Shutting Down A Startup Is Hard But It’s A Decision Some Founders Have To Make

By  |  September 23, 2019

Recently, startup shutdown has become near to normal. Before now, they were merely back-fence topic founders didn’t like getting themselves involved.

In a show of progress, most companies have been transparent enough to reveal that they’ve reached the end of the road. Some African firms have joined the pack, telling us where things went wrong and how the situation could not be salvaged.

When should a startup shutdown? The seemingly obvious answer might be “When it runs out of money.” But as you may already know, venture capital isn’t everything.

Most entrepreneurs are in for the “never give up, never surrender” quest rule of early-stage companies. But, chance says there must be a point of no return. In the light of that, when is it ideal to call for a startup shutdown?

When It Stops Growing

“Startup” and “growth” are as synonymous as a pen and a page. The idea of calling a company a startup often comes along with a growth pattern that shows there’s paradise ahead.

When a business is not growing, there’s a problem. According to YC Partner and Tutorspree (a failed startup), co-founder Aaron Haris, a good idea is not always sufficient to establish a startup. When the numbers are not adding up, and things are going haywire, a company should try to pull the plug.

If each day becomes a monumental struggle that doesn’t have a happy ending, that’s a sign. The antidote at this point would be a pivot – a solid idea that could turn things around. But when a game changer isn’t forthcoming, it may be time to start packing up.

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Founder of Nigerian realtech startup Hutbay, Olatunji Owolabi says “A startup ideally is on a mission to solve a problem that can be monetized. Sometimes the mission is realistic, other times the mission is too idealistic to be achievable”.

In a conversation with WeeTracker, he said a startup should consider shutting down when:

  • The management/founders realize the venture is not providing any considerable value nor does it have any potential to provide one in the foreseeable future.
  • The major drivers of the mission have serious health challenges and there is no one available and capable to take up the mantle.
  • The resources are no longer available to support the operations of the venture.
  • The mission has been accomplished and the venture can no longer provide any additional or considerable value going forward, and management are not keen on diverging into adjacent markets.

Sleep Mode? No. Startup Shutdown

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The Riverdale Press

By observing the startup ecosystem, you can understand that sometimes going on sleep mode seems to be a better option than a startup shutdown. During this period, the firm goes dormant for a while, takes its time to fix things up and awakens with full steam – that’s usually the plan. In a few cases, the plan actually works.

Take Nigerian ride-hailing startup GoKada for instance. Last month, they went on a two-week hiatus and came back better than ever. But do note that the startup had USD 5.3 Mn in rebooting power to reemerge with upgrades such as navigation helmets and brand new bikes.

Going into sleep mode can be medicine after death. While it’s necessary to take a break every once in a while, going under to come back up may not be a good option. When it’s time to finalize the business, a hiatus will not do any good.

Co-founder and CEO of Lagos-based digital printing startup Printivo , Oluyomi Ojo, calls it “zombie mode”. He told WeeTacker that zombie mode signals when a company no longer has money in the bank to run its operations and has no expectation of incoming funds.

“No new products that are working, user numbers are dropping, growth is not happening – the business is just there. A startup should shut down when it runs out of money, customers and ideas that can take it out of Zombie Land,” Ojo concludes.

East Africa’s Mondo Ride could be in the same situation. Since February when the cab-hailing firm said it was pausing to raise more money, nothing has been heard from their end. That does not only stir controversy but makes things even worse.

When VCs And Angels Turn A Blind Eye

There are people out there who specialize in turning failing companies into successful ventures. The problem, however, is that not all businesses can be saved. In July this year, news broke that South African blockchain startup Dala has decided to halt operations.

The company had won so many competitions and was near to beloved in the tech ecosystem – a sad turnaround of things indeed. Three-year-old Dala had its own startup shutdown story because it could not find anyone willing to invest in the business.

According to the fintech’s CEO, Tricia Martinez, she traveled to many places in search of a lifeline for Dala. The company’s rewards model went wrong and cost it a whole lot. The system can be porous if not meticulously checked, coupled with the fact that the startup experienced infrastructure problem.

You could have an idea to save your company, but investors will not always buy into it. When you toil day and night search for a capital consideration, you will have to give in to underfunding among many other problems. However, do not that a startup shutdown can still happen when there’s enough VC money – e.g., Reach Robotics.

Market Gone Wrong

Startups need to consider the inability to meet market requirements as a red flag. They should also be able to realize that they have misread markets and take drastic measures. One of Africa’s best-known startups only just pulled off what many have commended them for.

Andela letting go of 400 developers to reposition itself in the market is an excellent example of how startups need to act sometimes when the market has gone wrong. While the Lagos-based outsourcing firm did not shutdown, worse can be the case for other startups. Situations may require them to slowly move away from the venture before the mistake gets even bigger.

In the present day, when technology advances daily, market strategies and assumptions made while launching a product may not be working anymore.

Doing so, the startup will be able to upgrade its products and services to achieve success. Another option is calling it off altogether. If operations can’t be tweaked, it may be time for a mic drop.

Ebrima Fatty, CEO of Kenyan e-commerce startup Afrikasokoni, explained to WeeTracker the market conditions that warrant a startup shutdown.

“Are you able to move from idea to a Minimum Viable Product (MVP)? If no, you should shutdown your startup. Are you able to achieve a product-market fit? If no, you should shutdown your startup,” Fatty says.

“Beyond the product-market fit, have you been able to establish that your target market is sizable enough to turn your ideas to a profitable venture? If no, you should shutdown your startup.

On the other hand, If the answer to all the above questions is yes, and you are able to raise funds to finance your runway (either through bootstrapping or investors), then you should keep going,” he concludes.

The Employee Conundrum

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Hiring relevant talent can be a pain in the trunk. When you do get them on board, it is similar to striking gold in the middle of nowhere. After a few years, it’s as though those employees founded the company alongside you. They are the lifeblood of the growth mechanism, and there’s no imagining without them.

But what happens when these team members begin to resign from the startup one after the other? When your key strategists begin to suggest they are chasing opportunities elsewhere, it may be time to have a rethink.

Bernard Momanyi. co-founder of Onesha – an online platform that exclusively finds jobs for Kenyan creatives – weighs in.

“Lack of enough customers cut short your runway, which leads to employees leaving, loss of motivation among founders and no incentive for advisors to stay. More so when you’ve done it for a prolonged period of time”.

No one is irreplaceable. Be as that may, there’s only so much replacing you can do. There’s only so much talent out there. Sooner or later, you may have to settle for hiring unqualified candidates, which, in turn, will only drag your company behind its own growth lines.

Resignation letters upon resignation letters on your executive desk possibly communicate that the once nascent company is the less green grass on the block. Believe it or not, that’s a sign that things are not as they should be. Either you find a way to boost HR or the inevitable could happen.

Featured Image: Mentorphile

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