When It's Time to Pull the Plug
No one ever plans on
closing a business. But this year, a lot of entrepreneurs are likely going to
have to shut their doors--and there's a right way to do that.
EXPERT OPINION BY HOWARD
TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH
INVESTORS@HOWARDTULLMAN1
FEB 13, 2024
We're heading into a
year when it's entirely likely that the number of relatively young businesses
that will close their doors is going to be greater than the number of new
start-ups. Operations aren't improving, business isn't coming back, costs are fixed,
and substantial, and new money is very hard to find. This is obviously not good
news for entrepreneurs and new business builders.
But we've always known
that 90% of all new ventures will tank within five years, with restaurants
leading the way to even earlier and more abrupt demises. At least 10% of all
new enterprises will fail within their first year. As they say in the VC business,
lemons ripen early. Although to be fair, I'm not sure that this is such a bad
thing. Culling the crop always makes sense and, even more importantly, we'd be
helping a fair number of deluded and misled folks face reality, start anew and
get on with the rest of their lives. Wasting their time and their investors'
money further in a pretend business isn't good news or healthy for them, any of
the other parties, or the economy.
There are limits to the
kind of heads-down, unswerving persistence that so much of entrepreneurial
literature celebrates and regularly confuses with perseverance. In practice,
and when you're deep in the trenches, it's often hard to separate foolish
persistence from classical insanity - when doing the same things month after
month is getting you nowhere and you're just digging yourself into a deeper
hole. Someone needs to tell these busy bees that they're just hopelessly
flapping their wings and that it's okay to stop. Some of these soon-to-be-abandoned
businesses should have been put down years ago. And some of the alleged
operators - especially deluded refugees from corporate positions - had no business starting a business in the
first place.
In many cases we're
still seeing the residual effects of the pandemic in terms of slowed and
reduced top line revenues that may never come back. The math for many firms -
if it ever worked - no longer makes sense. That's because the overhead,
infrastructure, and personnel costs are largely fixed and can't be covered
because of the continued shortfall in sales. If things haven't improved by now,
holding your breath and hoping for a miracle just doesn't make sense. You need
to get to work on a Plan B, which includes an equitable wrap-up and a
professional shutdown. Don't bother wasting too much time on pursuing mergers,
asset sales, or acquisitions because I guarantee you that your numbers won't
pencil. Two lukewarm cups of anything don't make a hot drink. And your bank has
undoubtedly "misplaced" your phone number or they would have
certainly called you back by now.
Seems the real world
doesn't need millions of franchised late-night cookie businesses, print and
copying shops, nurseries masquerading as early-childhood education centers,
mattress and futon stores, or nail salons. These things look easy to get into
and, if some fairy godmother provides the funds, they are, but they're very
tough to turn into long-term sustainable opportunities. If someone you know is
desperate to be an entrepreneur, tell him or her to first go work for someone else who's already been doing it for
a while. They'll learn a lot and thank you later.
Finally, the easy money
spigots have shut down (except for A.I. deals) as the venture capital community
remains reluctant to step up to follow-on rounds and additional investments
when they'd be swallowing haircut valuations on their former highfliers as well
as side-eye glances from their partners at Monday morning firm meetings. The
absence of an IPO market has also stalled exits, which typically help to
replenish the dry powder of these funds.
As a result, the VCs are
hoarding their current cash because they also know that the IRR numbers for
their current funds are going to be warped and terribly disappointing due to
the pandemic's three-year hiatus in overall portfolio appreciation. This means
that the prospects for raising their next funds are looking fairly bleak in the
near term. They've got nothing to brag about and a whole lot of explaining to
do. A number of smaller funds have already said that they won't even be trying
to raise another fund.
When you realistically
add all these things up, and you've spent a couple of months filled with
sleepless nights, bad digestion, and got a lot of half-hearted encouragement
from people who actually know that it's not happening, you need to be honest
enough with yourself and start making plans for shutting down. It's easy to
lose your way in the process and lose sight of the end game because it's a
complex and highly emotional undertaking. Keep a few key objectives and ideas
top of mind; here are the most important three.
First, create a calendar
and chart a course of action - start to finish - outlining all the necessary
steps to get the job done. Understand that this will be a living document
because nobody thinks of all the issues and problems that will arise and need to
be addressed as you're moving down the path to shutting your doors. Flexibility
is perfectly fine as long as you hold firm on the end dates and don't move the
goalposts. Once you bite the bullet and make the decision, there's really no
turning back. You must resist the urge to seize upon little encouraging signs
and short-lived changes as excuses to reverse course. Treat these heartening
blips as something between a great daily horoscope and the latest rah-rah
fortune cookie message. Once things start to slide downhill, they rarely, if
ever, get better. Get started soon and don't stop.
Second, rank and
prioritize the people and the parties involved. Understand that you have zero
prospects of pleasing every vendor and creditor or making all the parties
whole. There's never enough time or money to secure a happy ending for everyone
so figure out as fair and equitable allocation of your scarce resources as
possible and go from there. Don't let the decisions be driven by the squeakiest
wheels, the loudest complainers, or personal rather than practical
considerations. And don't insist on being a martyr who assumes or takes on
additional obligations or debts because you feel guilty about the outcome. In
99% of all cases, everyone went into the whole venture with their eyes open and
a full appreciation of the risks. You're not obliged to set yourself on fire or
mortgage your future (and your family's savings) to make someone else whole.
Third, make sure that
you tackle the biggest problems first because - over time - a lot of the less
pressing and smaller concerns will work themselves out, disappear, or be solved
in bulk by common solutions. The critical idea is that you can't lose focus and
be distracted by the sheer volume of so many minor matters that you don't
address the showstoppers. If you fail to focus, you lose momentum, waste
scarce time and resources, and also forfeit the support and confidence of your
team members who must believe that you can get to the finish line if, in fact,
you're going to succeed. These proceedings aren't ever one-person shows. You're
going to need to recruit, secure and retain the help of other key players -
inside and outside of the business - in order to handle all the critical parts
of the process including legal, financial and personnel issues.
Finally, be realistic
and tell everyone, including yourself, the truth from the beginning and without
fail. The worst lies are always the ones you tell yourself. If you
tell the truth, it becomes part of your past. If you lie, it becomes part of
your future. This isn't just the moral and legal way to proceed; it's the
smartest and most selfish way as well. Protecting and preserving your good name is
the most important part of the whole journey.
If you're young and
ambitious, you're going to want to get back up on your feet and try to build
something again at some point. The two most important words in an
entrepreneur's life are "over" and "next." The way you
handle yourself and manage the whole shutdown process will be critical to your
ability to find the support and attract the necessary people and resources to
start over on your next venture because, while you may have many ups and downs
in your career, you've only got one reputation and that's the most valuable
asset of all.
