This is really a hard question and a complex problem. Once, a mentor told me that your startup is over when you run out of money. This answer is so simple and neat that has to be wrong, as H. L. Mencken said “For every complex problem, there is a solution that is simple, neat, and wrong.”
If you run out of money you are more of a gambling addict than an entrepreneur, you should never run out of money, even if your startup is having pretty tough times you should be smart enough to make a good move that gets you back on track or at least, stops wasting your resources.
So how do you know when to quit? Maybe this reformulation of the question makes it easier to answer: How do you realize that you are wasting your time, money and resources?
The answer is measuring your company’s growth. When your company stops growing then by definition you don’t have a startup anymore so this should be at least an alert to rethink some of your strategies.
Measuring the company’s growth is not an easy task. What you need to measure will depend on a number of factors but the most important are: the stage your company is, if you have investors or if you are bootstrapping, and the business model of your company.
Depending on the stage of your company, if it is in the early stage you will need to measure the growth of the implementation. In a second stage the most useful metric will be the user growth and in a third stage the most important measure of all, revenue and profits growth.
Depending if you have investors or if you are bootstrapping you will have more pressure in growing very fast the user base and revenue in the former case and you will have more pressure to growth the profits in the later case. Investments make you focus on fast growing revenue and bootstrapping make you focus on fast growing profits which are two very different things but at the end to make a solid company you will need both. When bootstrapping, profits will allow you to reinvest money into your company to accelerate growth. In the other case, when you have investment, then you already have money so you need to focus on exponential growth.
Depending on your business model and your exit strategy you can pay more attention to growing in revenue, users or innovation. For example if your exit strategy is to sell your technology you should focus to measure your progress in innovation which is quite harder than measuring revenue or users but it is a possibility. In case your business model is based on advertising you should be laser focused on growing your user base as fast as you can. In the case that you sell a product or service and you have good margins for your product or service you don’t need to grow your user base as fast as if you depend on advertising.
In all cases you must be measuring your growth, you should define the metrics you are interested in and keep track on those metrics while you are trying different technologies, marketing strategies and business models.
But we still didn’t answer the question. Now we are measuring the growth but we need to choose a threshold to decide when the growth is not enough to keep working on the company. This raise an even harder question that would be: Exactly how much time without growing is enough to give up?
To say a number I would say that the “bitter spot” is between 6 months and a year without growing but it depends of many factors like the company stage, the current revenue and several external factors.
A good benchmark is to look close to your competitors growth, if they were growing for the last 6 month and you weren’t, you should probably quit.
The lesson here is that the biggest fear of an entrepreneur shouldn’t be to run out of money. The biggest fear should be being unable to keep the company growing. So if your company is growing then find money wherever you can and don’t give up.