Sunk (Cost) or Swim

A startup is an investment. This much is obvious. For a founder, it is an investment of time, money, network, basically an entire 3–7 years of one’s life. The decision to jump off the deep end and devote your life to a startup is a daunting one. The potential founder should have a concept, effectuated it, spoken to potential customers, and have deep knowledge of the industry. If all of these are in place, it might be time to quit the day job and take the leap.

Even with all of these ingredients in place, the startup might fall on hard times. A FAANG might enter the market and envelop all the market share left. A regulation might change industry dynamics; a once in a generation pandemic might close all in-person events for 12 (+?) months. In any case, a founder will be left with the decision of whether to stick with it or close the shop.

It is critical that this decision be made only looking to the future, no matter the time/money/blood/sweat/tears invested prior. These are known as sunk costs in investing. There is no way to regain these costs, hence the name. For a founder who dedicated their life to a venture and made every sacrifice along the way, it is painfully difficult to ignore that sacrifice and make an objective decision based on future conditions. It’s easy to make this call in case (HBS DAG Group Case) or in a finance exam; it’s not easy to write-off the past three years of your life as a failure.

As I said in the “Fail Fast” post, “failing” is not the worst thing a founder can do at this stage. The worst course of action is to keep working on a venture because of emotions and prior investment when the future dynamics are unfavorable. This is just wasting time, whereas a shut-down decision opens doors for new opportunities quicker.

A founder has to first take the plunge to start their business. However, once in the water, entertaining sunk costs in the decision making process is a surefire way to sink yourself, your business, and your immediate future.