I’ve seen a number of situations recently where entrepreneurs decided to shut their startups down while they still had cash in the bank. (Contrary to popular mythology, I’ve never seen a case where investors forced an early-stage startup to shut down before they ran out of cash — it has always been voluntary). Shutting down is an incredibly hard thing to do. It takes great maturity and intellectual honesty to realize things aren’t going the way you hoped and that it might be better to just close shop and do something else.
How entrepreneurs handle shutting down is very important. First, try to return as much capital to your investors as you can (after paying off employees and other important debts – but don’t waste money on an expensive legal process). Second, if you’ve developed IP, spend a few months trying to sell it to recover as much capital as you can (often investors will offer a “carve out” to incentivize entrepreneurs since the likely return to investors will be under total number of preferences). Don’t go off starting a new venture before you’ve properly closed down your current one (I’ve seen this twice recently – very bad form). Finally, for your own learning as well as your reputation, write a detailed post-mortem about what went right and wrong and send it to your investors, and then try to follow up with in-person discussions.
Here’s the good news. One of the great things about angel and venture investors is that failure is accepted, as long as you do it in the right way. Venture investors will often fund entrepreneurs who’ve lost their money in the past. They understand that if you build an interesting product and, say, market forces turn dramatically against you, that’s a risk they took — and the type of risk they will take a again. Also, entrepreneurs tend to be judged by their wins (max() function), not their average. You’d be surprised how many entrepreneurs have failures in their past that no one remembers once they have some success.