Entrepreneurs are not known for their pessimism. To start a business, you have to believe in the best of all possible worlds because it’s too hard if you don’t. But at some point, you might need to ask yourself if optimism has given way to magical thinking. Optimism is a useful fuel during tough times—and there will be tough times. Magical thinking, however, is the siren song that diminishes real and present dangers and lures you on toward even more perilous rocks.
It is the kind of thinking that keeps you muddling along in a business that might need to be reclassified as a fun hobby—or shuttered outright.
I flirted with magical thinking for a while until I finally put my reality goggles back on and made the hardest best decision I ever made—the decision to quit.
After four hard years—that certainly included incredible experiences—I sold my share of my business to my partner for a nominal sum and walked away. I’d contributed time and 100 percent of the invested capital. So, walking away meant accepting the brutal reality of sunk costs and the disappearance of my savings.
I started seeing my business as one that was going to sit in entrepreneurial purgatory indefinitely—not dead but not thriving. My partner? He still believed. And he still does, and I wish him well. So, this tale is equivocal. Like many tales, the spin depends on whom you ask.
In retrospect, I wish I’d challenged myself with these questions sooner—like before I started the business. Once you are in, getting out is much more time-consuming, painful, and expensive. If you’re trying to determine whether to stay or go, ask yourself these three important questions.
1. Is Entrepreneurial Enthusiasm Clouding My Judgment? Identifying as an entrepreneur is heady stuff. But it is never, ever enough to replace a good business model, capitalization, and a deep understanding of supply chain and distribution. Our products were well designed, but they were also novelty low-cost impulse buys that needed high volumes to make enough money to support one—much less two—founders. The first antidote to magical thinking was accepting that we did not have the experience, network, or value proposition to get where I thought we needed to be. You can skate a long way on optimism, but thin ice is still thin ice.
2. Am I Behaving as if the Rule of Sunk Costs Does Not Apply to Me? I know from analyzing other people’s businesses that things take longer and cost more. And, at some point, startup costs are sunk, and future decisions should not be driven by efforts to get that original outlay back. If the idea doesn’t work, the money is gone, and doubling down isn’t going to make it come back.
In my case, I’d been losing faith in our concept for a variety of micro, macro, and values-based reasons. But I’d sunk the bulk of my savings into the enterprise and kept the cash drip going because each incremental investment to keep things alive fueled hope that a big break might be just around the corner—one that would flood my original outlay back home.
Newsflash: Luck is not a strategy. It’s simply luck. And luck can happen. But sinking more money into an idea to keep it alive with no real understanding of the potential return on that incremental investment should set off alarms.
When I finally took the real-hard look at my business, I concluded that it would take too long to generate cash flow to support us, even longer to return my invested capital, and more capital infusion in between that I was no longer willing to provide.
The second dose of the magical-thinking antidote? Accepting that the rule of sunk costs applies to me, too. At the end of my analysis, I decided that I was funding a hobby, not a business. While it is totally okay to fund a hobby, I recommend knowing the difference between the two before you do.
You wouldn’t be the first entrepreneur to admit defeat and move on. According to a 2014 FAQ report by the Small Business Administration (SBA), “About half of all new establishments survive five years or more, and about one-third survive 10 years or more.”
3. Am I Using My Time Wisely? It was hard enough for me to accept that I’d lost all of my money. But the killer, the real coup de grâce was the brutal realization that I was losing something I could never get back: my time. Money flows in and out of one’s life. Time just leaves. It is a depleting resource. You don’t get it back, ever.
No more magical thinking. This struggling business was making me so unhappy, but I kept going because I didn’t want to be someone who quit. But once I considered the value of my time and stacked it against any expected future value of sticking with the business, there was no outcome that made staying worth it for me. The opportunity cost to everything else in my life was too high.
And then I knew it was time to quit.
I am not suggesting that the first time you feel uncomfortable, broke, lonely, or stressed that your business is done for. Far from it. Overcoming challenges to pursue an idea you believe in is rewarding. What I am encouraging, however, is a regular honest check-in to make sure that the struggle isn’t overwhelming the reward or any hope of one.
For more nuts-and-bolts questions about deciding whether or not your business is in dire straits, CNN Money serves up 10 practical questions to help you decide.
Deciding to quit is an extremely personal call, especially when other people are involved. It was the right one for me. Despite the financial loss and professional disruption, the experiences I collected from starting and running my business yielded unexpected and wonderful benefits—and continue to do so. It’s all too fresh for me to say, “It was worth it.” But the sting of failure has certainly been eclipsed by a set of experiences, teachings, and people I wouldn’t encounter otherwise. And for that I am deeply grateful.
Fortune Magazine profiled several entrepreneurs on the topic of quitting and the signs to watch. While the reasons for quitting varied, optimism lingered. Serial entrepreneur Patrick FitzGerald said, “If you embrace failure, you say, ‘I’m going to shut this down, and I’m going to use it for my next company.’ You wasted your time if you didn’t learn anything from it.”