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‘Graceful way out’: Investors propose some struggling founders close shop and return funding

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Summary

Investors have suggested that some struggling venture-backed startups close shop and return their funding, arguing that clean, well-planned exits are better for everyone than messy ones. Gokul Rajaram, an operator and investor, believes that returning money could win entrepreneurs their investors’ trust and that pivots can be helpful, but more than two can take a toll on the team. He suggested that $2 to $3 million is a reasonable amount to burn through before finding product-market fit and that returning money is not a shortcut to raising the next round of funding. He also noted that investors should provide a safe space to entrepreneurs and help them understand that it is okay to return money or shut down the company.

Q&As

What is the argument for founders to give back funding if they have yet to find product-market fit?
The argument for founders to give back funding if they have yet to find product-market fit is that it is better for everyone than a messy exit, the money could be invested in something more impactful, and the founders' time could be focused on more productive endeavors, greatly improving their mental and emotional well-being.

What is the rule of thumb for the amount of money necessary to find product-market fit?
The rule of thumb for the amount of money necessary to find product-market fit is $2 million to $3 million in capital in reasonable times.

What are the advantages for a founder who throws in the towel and gives back some of their raised funding?
The advantages for a founder who throws in the towel and gives back some of their raised funding are that they will win the trust and respect of investors and so improve their odds of raising money in the future, and they can escape the psychological toll that endless pivoting takes on founders and other stakeholders.

Does running out of runway hurt a founder's chances of raising funding for another company later?
No, running out of runway does not hurt a founder's chances of raising funding for another company later.

What advice does Gokul Rajaram have for founders on the issue of returning capital in the current market?
Gokul Rajaram's advice for founders on the issue of returning capital in the current market is that returning money should not be seen as a shortcut to raising their next round of funding, but instead escaping the psychological toll that endless pivoting takes on founders and other stakeholders. He also advises that companies have a duty and obligation to treat their employees well, and making a decision early to shut down the company means that there is more severance that can be given to employees.

AI Comments

👍 This is a great article that provides valuable insight into the investor-founder relationship. It is a fascinating discussion about the decisions that need to be made when startups are struggling to find product-market fit.

👎 This article fails to address the financial burden that founders may face when returning funding to investors. It also ignores the fact that some startups have been able to successfully pivot and become successful companies.

AI Discussion

Me: It talks about investors proposing that some struggling founders close shop and return funding. Basically, investors are suggesting that some startups raised too much capital, at valuations that are too high, and that a clean, well-planned exit is better for everyone than a messy one. They're also arguing that returning some of the funding could help founders focus on more productive endeavors and improve their mental and emotional well-being.

Friend: That's interesting. Do you think this is a good idea?

Me: It's a reasonable suggestion, but I'm not sure many founders would take it right now. There are a lot of factors to consider, such as the current job market and the difficulty of fundraising. Plus, some companies have been successful after pivoting, such as Slack and Twitter. Also, if investors gave too much money, that's their own fault. Gokul Rajaram, a renowned investor, believes returning some of the funding can be a "graceful way out" for founders, but he says it shouldn't be seen as a shortcut to raising money in the future. He also believes it can improve their chances of raising money in the future, as investors will have more trust in the founder.

Action items

Research no-code tools to help find product-market fit without writing code.
Consider the advantages of returning capital to investors, such as gaining their trust and respect.
If shutting down a company, plan for how to provide severance to employees in order to help them through the transition period.

Technical terms

Product-Market Fit: The degree to which a product satisfies a strong market demand. It is a measure of how well a product's features meet the needs of its target customers.
Pivot: A strategic shift in a company's focus, typically in response to changing market conditions or customer needs.
No-Code Tools: Software tools that allow users to create applications without writing code.
Sunk-Cost Fallacy: The tendency to continue an endeavor once an investment in money, time, or effort has been made, even when the cost of continuing is greater than the expected benefit.
FOMO: Fear of missing out; the feeling of anxiety that an exciting or interesting event may currently be happening elsewhere, often aroused by posts seen on social media.
Net Promoter Score: A customer loyalty metric that measures the willingness of customers to recommend a company's products or services to others.