How to cut losses when shutting down a start-up

There was a time when starting a business required foresight, a business plan and some capital.

Today, an entrepreneur can sketch an idea on the back of a napkin in the morning and have the business up and running by the afternoon.

However, the ability to quickly seize upon new market opportunities can be a double-edged sword, as more than 80 per cent of all new business ventures fail.

While the statistics may seem grim, there are strategies savvy entrepreneurs can use to stop a business from going under.

Startup veterans say that when there’s trouble on the horizon, entrepreneurs should consider making changes in product direction, cash burn rate, business model, potential new markets and the management team.

Changing product direction was the path chosen by Watercooler, a social network software firm.

Two years ago, the company raised $500,000 in seed money from Canaan Partners, a venture capital firm, to fund the development of a Facebook-like social network that could be used internally by companies to link employees and improve communication.

Warning sign

Watercooler was able to sell its product to 10 well-known companies, including PepsiCo and Gap Inc.

But shortly after Watercooler closed its first deals, four customers unexpectedly banned the use of social networks within the workplace because some employees were using the applications to distribute trade secrets to outsiders and badmouth their employers.

The actions of those four companies were an early warning sign of trouble for Watercooler.

After the four contracts were terminated, Kevin Chou, Watercooler’s CEO, and Maha Ibrahim, a general partner at Canaan, met to discuss Watercooler’s options.

After reviewing the market data, they jointly decided to reuse much of the already written software code and the $250,000 that remained from the initial investment to build a new social networking application.

Within six weeks, Chou and his team were able to roll out a new fantasy football application that was widely used by those in the Facebook community who enjoy playing fantasy sports.

Since then, Watercooler has expanded its product offerings to include more fantasy sports games, TV communities and trivia games.