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Should Your Startup Pivot, Persevere, or Plank?

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Happy (Photo credit: Wikipedia)

(I originally published this in Forbes.)

It’s a cliché of the startup world that successful entrepreneurs persevere even when everyone else thinks their idea is doomed (see: Pandora).

It’s a cliché of the startup world that successful entrepreneurs pivot when appropriate (see: Paypal, Apple opening an app store, etc.)

Unfortunately, these two clichés are both true and they contradict one another.  The key question is: in the face of the inevitable challenges of entrepreneurship, should you persevere, pivot, or shut down?

Eric Ries and Steve Blank have correctly argued that you should have an articulated test for progressing with a certain business model, e.g., >25% of users use our site every month.  If you pass the test, then persevere; if not, pivot.  I love the lean startup methodology, but in practice it’s hard to develop bright-line tests.

The key to answering this question is to acknowledge the human reality that everyone thinks their own baby is beautiful.  (I do!)  You loved your startup idea, which is why you founded it.  It’s hard for your ego to say that your idea is bad, and/or you don’t have the skills to execute it.

So, you’re a terrible, biased judge of the validity of your business.  If you believe in your business, but every investor and potential employee thinks you’re wrong, then they’re probably right.

The key test is: have you persuaded a new investor, new employee, or new client, with no historical relationship to your business, to invest time and/or money in your firm? If so, that’s a sign that your business is likely worth persevering with in its current form.

If three months have gone by and no new investor, employee, or client has joined you, that’s probably a sign you should pivot (if you have cash left) or shut down (if you don’t).

As Paul Graham observes, most entrepreneurial ideas are bad and deservedly fail.  Most babies are red, wrinkled, and scream.  Unfortunately, most billion-dollar startup ideas also look bad on first glance and for the first few years, before they turn into billion-dollar companies.  I propose this “new recruit” test is a way of differentiating between the really-bad and the good-but-perceived-bad .

Dror Futter, an experienced lawyer, writes,

“In all the talk about Unicorns, it is easy to overlook the fact that the majority of startups eventually fail. Further, pulling the plug is rarely an easy decision – there is often a plausible event (new contract, new investors, etc.) that might occur that will “save the day” and always seem only days/weeks away.

For investors and management, making sure there is enough money in the bank for a “graceful landing” is important for at least 3 reasons:

1. It’s the Right Thing to Do – this is the livelihood of your employees and your suppliers we are talking about.

2. A Messy Failure Can Result in Legal Liability for Officers and Directors – failure to pay accrued wages and taxes can result in personal liability for officers and directors. Similarly, when a company enters the “zone of insolvency,” directors have to start managing the company to preserve assets for creditors. Failure to do so can result in claims against directors for breach of fiduciary duties.

3. It’s a Small World After All – Even if a messy shutdown does not result in legal liability, the venture world is not that big. The people who get “stiffed” in a messy shutdown are people you may want to work with in the future.

If you do think that you’re headed towards shutdown, I suggest tell all of your clients, business partners, etc. You are likely worried about the reputational hit, but if the company fails that will hit your reputation anyway. The businesses you’ve touched since launch are the most likely buyers of your company or at least the technology and team you’ve built, and the sooner they know about your situation, the more time they have for due diligence. You can also register on exitround.com , and/or hire an investment banker in your sector.

I would not count on an investment banker to save you.  Even the best banker will typically find it hard to drum up a buyer for a company which is going bust in 5 months. However, if you have identified a buyer from the people you’ve touched in the company’s development, then I definitely suggest hire a banker to help negotiate the sale.  

Diagram of the typical financing cycle

(Photo credit: Wikipedia)

 

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