When to quit? An entrepreneur’s guide to pulling the plug
If you believe the pop-psych literature, perseverance is the most predictive characteristic of successful people. But isn’t knowing when to quit equally important for a satisfied and fulfilled life as an entrepreneur?
The basic narrative is that anything worth doing will have major setbacks, and in the face of adversity what you must do is get up, dust yourself off, and try again.
I am living proof of this axiom. Of my five to six startups (depends on how you count them), half have failed, and each time I licked my wounds and started again. But perseverance is only part of the story, because sometimes you need to pull the plug on relationships, investments, and even your dreams.
In my experience, you rarely look back upon a project’s end and think “I should have continued.” More often than not, hindsight seems to say that you should have ended things sooner rather than later, and the dominant regret pattern of these failures is opportunity cost.
Let’s look at a few cognitive biases that affect the way we think about when to quit and some lessons from entrepreneurs that have done so smartly.
Sunk Cost Fallacy
The Sunk Cost Fallacy (SCF) is probably the most pernicious of the cognitive biases that affect our ability to make good decisions about when to end something. SCF means that you consider the past (sunk) costs of a set of choices when deciding what to do going forward, as in “I’ve been working on this for three years, I can’t quit now.”
This is, however, a bad way of thinking about future decisions because you cannot go back in time and recover the investment you’ve already made. The only factors that should affect your decisions in the present are their future potential values. Put another way, what’s in the past is in the past, and you can only act now for your future.
Strategy: Be conscious of the Sunk Cost Fallacy and make a mental note each time you use it. When doing pros/cons or SWOT analysis on your plans, be sure to record, then actively cross out, any SCF items.
Opportunity Cost refers to the value of the things you give up when you make a choice. For example, if you choose to continue working on your startup, but you could get a job making $120,000/year, every month you persist would cost you $10,000.
Now, it’s hard to know what the range of possible opportunity costs are, but don’t let that deter you from thinking about it. If your expected return from a project is less than an opportunity cost that would make you happy, why continue to do it?
For example, one of the most common strategies for dealing with a sideways company is to sell it below its market cap, simply to record a “win.” What many advisors will fail to point out is that — in general — you are expected to continue to work for the new entity for some time. So, when you are considering the value of that win, you must factor in the loss of agency, control, and opportunity over the years following such an acquisition.
Strategy: When you’re thinking about quitting, make a spreadsheet of your opportunity costs and consider what the tangible effects of such a decision may cost you in the medium term.
Naive Realism is the cognitive bias that what we observe in the world around is objective reality, and anyone who disagrees with our perspective is delusional/thinking incorrectly. This is most evident in the political arena, but it affects many quitting decisions as well.
The central tension for most startups, for example, is that you will receive market feedback (prospective investors, customers, partners, employees) that tells you there is something wrong with your business. Employees start to quit, investors won’t ante up, business partners become unresponsive, customers won’t stay. When you look back at a failure in retrospect, I assure you that you will see the pattern of feedback and kick yourself for not heeding it sooner.
But in the moment, we are taught to discount the perspective of outsiders and listen to our persevering gut instinct. This bias can be very difficult to root out, but it’s important to recognize that negative feedback is important.
Strategy: As you receive negative feedback from others, keep a running list in a spreadsheet. Every no or insight about “no” should be memorialized. Periodically come back to the list and analyze these. And remember, anything other than a “yes” from a venture capitalist is a no — no matter how sweetly delivered. You can also convene a separate kind of advisory board (trusted peers and friends) and ask them for honest feedback about what you should do.
Though it means something different in pure psychoanalytical settings, Magical Thinking in business (or in a relationship) is about building improbable or impossible connections between the real world and your desired outcome. For example, believing that we can simultaneously invent our way out of the climate crisis while preserving our capitalist system completely intact is a form of Magical Thinking. Lowering tax rates and increasing government revenues (trickle down!) is another form of this kind of shared delusion.
When it comes to failure, there is almost always a moment in the story when you convince yourself that a highly unlikely and improbable thing is going to happen and everything will work out. It might be a white-knight acquirer, large-scale angel investor, or even a great hire that will fix the dissent in your engineering team. In each of these cases, the likelihood that such a choice will substantially alter the outcome is really, really small. Not like the odds of your business surviving the first five years (10 percent) but more like your business becoming the next Amazon (.00000000001 percent).
Strategy: When considering what viable options remain for your venture, be sure to write down the necessary sequence of events that would have to occur in order for your vision to work. Don’t sugar coat it — share the list with trusted advisors and see what they think. If it seems basically impossible, it probably is.
These cognitive biases can be highly pernicious and make it difficult to decide when to quit. Hopefully this will help you spot them and push back on their impact.
Enjoyed this article? Gabe Zichermann will be speaking at TNW2019. Make sure to book your tickets now!
Published March 23, 2019 — 19:30 UTC