73. When your startup hits hard times: quit, pivot, or persevere?

Almost every startup finds itself in a dark place where it seems they have few options. Even if things are going well for you now, keeping these strategies in your back pocket will probably help at some point.

I am talking about the times when you can't raise funds, the company isn't growing, customers are churning, or the technology is not working. Your startup is up against the wall, and you need to take decisive action immediately.

In these situations, you have three options:

• Persevere and try to break through your obstacles to reach a new growth phase

• Pivot to a new product or strategy that looks to offer better opportunities

• Recognize that the world is not ready for your startup and close up shop

This decision is both high stakes and emotionally loaded. This article walks you through making this choice in the most objective way possible to reach a conclusion in which you can have confidence.

A close friend is in precisely this situation. I will use them as an example throughout this article with their permission. Their company started as a hardware/IoT business. Unfortunately, the device was getting massively delayed between manufacturing issues and COVID supply chain problems.

Fortunately, at the same time, they were developing a marketplace for other vendors to access data from the device and to sell products and services to device owners. Even without the hardware component, the marketplace was growing and attracting customers. They pivoted the business to focus entirely on building the marketplace and abandoned the device.

A year later, their marketing could go toe to toe with the most prominent players in the space. Unfortunately, in the process, they discovered that their reseller model would never be better than breakeven at best without the competitors' massive scale advantage. Despite consistently setting new sales records, including overhead, they were losing money every month and quickly burning through their cash reserves.

However, the unique sales and marketing model they built would work for other vendors with different economics. They have deep experience and a set of sophisticated tools they might be able to sell to other businesses under a SaaS model.

They are now at the moment of truth. Should they persevere, pivot, or quit?

Quit

Let's look at the last option first. Are you better off just walking away so you can try something new? It is essential to know when you are just beating a dead horse or if there is a realistic chance of survival.

It is easy to fool yourself that you can make it with just a bit more effort. We are all at risk of falling for the Sunk Cost Fallacy. Having spent months or years and most of your savings on the business, it's wrenching to think of giving up and losing that investment.

The key is to look at this from an outside perspective. Suppose you wanted to sell the company to a new CEO. If you were in their position, would you take the job?

See if you can prove that your current strategy is doomed, as my friend did. If so, quitting needs to be on the table as a serious option.

Some companies last long enough to accumulate mountains of deadweight in the cap table. All the earlier investors can make further fundraising impossible. Between conflicting interests and excessive/demoralizing dilution for the founder, the deal won't be appealing to new investors. This is another strong case for the "quit" option.

Quitting is not a terrible thing for entrepreneurs. Everyone in the startup universe knows that most early-stage companies fail. It is not a black mark against the founder unless you crash through fraud or incompetence. Earlier failures are a great teaching tool and can make your next startup more attractive.

Quitting also spares you from wasting more years on this zombie business when you could be achieving new things and having more fun elsewhere. Time is the only absolutely unrecoverable expense.

My friend's cap table is in good shape. They have strong intellectual property they can leverage. They can radically slash their burn rate to have time to experiment and adapt. At the moment, quitting is not obviously the best option.

Pivot

If your current path looks to be a dead-end, but you can see green fields nearby that look like they would be much easier and more lucrative, then a pivot could be a good choice.

The danger here is that you may discover that the green field is full of brambles, pits, and landmines. Until you understand a space in detail, you can miss all the hidden difficulties. New directions almost always appear easier at first glance, which leads to the common problem of chasing each new shiny object.

But, when you are in a deep dark place, you need to explore all your options. The key is to validate the alternative as quickly and cheaply as possible. Can you perform simple experiments and tests to validate the new direction without committing substantial time and treasure? Remember, hope is not a strategy.

My friend thinks that the idea of pivoting to a SaaS model, selling their tools and experience to other merchants, has potential. It was easy and cheap to reach hundreds of merchants to gauge their interest. That suggests their customer acquisition costs should be reasonable. The responses were incredibly positive, indicating significant demand for the solution. They now have a long waiting list of active beta testers.

These results suggest that this could be a viable path for their company.

Persevere

The third option is to try to stay the course. If things are not too dark, you might be able to work your way out of the hole you are in if you have enough runway.

But, if you had enough runway, it would not be such a dark place. Usually, you need to take decisive action to keep your company alive. I call this the Cockroach Strategy. After a nuclear war, they say that the cockroaches will still be around eating our leftovers.

The cockroach strategy is about surviving long enough to find new opportunities to grow. If you aren't alive, you can't win.

Persevering under these conditions means stopping your cash losses and getting to breakeven as quickly as possible. You need to transition from a state of being "default dead" to "default alive." That's only possible if the company has good fundamentals. The unit economics need to work, and you must be mature enough to generate revenue from your solution right now.

If you can prove that your current model is unworkable, persevering is not an option. Unless there is a clear source of light ahead, don't waste your time going down with a slowly sinking ship.

Persevering is not an option for my friend. The current model loses money on every transaction without any path to change that. There is no way they will hit breakeven in the short time available.

The Choice

So, what did my friend end up choosing?

There is minimal downside to exploring the pivot option. They can shut down the marketplace and cut costs to almost nothing while quickly building out the product and testing it with their prospects.

They will know whether the technology works and customer demand is strong in just a few months. At the same time, their research shows a large TAM for this market with typically high SaaS margins.

Low cost + short time + big upside = attractive option!

They will try this pivot, but with a clear timetable and endpoint. If this new direction does not prove out quickly, they will shut down and move on to new things. This company is not their first startup rodeo.

This article is part of our series on Running your Business. You can see the rest of the series here.

We also have articles on getting started, fundraising, pitching, critical founder knowledge, and interviews with other experts.

If you have weathered some dark periods in your startup, please share them in the comments!

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Until next time, Ciao.