Never give up? In business, sometimes you can’t carry on regardless

Buoyed with confidence, we did a second building, which was far bigger and more difficult to convert. Instead of admitting that the challenge was too big, we continued anyway. We made only a small profit and the lesson was obvious: it would have been better to have withdrawn our offer for the bigger building.

This is known as the “sunk-cost fallacy”. Even though the evidence is strong that you ought to stop doing something, your emotional, financial and personal connection means you keep pushing on. Sunk costs are those that have already been incurred and can’t be recovered, but it’s irrational to use them as a reason for continuing down a certain path.

It’s far better to look ahead, rather than base decisions on the money and time that have already been put in. Yet I’ve seen too many otherwise sensible people clinging on to underperforming assets because of how much they’ve invested. Instead of cutting their losses and focusing on more promising ventures, they hope a little more time, effort and money will reap dividends. It’s as if they feel guilty about ending something in which they once had so much confidence. We can’t bear the thought of waste and failure, so we continue our commitment in the hope of success.

Think Kodak, HMV and Blockbuster. Even when those companies were faced with the evidence that their business models were about to be highly disrupted by digital technology, they kept doing what they always did and paid a heavy price.

• Kodak files for bankruptcy in New York

It’s the same bias many adopt when staying in unfulfilling jobs rather than seeking new opportunities — things haven’t been good for a while, but, well, better the devil you know, so fingers crossed for 2025.

Politicians can be the biggest culprits. For instance, HS2 may have been a fabulous idea to begin with; anyone who lives and works north of London knows how desperately we need better travel infrastructure. But have our leaders been guilty of ploughing ever-greater resources into a single venture that may not reap the rewards first anticipated? Should someone have said “no” years ago and reallocated cash to more varied projects? There comes a point when you must face up to the realities of wasting taxpayers’ money. Otherwise, you’re a victim of the sunk-cost fallacy.

• HS2 needs fundamental reset, warns new boss

This same bias to keep going can apply equally to investing, both early-stage venture capital and private equity growth investing. For instance, if you have given heavy backing to a business that then significantly underperforms and badly misses key targets, sometimes the easiest thing to do is put in extra capital hoping for a turnaround — and I’ve been guilty of this on two occasions. The smarter option is to show discipline, not throw even more money at it, write off the entire investment and focus on your best investments, which could do even better with more growth capital.

A bad investment loses one times your money, while a really good one will make a five times return. It’s encouraging to see the recent shift in how venture capital is invested, stemming some of the more excessive “just keep going” mentalities and putting a stronger focus on getting to profitability.

When it comes to a investing in new business initiatives, we can all learn from how technology companies operate. Their model is to launch a number of small projects with an accountable leader who has a small team, a tightly capped budget and a fixed period — which can be as little as six weeks — in which to start proving that the venture can work.

At Checkatrade, we call these projects “speedboats”. By keeping them small, with a clear set of rules, it’s much easier to stop the ones that don’t deliver strong early results.

The toughest decision comes when you have an entire business that’s not working and, even after pivoting the model a couple of times, is still not achieving the right results. That’s when you need the courage to stop and close things down.

However, don’t allow failures to dent your entrepreneurial dream. You learn from every experience and get better each time. Your instincts become more honed and you see problems before they arise. Decision-making becomes sharper.

When HomeServe was in its infancy, my pay-on-use emergency plumbing model didn’t work, but the first pivot I made — to annual plumbing cover — transformed our fortunes. So don’t let your head drop. Digest the lessons, go again and adopt some American-style positivity. My experience over there is that people don’t dwell on business failures; instead, they see them as the next step towards future success.

My advice, then, is, first launch a project or a business as a speedboat, keeping it small. Second, allow yourself to pivot once or twice but no more. Set clear goals, constantly assess the data and make rational decisions.

Third, if you’ve launched a few small projects at around the same time, don’t pivot but put all of your efforts into those that show early signs of success. Fourth, practise saying “no” — more often and sooner.

Sometimes, we get so emotionally wedded to things that it’s difficult to make an honest assessment. It’s an indulgence we can ill-afford. That’s why you need entrepreneurial flair but with a culture of discipline.

Keeping on going regardless will not get you there. So this year, have the courage to stop and feel good about it.

Richard Harpin is founder of HomeServe and Growth Partner, and owner of Business Leader