Knowing When to Quit: The Art of Letting Go in Entrepreneurship

‘I heard 200 no’s before I got a yes’

‘There’s no such thing as overnight success, we didn’t see real traction for years and then it really took off’.

‘You have to believe in yourself against all odds’

The rhetoric in the startup ecosystem leans heavily towards hustle culture and not taking no for an answer. There are plenty of examples of businesses that struggled for years before reaching product market fit and subsequently unicorn status. But how do you know if success is just around the corner for your startup, or if you’re flogging a dead horse? When are you demonstrating grit and resilience vs. just spending good money after bad?

Paloma is a venture studio and VC fund whose role it is to help startups get through the valley of death and land safely at product market fit. We work with founders from day 0 to turn their ideas into venture scale businesses and our portfolio is now worth over $200m AUD and counting.

To date:

• 87% of our ventures have reached the $1m ARR milestone
• 90% of our ventures have raised over $1m at seed round

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We’re pretty proud of what we’ve created but that’s not to say there haven’t been failures along the way. One of the most important traits required to run a successful venture studio is knowing when to quit. Spending too long on the wrong idea is expensive; the opportunity cost is too high.

So how do we know when it’s time to throw the towel in?

Here are 5 things to consider:

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1. It becomes clear that there’s a problem, but it’s just not that painful

There are some problems in the world that will never be fixed. They might be frustrating but they are not so gut wrenchingly painful that are keeping people up at night. Potential customers might say they would like it solved in your survey, but in reality the solution you’re offering isn’t worth the effort of behaviour change.

This can be a real tricky one to identify because there is a problem and customers are validating that for you! But when you come to sales, it’s as dry as a desert.

So how do you test for pain? Typically you’ll want to quantify it in time and/or money.

• Is this problem costing your customer $2k a year or $2m a year?
• Is it costing them 2 hours a month or 2 hours a day?

We’ve built businesses before that saved companies money, just not enough money for it to be meaningful. The problem we were solving was a small irritation, not a gaping wound. We got some customers on board, but it became clear it was never going to be a high priority purchase and so we let it bubble on organically whilst we moved our time on to ventures with a higher ROI.

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2. You say things like ‘the only thing holding us back is our tech’

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I hear this a lot from founders. They have a great idea but aren’t getting any traction and blame their janky tech or UX.

Working for a tech-oriented venture studio, naturally I think tech is a vital part of building a venture scale business.

But we’ll often advocate that founders should wait as long as possible before they build out a fully coded, expensive piece of software. If you can’t prove there is traction or demand for your solution, spending thousands of dollars building it on React Native probably isn’t going to change that. If you’re solving a painful enough problem (see point one) ideally your customers will be knocking down your door to be on the waiting list or sign up as a beta tester.

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3. You discover something you hadn’t considered before

Startup ideas often sound fantastic on the surface. It’s only as you dig deeper that you discover you’re sitting on limestone not gold.

For a startup to be successful, 100s of factors need to line up exactly. The best way to figure this stuff out is by identifying your blind spots early on and not just relying on gut feeling or hunch.

A good early activity is to:

• Make a list of assumptions that need to be true for this venture idea to work. Sometimes the most basic ones are the best ones because these are the things you are taking for granted (eg. I assume the everyday 30 year old Australian has $20 a month to spare)
• Test those assumptions (eg. surveys, interviews, trying to sell an early stage version of your product)
• If you prove one of these assumptions wrong, it’s a shortcut to proving the entire venture may not fly.

We’ve been through this process with founders in early discovery- disproving assumptions can be disheartening. But it’s a whole lot better to cheaply invalidate a small assumption than it is to realise you’ve sunk a lot of time and money into an entire business.

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4. Your heart isn’t in it

This is a tricky one because you’re always going to have bad days when you want to give up. That’s natural and doesn’t always mean it’s time to throw the baby out with the bath water.

My top advice is to:

• Find a great co-founder (or venture studio😉). Often your bad day will be their good day and vice versa. They’ll be able to pull you out of a hole and help you see the wood through the trees.
• If you’re a solo founder, you might have to tackle this stuff alone. My advice to you is to track your bad days. Every so often? That’s fine, keep on cracking on. Every day? Not so good. Ask yourself if you still believe in this idea… Sometimes it’s a hard pill to swallow to realise you’ve invested time into something that isn’t going to succeed.
• Check your bank balance and be realistic about the amount of personal risk you’re comfortable with. Startups don’t come for free and often there’s an element of personal investment involved, particularly if you’re working on your venture full time. If you’ve struggled to raise external capital and your savings account is beginning to look a bit worse for wear, it might be time to prioritise your personal cash flow.

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5. A big incumbent has just eaten you for breakfast

Sometimes things can be going super well and then overnight they can …not be going super well.

The key thing here is defensibility. What makes your product hard to copy? Or difficult for an incumbent to replicate? Perhaps you have access to a specific resource or talent. Perhaps what you’re building is so different from the incumbent that they’re unlikely to be able to pivot their cash cow in that direction. Sometimes you can’t predict what a big enterprise will do. I’d suggest reading the ‘7 powers’ by Hamilton as a good place to start when it comes to ensuring defensibility.

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What about rejection?

You might notice that there isn’t any suggestion to give up on your startup idea just because other people tell you to. You’re likely to get a lot of no’s from investors and customers throughout your startup journey- it’d be a miracle if you didn’t. But this alone isn’t a reason to walk away. You know your idea better than anyone else and if you still have deep conviction that it’s going to work, it might just be a matter of finding the right customer, investor or co-founder.

If you’ve got a startup idea and want some unfiltered feedback, get in touch.

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