When to Walk Away
Right now, many founders are facing difficult decisions.
In the aftermath of the 2020-21 bull market, countless startups are nearing the end of their runway. Some will make it. Many more will not. And then there are the companies languishing in the middle. They have revenue, but not product-market fit. They are growing, but not fast enough. Some employees have decided to move on. So have some customers. They can potentially extend their runway, but at what cost?
Over the past few months, I’ve spoken with a number of founders trying to decide what they should do next. Every investor I know has. And I expect to have many more of these difficult conversations in the near future. For founders caught between a clear win and an obvious loss, with the added pressures of investor expectations and employee responsibility weighing heavily on their shoulders, the path forward is as clear as molasses.
It’s a struggle I’m deeply familiar with. Because I’ve been there.
Which is why I was curious to read Annie Duke’s latest book, Quit: The Power of Knowing When to Walk Away. For readers unfamiliar with Annie, she was a professional poker player during the heyday of the World Series of Poker in the late 90s and early-2000s. After retiring from poker, she became a speaker, consultant and author and has written a number of books on decision science. Last year, Annie joined First Round Capital as a "Special Partner” focused on coaching founders through difficult decisions.
In her latest book, Annie discusses both the power of quitting and the social, societal and psychological barriers to doing so. In particular, she talks a lot about the two-sided nature of “grit”.
Persistence is not always the best decision, certainly not absent context. And context changes.
That’s the funny thing about grit. While grit can get you to stick to hard things that are worthwhile, grit can also get you to stick to hard things that are no longer worthwhile.
What makes the book so powerful for founders is the way it combines deep insights into the psychology, emotions and economics of quitting with real-life startup examples (including from Canadian founders Stewart Butterfield and Andrew Wilkinson).
Here are a few of my key takeaways from Quit:
Loss Aversion and Sunk Costs
While most founders understand (at least conceptually) the notion of sunk costs, loss aversion is an equally important concept. Loss aversion is a cognitive bias that causes humans to feel the pain of a loss more acutely than the pleasure of an equivalent gain:
One of the key findings of prospect theory, a theory at the core of behavioral economics, is loss aversion. Simply put, the negative emotional impact of a loss is greater than the positive emotional impact of an equivalent gain.
Loss aversion makes us not want to stop something we have already started.
The combination of loss aversion and sunk costs creates a powerful foe for founders who are considering quitting. Instead of clearly and rationally analyzing whether or not it makes sense to continue on, founders who’ve been grinding it out for years often struggle to separate the decision of what to do moving forward from the blood, sweat and tears that they’ve already put into their startup.
When we quit, we fear two things: that we’ve failed, and that we’ve wasted our time, effort or money.
Founder Identity
When you add founder identity into the mix, it gets even harder for startup founders to walk away.
When your identity is what you do, then what you do becomes hard to abandon, because it means quitting who you are.
First-time founders, in particular, often struggle to separate their identity from that of their startup. What started off as a statement of pride “I’m Chris, Founder of X”, can over time become an albatross that holds them back. Founders who have embraced grittiness as a core part of their identity (picture of all the founders you know who’ve been quoting The Hard Thing about Hard Things ad nauseum for the past few years), this effect can be orders of magnitude stronger.
Founders, who are gritty by nature, all too often continue to grind it out until the bitter end.
Duty to Investors
When it comes to quitting, most investors think the opposite of what founders assume. The reality is that no investor wants founders to work themselves into the ground when there is no longer a clear path to success. Investors are looking for a return-on-investment, not a martyr. Yet many founders believe this.
One of the most common ways that founders push back [on quitting] is by claiming that they have a duty to the investors to give it everything they have.
To prove this point, Annie points to one of Silicon Valley’s most successful angel investors, Ron Conway. Most people know Ron as the founder of SV Angel and as an investor in countless unicorns. What few realize is that he is also one of the startup world’s most skilled “quitting coaches”. According to Conway,
There is no honor in spending every last bit of investor money pursuing an endeavor that’s failing. Returning capital to investors is the responsible choice under those circumstances and demonstrates the ability to make the hard decision when it’s the right thing to do. It shows an understanding of expected value and the ability to respond to new information and changing circumstances with flexibility rather than rigidity.
Contrary to most founders’ beliefs, returning capital increases the chances that those investors will want to work with them again.
Duty to Employees
If you ask founders what holds them back from shutting down a business, responsibility to their employees is often at the top of their list. The idea that the people who took a chance on them will be out of work can be hard to stomach, leading them to continue on with the status quo.
This is another “trap” the adds founder ego into the mix. While it’s absolutely noble to want to take care of your employees, if it were really true that nobody on your team would be able to get another job, then you must have a pretty awful team. The reality is that each employee at a startup has made (and continues to make) economic decisions that take into account the potential future value of equity/options in considering their opportunity cost.
The problem? When founders of failing startups continue to sell their team on the future success of the company, they’re providing those employees with false information with which to make those decisions.
Just as investors don’t want to see founders trapped in something that’s failing, founders shouldn’t want that for their employees.
While reading Quit (which I highly recommend for both founders and investors), I found myself replaying some of the conversations I’ve had recently with founders debating the future of their companies. A few of those founders made the difficult decision to shut things down. Many are pushing ahead. As a VC, I obviously want to see every company I invest in succeed, but I know that will never happen. So while it’s hard not to admire the grit of those founders determined to give it their all, it’s difficult for me as a former founder to watch some of them continue down a path that I know has little-to-no chance of success.
If you’re a founder reading this, I hope you win. But please know that it’s okay to quit. To quit something that’s no longer worth pursuing isn’t a failure, it’s a success.
When the world tells you to quit, it is, of course, possible you might see something the world doesn’t see, causing you to rightly persist even when others would abandon the cause. But when the world is screaming at the top of its lungs for you to quit and you refuse to listen, grit can become folly.
Too often, we refuse to listen.