227: The Art of Cutting Your Losses
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In this episode, Steli and Hiten talk about cultivating the art of cutting your losses. Investing your time, energy and money into something that is NOT working is painful to admit, but necessary to confront when it comes to the success of your business. Listen as Steli and Hiten give examples of how people choose to not cut their losses when they really should. They discuss the dangers of holding on to that bad employee, poor marketing strategy, or ad agency that isn’t producing results. They also express the need for self-awareness when making that tough choice to STOP what you’re doing and cut your losses.
Time Stamped Show Notes:
- 00:05 – Today’s episode is about how to cultivate the art of cutting your losses
- 00:47 – Steli says founders have a problem with knowing when and how to cut their losses
- 01:46 – The problem is that founders don’t STOP, even if they know they’ve already made some wrong decisions
- 02:09 – Hiten says to explore the sunk cost fallacy
- 02:28 – Hiten says it is the root cause of 99% of our business problems; and it won’t stop until we get over it
- 02:51 – In a previous episode, Hiten and Steli talked about organizational and personal self-awareness which relates to today’s topic
- 03:07 – Hiten says the problem lies in one’s decision to keep doing something (that’s proven to not be beneficial) because you’re already so very invested in it
- 03:50 – The hardest part is to evaluating and realizing that what you are doing is NOT working
- 05:05 – Hiten’s tactic is to think of the exact opposite of what you are doing
- 05:48 – Steli says thinking of the opposite in and of itself is not enough, especially if you are just doing something to prove yourself right
- 06:54 – Steli says this is like going to different places, but still applying the same angle
- 07:45 – An example of this is hiring an agency to do an ad for you and they are not delivering any good work
- 08:01 – Since you already spent money on them, instead of stopping the project and looking for another agency, you stay with them because the thought of stopping is painful – this is NOT cutting your losses
- 08:36 – When it comes to investments, people do not stop even if they have started losing
- 09:15 – Steli says there is a cost of doing business and a cost of living—you are going to make mistakes along the way, but there is a way to mitigate the risk and that is by cutting your losses
- 10:02 – Steli says to lose quickly and move onto the next thing where you have a chance to win versus waiting for the time when you think you will win
- 10:21 – Steli’s base principle is if things start out very difficult, they typically never end well
- 10:47 – Steli wants to cut his losses as early as possible; so, when things start out too complicated, that is his signal to stop
- 11:28 – Projects that start with problems don’t end well
- 12:33 – Hiten says the more you persevere at something, the more likely it is for you to stop doing it the way you have been doing
- 13:05 – Hiten says to ask if what you are doing is making an impact
- 13:13 – People have the idea that they just have to persevere at something, but if they are moving in the wrong direction, it’s not going to do anything for you
- 13:49 – To change what you are doing, you have to realize that it is not working anymore
- 14:02 – For example: hiring someone that is not working out and you deciding not to cut them out fast enough
- 14:54 – Another example is selling one way that is not working for your business, but you keep doing it because it’s the easy thing to do
- 15:13 – This is the sunk mental cost – it will be harder to find another way to do things but what you are doing right now is not working
- 16:12 – In marketing, this is doing a certain type of marketing that is not converting for you but you still keep on doing it
- 17:43 – In regards to fundraising, talking to the wrong type of firm or investors or raising more or less than you should—this is just doing things that are easy for you
- 18:22 – People are more resistant to change when they have already invested a lot into what they are already doing
- 19:09 – Steli says to write down the reasons why you are doing things. If the reasons involve things that have already happened in the past, this means you have invested too much to stop and are not giving you enough good reasons to continue
- 20:01 – If you are doing something because it would hurt to stop it, you should stop
- 20:15 – The hurt is a strong signal that things are going in a bad direction and that feeling will increase every day
- 21:08 – Think of the reasons why you decided to work with a person—if there are multiple days where you feel you’d rather not work with that person, then you have to change directions
- 21:31 – Decide the criteria that will help you discern whether you should continue on or stop
- 22:24 – Follow through on your criteria
- 23:13 – End of today’s episode
3 Key Points:
- Cutting your losses relies on your awareness of your organization’s needs—think of what will make an impact rather than what you have already invested in it.
- If the reasons that keep you going are rooted in the past, this is a good sign that you need to stop and cut your losses.
- Persevering in the wrong direction will not benefit you or your business.
Hey, everybody. This is Steli Efti.
This is Hiten Shah.
In today’s episode of The Startup Chat, we’re going to talk about learning how to cut your losses or how to cultivate the art of cutting your losses. Here’s why I proposed this topic and here’s why I want to talk about this with you, Hiten. I don’t know. It feels like more recently for one reason or another, some of the challenges that founders have been communicating to me could all be summarized as people getting into trouble or their startups into trouble not necessarily because they decided to go down a path that turned out to be wrong, but because once there were sufficient enough amount of data and proof that they’re going down the wrong path, they felt so invested in that path and that project-
They kept going.
That they kept going. This is not just other people. I’ve made this mistake in many ways in my own life, and we’ve made this mistake as a company ourselves. Like I don’t think like I’m above it, but it’s just funny enough that it’s been kind of in very different shapes and forms been a topic. At least it’s been the way I’ve been interpreting some of the problems that have been coming to be. Today it’s been a very strong thing on top of my mind, so I was like, “I need to talk to Hiten about this.” You know, the problem not being you made a wrong decision. The problem is once there was enough information that it’s the wrong decision, you kept going because you didn’t want to take your losses and start again. Like am I crazy or is this a really big challenge?
Dude. There’s this thing, and this is for anyone listening that wants to super geek out on it. We are not going to talk about it like this, but there’s something called a sunk cost fallacy. Like you can look it up. Google it. I’m sure there’s content about it. I don’t want to talk about it in that way because I think it’s too not advanced, but lik it makes it too complicated. Basically the concept and the idea is what you’re talking about. I’ll first start by saying dude, that’s so cool that you found this. It’s one of the root causes that I’ve found to 99% of business problems until you get over it. After you get over it, a lot of things change for your mindset is what I’ve noticed. Some people are over it. Some people aren’t. It’s just very interesting. We’ve talked previously. I don’t know what episode, but you should search iTunes and search our blog and find the good stuff. I’m not even going to go there, but basically we talked about like organizational self awareness and personal self awareness, and this is very related to that to me because the way you stop this problem is by going there. What is the problem? To me, the problem you’re hitting on is basically this idea that you’ve been doing a bunch of stuff and instead of realizing that it’s bad or realizing it’s not serving the business well or serving you well, you continue to do it because you’re already invested in it. This is like so tricky, because you always have that feeling that whatever you did is like it’s good, right? Like you did it and there’s just more you can do and make it work, and there’s all these feelings around it depending on what you’re dealing with. But at the end of the day, you have to be willing to stop and possibly scrap everything you’ve done before in order to get to where you need to go next. I think it’s the hardest thing to do. The easiest thing to do is continue doing what you’re already doing. The hardest thing to do is evaluate it and realize that whatever you were doing isn’t working and that maybe you even wasted a little bit of extra time than you should have on it. Then what do I do? Usually you keep going, because you’re like, “Oh, wait. We spent this much money,” or, “We hired this person and we shouldn’t fire them,” right? Because we already hired them, and what happens when they leave. Like all of it relates back to this core problem, which is I have invested so much in something, we have invested so much in something, why not just continue it? That’s almost the easy way out versus thinking through your problem and saying, “Look, whatever we did in the past doesn’t even matter.” One trick I use just to jump in, and then I want to hear how you think about this lens, because I think you’ve hit on like one of the core problems that every company has, every business has, every person has in life, which is this idea that they invested in something. The way I think you dispel it is like, and I do this constantly. I just did this yesterday to Marie, my business partner, and she freaked out. Not in a bad way, but she was like, “Oh, no. We can’t do it like that.” I’m like, “Wait. I’m not even saying we can’t do it like that. What I said is fragile. You know, like you don’t need to like scrutinize it the way you did, but I get why you are. That was why I said it.” Essentially what it is is just think of the exact opposite. In every are you’re struggling with today or every area where you think there’s a problem, just think of the exact opposite of what you’re doing today, just for the thought process of like going there. The reason is you’ve invested so much in it whatever it may be, whether it’s money, time, brain power, humans, whatever it is that it’s hard to see the opposite unless you actually just sit there and sit with the opposite for a second, right? Which is like, “We’ve been thinking about this like X. What if we think about it like Y, which is completely opposite than X? What could happen?”. That’s the interesting trick in my mind that I’ve found to be most impactful for me.
I love that. But I think the nuances here really matter. My only immediate response or comment on this is that thinking of the opposite in itself is not enough, because intention matters. If you think of the opposite in order again to prove yourself right, if you’re like, “Oh, I thought about the opposite strategy,” but then you still do it through the old paradigm of your old habitual ways of thinking of like, “The reason why we’re doing enterprise sales is because dada dada dada,” like you just repeat what you’ve already thought and already said and already decided versus thinking of the opposite with the intention of believing that the opposite is right, right? Just doing the thought experiment not to prove yourself and the current strategy right, but to prove it wrong. If we did the exact opposite and that was the true answer, how would we have to think about it? I don’t know how you get yourself to that point, but it’s really important when we do these thought experiments to do them in the right framework. Otherwise, they’re kind of useless or they can be misused to just circle jerk and do the thing that you wanted to do anyways and then convince yourself that you thought it through from different angles, although it was you went to different places but you always applied the same angle if that makes any sense. But I love that. With you in particular and the kind of flexibility of thinking that you demonstrate daily, I think that I can see how you’re challenging your environment and the teams that you’re part of to really think of the opposite strategy as in like what if that was the right thing to do. I think that like there’s something. I’ll share something philosophical and then something practical. I think maybe even before I do that, just very quickly for the people that still find this too theoretical, maybe a few examples of when people, projects, and companies don’t cut your losses. Maybe that makes some amount of sense at the beginning of this episode. I mean cutting your losses, this is the type of thing where as an example you hire an agency to develop an app for you and the first few weeks are going really badly, and they’re not delivering any good work, and the first version of what they promise you they did really, really poorly. Now if you’ve already spent maybe a month with them or two, you already spent some money with them, the thought is very painful. This is the emotional part of this. The thought of stopping and say, “You know what? We’d rather just stop here. Take the money you’ve taken from us, and we’ll try to find another agency we can work better with.” That thought seems very painful to most people. That’s cutting your losses. That’s not seeing it through, although you can tell that it’s not going well. It’s like cutting the loss and admitting this was the wrong agency and we’re not going to finish the project with them just because we started it. Also this applies to investment. That’s probably why most humans are not great financial investors is they buy stock or they buy whatever kind of investments they make, and then when things start … When they start losing, even when they just lose theoretical profits, they get go invested in those losses that it’s just too painful for them to sell and take their losses, cut their losses and move on to the next investment. They just try and wait out to get back into the green or back into the black. Then of course most of the time it gets worse and worse and worse. There’s many different places where this applies. I think for me there’s one thing that you just have to realize in life, and that is that there’s a cost of doing business and there’s a cost of living. That means that you’re going to make mistakes and you cannot avoid making mistakes, but the way to mitigate the risk of making mistakes is to cut your losses once you realize that. I think most people don’t operate under that principle. Most people try to never make a mistake by gathering a ton of data before they commit to something, or once they commit to something they try to make that something a success no matter what. Like once I buy a stock, I’m going to wait until I have a profit. I think that that’s obviously the worst strategy ever. Like you just need to realize that you cannot win all the times. You’re going to have to cut. Get into the habit of losing, but just lose quickly. Lose quickly and move on to the next thing where you have a chance to win versus sticking with things for way too long until you’re in the winning column. One practical framework that I have to share here, before we move on and I want to hear your thoughts on that one, is that I have this base principle in life that when things start out very complicated and very difficult, they never end well. This is something like a lot of people on my team hear me say. People who know me have heard me say this many, many times in many different situations. I apply this principle when it comes to hiring, when it comes to working with people, when it comes to projects. Whenever things start out too painful, too difficult, too complicated, not that great, I always want to cut. I want to cut my losses as early as possible. Ideally I cut them before we even really got started, and that’s kind of one principle that allows me to see an out is whenever things start complicated and difficult, there’s misunderstanding and there’s back and forths and there’s misalignments, in the early days, to me that a very strong signal to get out. That’s a really strong signal to move on and do something else or work with somebody else, because I’m like, “This thing is not going to go well.” It just starts off already on the wrong foot. Because when projects start beautifully and perfectly aligned and everything is amazing, by the end you’re going to have to overcome some challenges and some misalignments and some problems. But when it starts out with problems, usually it’s never ending well. What do you say to people, Hiten, that are like, “Well, what about perseverance? What about all these stories that we’ve read about things that weren’t going well and some entrepreneur just pushed and pushed and pushed until they turned things around?” That seems in contradiction with cutting your losses, right? This is a balance that I think a lot of entrepreneurs struggle with, which is how do you know when to persevere versus when to pivot or stop? Like how do you make these assessments? How do you know when to cut your losses? You know, applying some of the things that we talked about might be useful, but what do you tell to people that are like working on a project that’s not going well and they’re like, “Well, don’t I have to just persevere until I turn this thing around? I can’t just quit on everything just because it’s difficult”?
Oh, man. This is such a powerful way to like run, fix, solve problems, I think this perseverance. I’s almost like the more you think about persevering on something, the more likely it is you need to stop doing it the way you have been, you know? I know that’s fucked up, because like in your head you’re like, “Well, I started this business and like I’m a founder,” or even if you’re working at a company, right, and like the company is doing something that they just continuously keep doing without stopping it but it’s not doing anything for them. It’s like it’s just the most ineffective way to keep running and operating if like it’s just not having an impact. To me, like putting the lens of like, “Is this actually having an impact? Do we have the information we need to stop doing it?”. Those are the kind of things that come to my mind, because people start companies, people do these things with the idea that I have to persevere through it in order to make it work. You know, I have to have the grit. I have to just keep going. But like if you keep going in the wrong direction, guess what? You keep going in the wrong direction. It’s not going to do anything for you. That perseverance is useful. To me, I think like the reason I get excited about this topic because we all are making this mistake all the time regardless of how good we think we are, how good we actually are, or how experienced we are. There are things we’re doing that we shouldn’t be doing right now. The reason we keep doing them is because we’ve always done them. You can’t change without actually recognizing that whatever you’re doing is not working anymore. For me it’s like … I’ll give a few examples because I know you’re right, we shouldn’t be theoretical about this. Let’s get really practical before we’re done with this topic. One, you hire somebody and they’re not working out and your team keeps having conversations about them not behind their back, but essentially behind their back while they’re not around. You probably need to do something about that. There’s a sunk cost to it though. You hired the person. You’ve trained them. They know a bunch about your business. It’s easy to think about the positive, but yet there’s these reasons why they’re just not working out and you don’t cut them fast enough. Not cut in a bad way, but realize that they’re no longer good for the company, right? Maybe they were in the past and you’re stuck on that. You’re stuck on the goodness, the things they did that were great. You can’t get over it, and you have to because you have to move the business forward and they’re probably holding it back at that point. When you’re talking about someone too much like without talking to them about something, that’s a big sign and that’s again sunk cost, right? You sunk all this time and energy into them. They’re not working out. You can’t get over it and you keep them on longer than you should. Another one is you’re selling a certain way, whether it’s inside sales or enterprise or self service or whatever, and it’s just not growing your business. But yet you’ve kept doing it and it’s the easy thing to do, and you’re not figuring out what the hard thing is because you have this whole sunk cost thing around the processes, the systems. This is like more of a sunk mental cost, which is like it’s going to be hard to find any other way, but the way we’re currently doing is not working. It’s almost like you have this push and pull towards something new where you think you might want to do something new, but you keep debating of how to make the existing model work even though you’ve been doing it six months and had no progress. That’s another one where I see it in sales quite a bit actually when folks are selling a certain way, and I count self service and online sales as sales even if you don’t have a sales process. Then what happens is you might just have a product or a business that should be sold with a sales person, needs to be, but you’re not realizing that or vice versa. You’re selling through sales people, but your product’s so good you can just pop up online and set up a credit card and people will buy it, which is rarely the case but that happens too. It’s mostly the case where you’re selling self service and sales people would totally increase the sales of the business, but you’ve just been doing it so long one way the resistance is high and the sunk cost on that system is pretty high that you won’t change. Another one in marketing is you’ve been doing certain types of marketing like content marketing, and it’s not converting for you but you keep going it. Well, like it’s probably not going to work for you for your market, for your business, for your product if you’ve done it for six months or two months or three months and it’s just not converting. Try something else. But yet, you’ve just gotten used to the system. Maybe even the headcount you’ve added around that area to make that model work, but the model’s not working. I got one more, which is more of a business model problem. You’re charging a certain price, right, or you have freemium in your business and you take too long to convert it to a non freemium model. This is hilarious for me to say considering how much I love freemium, but there are businesses that a free plan will not scale the business. It will not make you money, and you take too long to cut it and then start selling a different way or start thinking of your business model a different way, or vice versa. You have a product where you’re having a hard time getting six figure deals, five figure deals, even four figure deals. But if you simply put a credit card online, people would just buy it and your business model’s off. Or the idea that you’re selling a one time fee product when you should be selling a recurring revenue product, right? There’s a bunch of stuff around business model where you get stuck. I think this is really a way to identify and solve a problem that most companies have, which is they’re stuck on something. They’re stuck on something they’ve been doing for such a long time. Those are my kind of small sort of examples that are common. There’s a lot of uncommon ones too that come up around fundraising, and who you talk to with fundraising, and how you continue to talk to the wrong type of firm or angel group or whatever, angel investors, because there’s a mismatch in who you should be talking to for the amount you want to raise. You keep trying to raise more than you should or less than you should, right? These are all things because you’re just doing what you’re used to and what you’ve been doing and don’t realize that there’s a better way because you just keep doing it. It’s really easy. There’s a bunch of sunk cost of mental energy, cost of thinking, and all these things that you kind of get wrapped up in. Yeah, I could come up with examples for any area of a business and point it back to the fact that people are most resistant to change especially when they’ve invested a lot in what they’ve already been doing.
So powerful. A few things let me … I mean you’ve given some amazing tips. I’ll throw in some before we wrap up this episode. I think that number one, once you … You have to rejustify the reason why you’re doing certain things typically again and again, right? Why is somebody a good hire? Why is this project going well or not going well? Why are we seeing results? Once you notice, and this goes back to the self awareness episode that we had, but once you notice that the reasons why you are pro continuing on something or with somebody, once most of the reasons that you … If you take a piece of paper right now and you write down all the reasons why you should keep doing this, if most of the reasons are based on things that have already happened in the past that are like, “Well, we’ve spent three months on this thing. Well, we are seeing slightly more progress today than we did in the early day. Well, I put a lot of effort into it,” these things are all indicators that what you’re saying is, “We’ve invested too much to stop.” You’re not really giving good reasons to continue. You’re not really talking about all the positive results you’re seeing, all the success you’re seeing, the traction you’re seeing. You’re not giving good reasons why this is going well. You’re giving a lot of reasons why it would hurt to stop. If the reason you are continuing something is because it would hurt to stop, you should stop. Like most definitely you have to fucking stop right now, because that’s not a good enough reason, right? I mean I get it. I think we all get that certain things just hurt to do, but that’s why they’re so important. The hurt, that is a strong signal that this is going in a really bad direction. That pain, emotional or otherwise, is only going to increase every single day most likely, right? When you can’t come up with good quality reasons to continue something, that’s almost always an indicator that you have to stop. The other thing is like having just a mental mindset of instead of thinking I’ve hired somebody, or we’ve decided on a pricing strategy, you need to think about these things, I think we all need to think about these things much more in the framework of every single day I’m reconfirming that this is a great hire, or like I’m rehiring this person every single day based on the action they put into practice yesterday. Instead of thinking hiring somebody was a decision already made in the past so I’ve already decided for all times that this is a good person to work with, thinking about it as a continuous decision you make. Every single day you decide again to work with this person, right? If you have multiple days where you wouldn’t have decided to work with this person, maybe you need to kind of change direction on what you’re doing. Then the last tip that I’ll give on this is that before you get into something, decide when you want to go out, right? Decide what is it’s going well enough to continue and what are the criteria that are showing me that it’s not going well and I need to stop. Most of the time, people don’t really clearly spell that out, so then when they’re already invested, all they have to base their decision on if they want to go out or not or continue or not is their emotions, right? Your emotions are going to fuck you up in those cases. Before you invest in a project, think about what would need to happen for us to stop that project. Even when you hire somebody, you should know why you want to hire them, but you should also know what are the type of performance I would have to see from somebody in the first three months to decide to let them go, that it’s not working, right? Deciding fully your exit criteria is really crucial. Then obviously you have to follow through on those criteria, which is what a lot of people might struggle with. Even mentally thinking through, “What is a case where I have to take my losses on this? What are some signals that would point me in the direction of stopping on this project or down this path?,” is I think a really healthy process to not be blindsided and not make this mistake. Which is one of the core reasons I think why startups and why people waste an immense amount of time is they commit to something, then everything shows them that this is the wrong thing, but because they’re committed they can’t look back and they just keep going down the wrong path. I think if we all learn to cut our losses faster, a little sooner, we made the world a better place. I think this is something that’s super crucial for all founders to master and get better and better and better at.
All right. This is it from us. We’ll hear you very soon.