by Margaret Heffernan - Thursday, 6th September 2007 -

Last month I argued that staying power is the hallmark of great entrepreneurs. After all, the prerequisite for any business success is staying in business – so you need the resilience to face down near-death experiences.

But when does that resilience turn against you? After all, not every business can or should survive. Some market poor products.

Others target flimsy, transient or non-existent markets. Tenacity is vital, but it can also blind and deafen you to the inevitable. How do you know when it’s time to quit?

Great entrepreneurs never want to quit. They’re passionate, driven optimists.

A leading investment banker in New York once told me that she prized passion highly – because it kept owners working when their competitors had gone home.

But, she added, sometimes entrepreneurs are so passionate that you start to wonder: will they know when to stop? Will they hear the signals, see the signs?

For me, there have always been a couple of key indicators that put me on alert – that make me set my passion aside to attempt a dispassionate analysis of what I’m doing.

The first: is the product great? Not about to be great, not getting better, but truly great. If it isn’t, then you may miss your market entirely. Your sales cycle will be slow and you may never build momentum.

Of course, most great products evolve – but if yours is one of those, you’ll need to make your sales forecasts a lot more pessimistic. You will need time.

Is your market hungry? Selling into a market that hasn’t recognised that it needs you yet is hideous.

You have to persuade your customers that they have a problem (they don’t love you for this) and then you have to persuade them that you are the solution to that problem. This is a slow sales cycle that consists largely of bringing bad news.

Once again, it’s time to ramp down the numbers. If you have to wait for your market to develop, you’d better do so with as little overhead as possible.

If, on the other hand, you already have a product and you have happy customers, then the question is: when will you become profitable? Profitable enough to pay everyone and develop new products?

If you aren’t already, then either your prices are too low or your costs are too high. If you can cut costs, cut as much as possible at once – salami cuts dissipate everyone’s energy and enthusiasm.

Similarly, if you believe you can raise prices, do so boldly once. Inching up drains customer commitment. What you’re trying to do is get to a point where you’re making a profit that is sustainable.

Do you have enough cash to cover all your costs until you are profitable? Money buys time – but how much time will you need?

That takes us to the next point: do you have the time and do you have the passion? Those, it seems to me, are the two crucial questions to ask when your business is going through a near-death experience.

Do you have the time to keep going until you are profitable, until the product works, until the market ripens? And do you have the stomach for the fight? If the answer to either question is “no”, then it’s time to close. If the answer to both questions is “no”, get out fast.

It is possible to close down a business well. I did it once, in 2002. As the internet bubble burst and my investor saw the value of his portfolio melt, neither he nor I lost faith in my business.

The product, the market, the execution were all spot on. But our timing wasn’t. It was always going to take a good five years for the company to become profitable – time that, when the market was buoyant, we could afford.

But, under pressure to achieve profitability faster, we’d be forced to make cuts. The more we cut, the less we could charge. We were like the arrow in Zeno’s paradox: the arrow would get closer and closer but never, ever hit its target.

Whichever way we worked the spreadsheet, the revenue took too long to overtake the costs. We had to close.

What happened next felt like a minor miracle. Everyone – suppliers, business partners – got paid.

Out on job interviews, employees talked about the work they’d done with us; they went to new jobs, proud of what they’d achieved. Friendships and reputations remained intact.

It’s important to know when to quit because persevering against the odds can prove so costly. Debt spoils relationships. Unpaid employees destroy reputations. Bankruptcy wrecks future opportunities.

Most great entrepreneurs have a business failure (or two) to their name and most will tell you that they learned more from the failures than the successes.

But they can say that because they got out in time – with their most precious asset, reputation, intact. You’ll need that when you’re ready to start again.