong belief that one can surmount all odds. And, make no mistake, the odds are stacked very high against the startup. Yet, the typical entreprenuer is “foolish” enough to pursue his/her dreams.
    This same blindness to “reality” makes it difficult to see when the odds are too high.

    What is additionally required is an outside view. Sometimes it is the VC and sometimes it is the well-wishers you have collected around you. It is these people, gently or with a firm kick in the butt or both, who can help. I hope you have such people around you, because you need them – in good times and bad times.

    Here’s looking forward to the next boom!

  2. Sanjay, you are right–an outside perspective is critical. Great entrepreneurs surround themselves with people who challenge their perspectives.

  3. You are right to raise the issue of responsibility to investors, board members and others. This might seem like a detour, but keep in mind that some of the people working with the entrepreneur (board members for one), may have personal liability for part of the mess that could be left behind once “[the entrepreneur] hit[s] the boulders below.” In my practice I have seen situations where it turns out that payroll tax, back wages, and other priority liabilities are left unresolved. These are worst case situations where the planning has really been poor, but sometimes (due to excess optimism or for another reason) people don’t track these liabilities or just assume that somehow they will be dealt with. In any event, no entrepreneur will get “the reference of a lifetime” from his or her director who was tagged with even a small amount of this sort of liability. As you point out, all of this militates in favor of prudent risk taking.

  4. Dave: very true, if a shutdown is not orderly, liability can bleed over.

  5. Great article and addresses a really important topic.

    One of the things that makes this decision so challenging is that entrepreneurs often have this misguided notion of “you should never quit”. Most of the time, this is a good thing. Almost all startups will face near-fatal points in their evolution and it’s impossible to ever succeed if one is not willing to push through those tough times. But, this “stick-to-itness” needs to be balanced with some pragmatism and objectivity.

    Giving up on a startup before the bitter, bitter end (and then some) is never easy. But, it’s often the right decision. If the entrepreneur knows (and often she does) that there’s near-zero probability that the company is going to pull through it makes little sense to consume remaining resources (including the opportunity cost for the team) simply to prolong the inevitable.

    • Dharmesh, I sometimes wonder how much more productive and innovative the high-tech industry would be if companies were more honest about their prospects and released their employees earlier so that they could be more productive someplace else.

  6. hadrian says:

    PLease if you are making an article,please try to write the responsibility of an entrepreneurship to the employee and customers I’m begging you

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