The mere mention of "start-ups" conjures images of successful businesses like Uber and Atlassian; companies where their founders turned simple ideas into multimillion dollar ventures. We're overwhelmed by coverage of start-ups that do make it big, which has encouraged more people to join the fray and create their own businesses. But the reality is most of them won't make it big and playing in the start-up game is like entering the lottery; a very expensive lottery. So how do you know when you should bow out? We put this question to a group of start-ups and a venture capitalist.
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We hear a lot about start-up success stories and there's an illusion that it's an easy way to gain fame and fortune. I've lost count of the times I've heard someone say "You know app X? I had the same idea years ago. I can totally kick off a start-up now with a new idea and make lots of money. It's not that hard." But it is that hard. The success stories only make up around 10 per cent of the start-up community. For the likes of Uber and Atlassian, they sit at the top one per cent.
Statistics vary, but roughly 90 per cent of start-ups will end up as failures. Most of the time start-ups are founded by tenacious entrepreneurs whose defining characteristics are their perseverance, conviction and reluctance to admit defeat. It may be difficult for them to let go of a business venture that they poured their blood, sweat and tears into.
But this industry is about "failing fast and failing often". So how do you know it's time to let it go?
Kris Howard is the engineering coordinator and developer relations manager at Canva, an online graphic design start up. She has worked in a number of start-ups in the past and said one of the warning signs that a start-up is about the fail is when it loses sight of its vision.
"I've worked at start-ups where there wasn't that clarity of vision and it becomes more about money rather than working out the problem you're trying to solve as a start-up in the first place," she told Lifehacker Australia at an AWS media event.
Start-ups that are obsessed with working in overdrive mode are on the road to failure as well, according to Howard.
"A lot of start-ups romanticise the idea of working 24/7 and jumping right into the next thing. It shouldn't be about that," she said. "At, Canva, we do work hard, but we also take time to celebrate the victories and make an effort to take time out, eat together and go to the gym together."
For Dean Jones, co-founder and CEO at formal wear rental website GlamCorner, the question of when start-ups should call it quits brought back experiences from his previous business ventures in his university days.
"In university we did start a startup which imported trinkets from Asia to sell in Australia," he told Lifehacker Australia at the AWS event. "We realised very early, there was no demand for it so we called it a day and cut our losses."
He noted that entrepreneurs are goal driven and typically don't want to lose, but there comes a point where one of three things will happen: the company becomes successful (which doesn’t happen often), the company is onto something good but requires a change or the company is a resounding failure and abandoning it is the only option.
But figuring out exactly when to end it is extremely difficult.
"I've spoken with start-up founders with a hundred million dollar valuations who tell me they still feel that small little sinking feeling of doubt of 'could this somehow blow up?'," he said. "I don't think that feeling ever goes away in a founder.
"How do you know when to quit? You know what? You don't ever know. I don’t think there's any clear signs — you just have to be flexible and nimble enough so if it isn't going to work, you can iterate fast enough to get to that point sooner so you don't waste time and money. But just because you have to change the way you do things doesn't mean it’s a bad idea."
Craig Blair is a managing partner at AirTree Ventures, a venture capital firm that has invested in a plethora of start-ups. He said start-ups need to figure out what their finite resource is when deciding when to shut up shop.
"Is it money? Is it time? For someone who has taken 12 months off their full-time job to do a start-up, time is obviously going to be a factor," Blair told Lifehacker Australia.
Monitoring the feedback from customers and looking at their usage data should also factor into the decision to shut down.
"How often are they using the product? If you're not seeing even if a small number of customers love your product, you need to rethink your product and possibly your business," he said. "Many amazing start-ups have had to pivot a few times — it's okay to move around, to change the direction of your company. But trying too long to sell a product when people really don't care about it is just not a good use of time and capital."
As to whether start-ups should give themselves a deadline to achieve success or call it quits, Blair said it can vary greatly between companies.
"You can have a business with a lot of backing and trying to solve a complex problem and they can take years," he said. "A start-up might have a lot of funding, a great team and you need to go through a lot of different product lifecycles, which could take years. A start-up may have two people who have left their cushy job investment banking, they might need to get their arse out in seven months. So it varies case by case."
If you've been involved in an unsuccessful start-up in the past, we'd like to hear your thoughts on this topic in the comments.