The money’s gone, and no one’s buying your product. How do you know when it’s time to abandon ship on your startup?
Terry Drayton is like a cat with nine lives. Today, the Bellevue-based serial entrepreneur is three years into his ninth startup in 30 years as CEO of Livible — a web-enabled company that provides storage for household goods.
Backed by a little more than $3 million in angel investment, Livible, founded in 2013, slowly has tested and retested to determine how to get people to buy the service.
After several years of choosing to store only small seasonal items for customers, Drayton and his team in June decided to accept and store larger furniture and appliances.
“We pick up whatever they want,” Drayton said. “We’ve quadrupled (in revenue) in the last few months.”
Drayton’s Livible finally is starting to take off. That’s a good thing for Drayton’s sanity, because he says he doesn’t have it in him to give up on anything he starts. He argues that’s true for most hardcore entrepreneurs — the reason venture capitalists and angels invest in entrepreneurial startups is because of this. Giving up is not in the DNA of many successful entrepreneurs.
“In the face of obstacles, we’re too stubborn to give up,” Drayton said. “We have a hard time admitting defeat.”
Drayton remembers the defeat of his online registration company, which got into financial hot water during the meltdown of 2008.
“I tried to save it. I almost had it saved,” he said. “It was pushed into involuntary bankruptcy. A trustee let me operate it under bankruptcy for four months, and then I bought it back out of Chapter 7. That company is now called Rainier Software.” Drayton also founded HomeGrocer.com, the popular online grocery delivery service that eventually sold to Webvan and struggled during the dot-com bust.
“I’m a glutton for punishment, and I’m lucky to have a wife who is supportive,” he said.
Still, failure is an undeniable reality among startups.
“The best, most successful entrepreneurs put passion, drive, time, and money behind their ideas,” said Allison Nelson, a Mercer Island-based consultant and mentor to entrepreneurs and small to midsized businesses. “Yet, as we all know, over 90 percent of startups fail, and those components are often not enough to create success.”
So, then, how does an entrepreneur know when it’s time to hang up the hat, or pull the plug, so to speak?
Nelson said one metric to go by — but certainly not the only one — is negative cash flow.
“Successful entrepreneurs should always understand their company’s cash flow position and cash flow-based projections from the beginning,” Nelson said.
But Nelson also encourages entrepreneurs who are assessing the viability of their business to answer what she calls the “Big 5”:
- Do I believe in the company’s mission/strategy?
- Do I have a sustainable business model with a product or service that people are willing to pay for?
- Does the company have real competitive advantages?
- Am I making progress?
- Is my founding team set up for flexibility, resilience, growth, and success?
“If you’re answering ‘no’ to any of these questions, then it may be time to re-evaluate,” Nelson said.
Among the most critical of those five questions is ensuring your organization is set up in such a way that your cofounders and team can be resilient and change paths, Nelson said.
“In my personal experience, that was one of the key issues that told me in the past to shut down a business,” Nelson said. “The organization wasn’t set up in a way to move forward. This is unfortunate, but these are lessons that you learn.”
Drayton said above all, entrepreneurs must have a product that customers care about.
“You have to have customer traction,” he said. “If there is no customer demand for the product, then that is one that is fatal.”
Most often, Drayton sees entrepreneurs run out of money. Other reasons for giving up the dream, he says, are by and large external.
“Doing a startup is really hard work,” Drayton said. “I see people exit because of health reasons. It takes a toll on you and your family. I’ve seen people divorce that weren’t willing to give up on their dream.”
Nelson says giving up isn’t a bad thing. Accepting failure can prove fruitful to an entrepreneur’s long-term success.
“The key is to not take it personally,” she said. “There are unfortunately many examples of founder depression following a business failure.”
Entrepreneurs should instead, Nelson says, take stock of the lessons learned from their negative experiences.
“There are many examples of success following failure, either through a strategy pivot, launching a new idea, or even using the startup experience to invigorate a larger organization,” Nelson said.