Techtalk: Pulling the plug
This article first appeared in Digital Edge, The Edge Malaysia Weekly on January 8, 2024 - January 14, 2024
Start-ups run the risk of failure from the get-go. Founders encounter problems such as insufficient cash flow, not achieving the optimum product and market fit and unconducive working environments due to employees or even the founders not getting along. Worse still, all the puzzle pieces could be in place, and yet a start-up could fail due to plain dumb luck.
So, founders should always be prepared for their start-up to fail and know the right time to let go instead of flogging a dead horse.
It might be tough for founders to let go of their dreams, and it might take time for them to find a venture that is successful. When closing down a company, a multitude of questions might arise. How can founders develop a wind-down plan? How do founders support employees to move on from the failure of a start-up?
Digital Edge spoke to industry players on the advice that they would provide to start-up founders.
1 Winding down
Start-ups and investors have a shared goal — financial return on capital. Start-ups potentially take up to 10 years to exit, observes Justin Lim, principal of Nexea Malaysia. This is because a good and sustainable business relies on a multitude of factors and not solely on the founder. The whole organisation needs to be strong.
Lim notes that unsystematic processes and high spend on untested strategies could also lead to problems. Essentially, the founding team holds the card to whether a start-up continues to fight another day.
“Qualitatively, it all depends on the founding team. If they are too tired to continue even after a break, or there is a persistent sense of dread associated with running the start-up, it is time to call it quits. Quantitatively, if all decisions available are more likely to result in further losses instead of gains, that’s a sign as well,” he says.
“I do want to highlight that there is no shame in calling it quits.”
Lim says before closing shop, founders should speak to mentors, peers, shareholders and employees who may provide different insights. Cost-cutting is another option to buy time and try different revenue generating plans.
“The merits of different cost-cutting strategies are dependent on each company’s situation; there is no one right way. Ultimately, the more cash you have, the more time and opportunities you have to ensure survival,” Lim says.
Once all options are exhausted, the directors of the company can pursue a voluntary winding-up if the company is solvent and able to meet the creditor’s liabilities.
“Find a good liquidator and let them do their job. Be mindful that there is a human cost involved with winding up and be prepared to help your team find new opportunities. Settle your accounts, close that chapter and finally get some rest. We’re all human,” he advises.
2 Not the right fit
Most start-ups are created in the hopes of solving a problem with a unique solution. It is important to have a product-market fit, says Renuka Sena, co-founder and CEO of Proficeo Consultants Sdn Bhd. Product-market fit happens when a start-up’s solution is being bought, used and subsequently recommended by its target customers.
“To achieve product-market fit, [start-ups] will most likely need to test and validate their product offerings with a large cross-section of a potential market before they can get a feel for the right target customer for their product. Without product-market fit, scaling is also a problem,” says Renuka.
Start-ups may survive their first year as it usually centres on product development and getting early customers. However, she warns that these early customers are not necessarily the right target segment that will help the start-up to scale its revenue.
This is because start-ups tend to bend over backwards to persuade early adopters through free trials or large discounts. This in turn helps to refine product offerings, articulate value proposition and determine pricing.
“Start-ups need to get to product-market fit within the first two or three years of inception. While many start-ups may well be revenue generating throughout this period, it does not necessarily mean they have achieved product-market fit,” notes Renuka.
It is time to pull the plug when it is apparent that the founders have less than six months runway, she cautions. This means the founders have to figure out cash flow issues.
In the event, the founders have decided to call it quits, they have to determine their commitments to their customers, investors and staff, advises Renuka.
“Not all founders have the grit and wherewithal to be an entrepreneur. Entrepreneurship is a marathon. Many entrepreneurs take a break but will likely be itching to start again. Some will decide never again and go back to employment. Many founders who have failed but start again will have a truckload of experience [and mistakes] that they will not repeat and will be stronger for it,” she says.
3 Keeping an eye out
Sivavenayakam Velayutham, co-founder and managing director of 25 Startups, says the signs are there for start-ups to close shop when several things occur. These include: a lack of market demand despite marketing effort and adjustments; if the start-up is struggling to generate consistent revenue with no viable path to monetisation in sight; fundamental operational or technical problems; regulatory and legal challenges; and founder burnout or loss of passion for the project.
“Deciding when to pull the plug on a start-up is a difficult and emotional decision. It needs careful consideration on multiple factors,” he says.
When the signs are there, what should start-ups do when they decide they are shutting down for good?
First, Sivavenayakam recommends transparently informing the internal team and external clients on the decision. Thereafter, develop a wind-down plan to properly close down the business. Other aspects include handling financial aspects such as debts, payments to vendors, salaries and other potential legal issues. Other than that, sensitive customer data should be disposed of properly in compliance with the data protection act, he suggests.
“Lastly, reflect and learn [from] the failure of the start-up and take care of your mental health as it is emotionally taxing. There is no harm seeking help or sharing with friends or family,” he says.
Once the start-up closes down, Sivavenayakam tells founders to reflect and learn from their mistakes before moving onto their future. “Take a break, reflect on your past experiences and decide what to do next. Don’t be shy to get back to the workforce. It’s pretty normal, if necessary.”
4 The will to survive
According to Fabian Bigar, CEO of MyDigital Corporation, reasons for start-up failure range from poor product-market fit; running out of money and failure to raise new capital; poor execution; competition and disruption; internal problems; and regulatory challenges.
“Start-ups often face legal and regulatory issues as most of them are constrained by limited resources and lack of experience in some. Challenges relating to intellectual property rights, compliance, licensing or government regulations can be overwhelming and can pose significant obstacles for start-ups,” says Bigar.
To make it easier to navigate the ecosystem, he notes there is government assistance such as the start-up single window.
“The MYStartup platform will be enhanced as a single window that brings start-ups together while simplifying business activities throughout their lifecycle. This initiative will optimise the RM200 million fund under various funding agencies and venture capital under a single platform,” he notes.
He hopes Malaysia will achieve its KL20 goal, which is for Malaysia to rank in the top 20 of the Global Start-Up Ecosystem by 2030 with Kuala Lumpur as the hub for the digital industry and start-ups in the Southeast Asian region.
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