Published in the San Diego Union-Tribune, December 12, 2022
by Neil Senturia
It is hard to call it quits.
This is a tough topic for the entrepreneur. The puzzle that you must solve for is this. When is the right time to accept defeat? More importantly, in my humble opinion, is how you deal with it, namely your employees, your creditors, your investors and your own psyche.
A famous Harvard professor, Tom Eisenmann, refers to the approaching end of the adventure as the “fume date, the time when the bank balance is pointed at zero.”
I have some strong feelings here. In particular, my core rule for this situation is “do not leave a mess.” The list of lousy endings is legion.
Munchery, having raised $120 million, closed owing $3 million to more than 230 creditors. For sure, the king of them all, will be FTX, where already Sequoia Capital, the most august and premier of all venture funds in the valley, wrote a letter to their investors and said they were writing off their entire $150 million investment. Then, and friends, this takes real chutzpah, they told their investors that in the future they would do better due diligence.
You cannot make this stuff up.
Back to Eisenmann who makes a few salient points. “Failure happens slowly.” You don’t go broke overnight (although in the case of FTX, they may be the outlier to that rule). And as CEO, you need to be deeply aware of signals that something might be broken.
As a board member, the first question I always ask is a simple one, “When do we go broke?” And if the CEO does not know this answer instantly and with precision, then my next comments will not be charming or pleasant.
I like setting a baseline. I have a tiny new startup, and I have drawn a line in the sand at a future date, a set date, not to be easily moved or adjusted, with fixed parameters to measure traction, success, financing etc. If the company misses at that deadline date, my plan is to close, return the remaining money and not leave any mess.
I know about pulling rabbits out of a hat. I have done it more than once. But I also know that trick has a sell-by date, and that I am not Houdini. You can be lucky only so often.
And so, be rigorous with deliverables. If you keep moving the goal posts, you will end up in the parking lot with no way to get home.
Eisenmann suggests that the entrepreneur “seek counsel” from investors or mentors. Easy to say, hard to do. The CEO is supposed to be the stalwart, the man/woman on the bridge surveying the ice field, looking for a path forward. The view of the investor in particular might be suspect, since depending on where he sits in the financing stack, one wonders if he will have the courage to call it quits.
I have a friend with a company. To his credit, he has kept it afloat for a couple years. I am an investor. I do not see an economic future. If I were asked, I would tell him to stop the madness and close. I have not been asked.
As a founder, you need to leave with dignity, if at all possible. If you look carefully and with a clear eye, it is always possible. It may not be your first or even fifth choice, but investors and employees trusted you, and you can never cut and run. Never.
“Do not blame others.” But beware the self-serving letter where you say you are sorry. For your own sanity, write down the history, what really happened, was there a fatal mistake, was there personal confusion or ego that blinded you and hurt the company.
Eisenmann’s book is “Why Startups Fail.” Personally, I think there are more than enough books mining that vein. What interests me is, why do startups succeed. And that is actually a magic trick. It appears you are cutting the lady in half, but voila, she arises from the box with all her limbs.
The problem with magic tricks is that great magicians don’t tell you how they do it.
I have marked my fume date on the calendar. I will let you know the outcome in a few months.
Rule No. 741:
There might be a trap door.