When to Hold and When to Fold

An entrepreneur's life is filled with a significant degree of uncertainty. One of the questions that an entrepreneur will need to answer in the course of the life of his business is if he should shut down / sell the business and do something else. The 'Rocky Balboa' type entrepreneur will persist in the face of constant failures and a future that looks bleak. On the other hand the conservative, mercenary type entrepreneur who is looking to make a quick buck may land-up quitting just before the venture becomes successful. This post attempts to dissect the reasons for entrepreneurial failure with a view to understanding when to hold and when to fold.

A venture can fail due to three reasons:

1. Poorly differentiated, poorly positioned, poorly focused from the outset:
If you don't know where you're going any road will take you there. If your venture 'caters to everybody', provides software services and sells ice-cream on the side, and cannot be distinguished from other, similar businesses then your venture is doomed to a lifetime of struggle with periods of middling results. If you are in a services type, fragmented industry such as consulting, design services or outsourcing it is possible to get-by or even thrive. But the effort will be great. And quality, efficiency, contacts or cost becomes your method of survival.

What do you do in this case?

If you are in a fragmented industry, the question is harder to answer. You will need to ask yourself if you are willing to work at building something that has a low chance of survival if you quit. But your best-bet is to quit. Or if the business is throwing off some cash, you can use that cash to build another well-differentiated, well-focused, clearly positioned business on the side (much like what the founders of 37 signals did when they used their consulting earnings to build and launch Basecamp project management software.)

2. Well positioned, focused and differentiated but not enough traction:
Let's say the year is 1905. You decide to start a sports shoe manufacturing business in Africa. Your goal is to sell sports shoes to the tribes that reside in Kenya (and protect their feet from those thorns!)You're well-positioned, focused and differentiated. But the problem is that your target market don't care about wearing shoes and even if they did, they don't have the money to pay for it. You're telling yourself that there is a gap in the market. But is there a market in the gap?

What do you do in this case?

One option is to wait and attempt to develop the market. Educate your customers. Bring down the prices of your footwear. Indulge in business development style activities at the government level so that they introduce subsidies for tribal people that buy sports shoes. Actually, that's not such a bad idea. It may take awhile but once the market develops, you will be king and no competitor will even think of touching your business. But you need to realize that this takes time and ensure that you don't run out of resources or motivation as you wait.

3. Well Positioned, Differentiated and Focused But Competition Arrives
Let's say you've started Netscape Navigator. It's a well-positioned business with traction but gorilla-type competitors arrive on the scene.

What do you do in this case?
You raise capital and you fight like hell. But continue to figure out a way to differentiate. Also know that most industries will support 2 or 3 players (Law of the Ladder as described by Jack Trout and Al Ries in their book 22 Immutable Laws of Marketing.) So being number 2 or 3 may not be too bad. But if it is a winner takes all kind of business (such as browsers, operating systems etc.), you may be better of folding the business if you have not figured out a clearly defined target audience. For example, the Apple OS has survived against Windows because of a clearly defined, passionate target market and different way of delivering the software (you can't get the software if you don't buy an Apple system.)