If you are an entrepreneur or an early stage investor of any kind, it’s very likely that you have failed at some point in your career. I have. I have made a lot of mistakes. If you haven’t, it’s likely that you will or you haven’t pushed hard enough. I think any general post about when to sell in business probably lacks any specific detail that would be helpful for any entrepreneurs and probably wouldn’t give much insight into how I think about the subject. I am not talking about the decision to sell because someone offers you a good (or great) offer for the business but rather the situation where it’s the option of last resort. No one is making money and realizing their vision for the company. Lots of people have different opinions on the matter. I have found that the obvious flags for shutting down a business, while incredibly disappointing for everyone, are not nearly as agonizing as times when it’s not so obvious a decision. People like to retell stories and make it sound obvious – but that is often just revisionist history. It makes for a better (and shorter) story.
I was involved with a company in the past where I wrote the first check to seed fund the entrepreneur with an idea that we all thought had merit. We made some great progress over the following months including some good initial customer interest that led to a series A with a new co-investor who also had a lot of domain experience. We also had an outside board member who I had and still have a tremendous amount of respect for (who was originally brought in by the founder) and had a lot of experience in similar markets and businesses. In other words, we had the right ingredients for success. So what happened?
Over the next 12 months, we realized that the product/service that we had built really didn’t hunt with customers. The initial “interest” we had poorly interpreted and we missed key functionality in the design that was required for success. We spent the next 12 months trying to “fix” things. The founder for good personal reasons had physically moved and was commuting – working just as hard (or harder) but it compounded the problem. By the time we got the founder some help to refocus the business – and we got some great people to help working full time – it was too late. This is all hindsight – at the time it seemed like a good strategy. We spoke with new potential investors as the cash began to run short and we just didn’t have enough new customer traction to get anyone new to invest. Maybe we just didn’t give the new team enough time to figure things out. At the time, I believed that we could re-trench and rebuild and initially was willing to continue to fund the business regardless of any new investor – concluding that while we missed the target initially we could move forward and build success. I was motivated by the opportunity. In addition to believing in the opportunity, emotion was a big factor for me as I had been involved with the business since the very beginning. I was a believer which sometimes gives a rose colored tint to any situation. I believed in the new executives and their ability to change course.
But in the end we sold the business. I agonized about it. We didn’t write another check – no one did. The company was sold for essentially just assets. All employees found a new great place to work and a future. My co-investor deserves credit as well – which is a great argument for having multiple investors – in that they were very clear on shutting the business down. There was no disagreement with management either on the path forward. We had not delivered against the numbers, we had tried to fix things without enough tangible evidence. It was time to sell. This is what happens to many startups. It’s a bitter pill. No one likes it to end this way. But that risk is required in order to achieve the rewards that venture and startups offer.
I guess we will never know if it was the right decision ultimately – but it was the right decision at the time. For everyone. We as venture investors contribute money but anyone working at a startup is giving something just as precious which is their time. I would make the same decision today. I probably will remember more about it it some ways than the successes like Sandforce – a story for another post. It just didn’t make sense to invest more money and time. For me, these are hard decisions investors and entrepreneurs have to make together with less than perfect information. It made sense for employees and founders and for investors. The not so obvious flags looking back were lack of product market fit clarity after working at it for some time against a backdrop of a substantial future commitment in terms of time and investment, a collective effort that had repeatedly missed the mark. It was the right decision. I like to think I don’t give up often – but being thoughtful about when to sell I think is part of being an early stage investor and entrepreneur.