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How to shut down your startup when you’re out of runway

Raising money has always been hard. Nevertheless, some industry insiders and VCs believe it’s now so difficult that it’s not even worth trying. Either cut costs and get to “default alive” or look for a buyer and shut down, they say.

This isn’t how founders think, of course, but at some point, pushing forward is no longer the right thing to do.

If you’re a founder and you haven’t found product-market fit, if your churn rivals your growth, or if your user number is growing by less than 10% each month, it may be time to think about closing.

Here are the steps I took, plus some things I would do differently.

Step 1: Inform your audience

As a creator, there are typically two forces driving any communication: the need to be positive to keep employees, partners, and investors engaged, as well as the desire and obligation to convey the whole story.

I can see why the founders think they can change the situation. Even though my company was unable to find a product-market fit, I persisted.

We relocated, changed business models from marketplace to SaaS, and even altered the organization’s overall goal. I genuinely believed we could have succeeded, but we fell short.

Along the way, I misplaced several folks. Surprisingly, when I informed people that their jobs were in jeopardy, they weren’t always as angry as I had anticipated. Some others offered to labour for less money rather than risk their coworkers’ employment.

No matter how gloomy the situation, I came to understand how highly valued transparency is. My staff behaved like owners and, in some cases, seemed to care more about the firm than themselves, which showed me how much they cared about it.

I would provide personnel with as much information as I could if I were in the same situation again. In addition, I would give them choices, such as enabling everyone to take a wage cut rather than having to choose which employees to fire.

monitor your finance
monitor your finance

Write to shareholders in Step 2

Even when things aren’t going as planned, most founders don’t produce thorough, frequent investor updates. While hoping for excellent news, it can be tempting to put off writing a report.

Your investors won’t be able to offer their experience or guidance if you don’t let them know how terrible things have gotten.

Instead of being defensive or evasive or blaming the macro climate, be honest and offer the facts to investors.

Explain with as much objectivity as you can what was and wasn’t working. It’s crucial to be objective while describing your company’s flaws and vulnerabilities rather than acting emotionally.

Next, schedule a board meeting.

The board of directors, not the company’s founder, should make the decision to shut down the business. Although most boards are quite knowledgeable about their company’s future, they are rarely as knowledgeable as the CEO.

It is your responsibility to call an emergency board meeting if you believe that the company has reached the point of no return.

Make a discussion topic for the future of the company the only item on the agenda. Prepare a list of the possibilities you think are still available, as well as a synopsis and a suggestion.

The board members might provide fresh concepts, or maybe not. Don’t let things get out of hand. Make a decision during the meeting, write it down, and then take action.

Make a shutdown budget in step four.

Even if creating a budget may be the last thing on your mind, you still need to be aware of it. Knowing what you have, what you’re spending, and how much time is left is essential.

We made sure we had time to spare when we shut down our business. In Singapore, closing a business is difficult, and doing so improperly might have negative effects.

You will have the best chance of winding up the business on your terms and avoiding insolvency if you have a budget. The directors of the firm and, maybe, other interested parties, should formally decide to terminate the business, stop trading, try to sell the company’s assets, and settle all debts. Compared to an involuntary liquidation, which can be the result of a shareholder or creditor suing you, this is more cleaner.

Budgets for emergencies don’t have to be masterpieces, but they must be accurate. Consult your accountant to make sure you don’t overlook any significant liabilities.

You and your stockholders are likely to receive nothing if you have to dissolve your startup. Priority must be given to feeding other mouths.

Pay the costs of the shutdown first. Then follow secured creditors, who may have made a loan to the company secured by a number of assets. Then come the unsecured creditors (including suppliers), the employees, and lastly the shareholders.

As the startup’s founders, we embraced the risk, but our creditors did not. Leaving suppliers and employees unpaid is reckless, and there may be repercussions.

Step 5: Consult an attorney

My team was able to respond promptly and responsibly because of some great colleagues and advisers, and we received the appropriate legal assistance.

This significantly decreased our chances of making a mistake, getting sued, being held personally accountable for obligations, and declaring bankruptcy. Talk to a lawyer at all times.

Sell what you can in step six.

Even when things are going well, selling businesses and their assets requires time. It is challenging to do so when there is conflict.

I made several unsuccessful attempts to sell the software that we had developed. I did two really significant lines of investigation, but I couldn’t get a deal done.

If you ever find yourself in this predicament, keep in mind that a buyer might value more than simply your intellectual property. In one of our discussions, the team rather than the programme attracted the most attention.

Step 7: Update shareholders.

You must inform your shareholders of any developments if you decide to wind down the business. If the board decides to dissolve the company, this must be announced as quickly as feasible.

The majority of our investors weren’t shocked when I wrote to explain our board’s decision to shut down the company. The investors who read our quarterly investor reports were aware of our ups and downs because I continued to publish them.

Despite this, I yet got one or two unfavourable responses. I learned from this that communication is a delicate balance.

Step 8: Look for a mentor or coach

Failure is frequently viewed as a badge of honour in startups. It’s something to be proud of and can even be a rite of passage one must pass through before achieving success. But for entrepreneurs who have failed, it doesn’t feel worth celebrating.

I was a shell of the person I used to be for the better part of 18 months. I had always been self-assured, but I began to wonder what, if anything, I was genuinely good at.

Getting a coach was the finest thing I did. Before getting help, I was embarrassed to share my experience and felt personally accountable for the financial and employment losses of my investors.

Being able to confide in someone, especially someone who wasn’t a part of the business and wasn’t a relative or friend, was quite helpful. They assisted in bringing me out of several tough situations and helped me see that I had done nothing wrong.

I did my best to take care of all the interested parties, but if a coach hadn’t reminded me, this aspect would have appeared nearly inconsequential.

I discovered that the greatest individuals to talk to were other entrepreneurs, particularly those who had also experienced failure. These guys gave me perspective on what I was going through in addition to giving me helpful counsel for the current difficulties.

Look me up if you can’t locate anyone.

Update your résumé in step nine.

I stopped paying myself, and my family’s only source of income was gone. I put off looking for a job for a few weeks, but when I did, I quickly realised that my chances of finding a corporate position were minimal. Since I managed my own business for many years, neither I nor potential employers knew what position I would be a good fit for. To my surprise, I learned that scaleups and corporations preferred hiring specialists over generalists like myself.

There are thousands of talented individuals on the market right now, many of whom were let go by expensive IT companies. Sadly, companies can choose from a large pool of candidates who appear to be a safer bet than a previous startup founder.

I could have easily found the time to begin interviewing sooner, and having a consistent income would have greatly improved my quality of life at the time. Here, it is important to remember to take care of yourself as soon as possible.

Tenth step: Don’t try again just yet.

According to research, folks who have started and shut down a business in the past—successful or not—are more likely to start a new firm than those who haven’t. Contrary to popular opinion, however, unsuccessful founders do not always have better chances of success.

As opposed to this, other research show that business owners who accept responsibility for their own failures in the past have a higher likelihood of success.

Some businesspeople have no intention of ever attempting again after facing the shame of failure. This is frequently made worse by the fact that they also lost the assets, such as money, connections, and reputation, that got them off the ground in the first place.

Others are of the other opinion. They’re resolved to mend the psychological, social, and financial harm they’ve endured by applying the lessons they’ve learned.

But such a businessperson need to wait. It’s crucial for founders to avoid letting their emotions distort their judgement given the odds against them.

It depends much on the individual how long it takes to recover from a setback, but you’ll know when the time is perfect, just like I did. In the interim, allow yourself to recover.

Step 11: Make the following one count because it only gets harder.

Even though it may not seem conceivable right now, if you give yourself time to heal, you might eventually feel ready to resume your activities. While the majority of other unsuccessful entrepreneurs I know recovered within a year or two, it took me 18 months.

It’s definitely harder the second time. First of all, you’re older.

Statistics show that entrepreneurs in their 40s have a higher chance of success than their younger competitors, but that doesn’t always seem that way. In my instance, my obligations had increased in addition to the fact that my financial situation had weakened.

I was an elderly man with a house, two kids, and a job. Additionally, my network and resources were less accessible. Several investors promised to support me again when I closed my last startup, but naturally, none of them did.

For my benefit, I was able to locate what I required to restart. I firmly believe that I am now a stronger founder and investor. Despite the fact that I may not always know what to do, I frequently know what not to do.

As a final observation, the value of making wise decisions is the one thing I have learned from the entire experience. While not everyone can succeed, anybody may act morally.

You’ll eventually emerge from this a better person if you put the interests of your investors and employees above your own. Good luck with the choices you make and the challenging times that lie ahead in the meantime.

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