Knowing when to call it quits on your startup

January 15, 2013, 6:58 PM UTC

FORTUNE — Before Craigslist, before, there was Drei Tauben Ltd, a proprietary system for help-wanted advertising for technology jobs. Christopher Frank started the company with two business partners in 1991 and spent two years building the business.

They created a user-friendly platform that could be customized by organizations that wanted to advertise job opportunities online under their own brand. Revenue started to come in and the partners had connected with an association of technology schools interested in using the system. All the signs were promising to tap into the $100 million market for technology job ads.

But revenue was growing more slowly than they had anticipated. Every month or two, the partners had to sink more of their own money into the business. In the fall of 1993, they decided to shutter the company.

MORE: 5 ways to find the best business pros

“It was painful. It was like a death,” says Frank, 45, who is currently a vice president at American Express and author of Drinking from the Fire Hose: Making Smarter Decisions Without Drowning in Information. “When you’re passionate about something, you feel it in your bones. When that doesn’t work as planned, it just drains you.”

Closing down a business and giving up on the potential that inspired you to launch it in the first place is perhaps the hardest thing an entrepreneur can do. By nature, entrepreneurs see setbacks simply as problems whose solutions aren’t yet evident. That same quality can put a blind spot when the answer is one you just don’t want to hear: “Move on.” The history of small business is littered with the shells of could-have-been success stories, companies built on a brilliant idea whose time hadn’t come or was too challenging to execute profitably.

“Optimism is a gift of the entrepreneur and also an occupational hazard,” says Jay Goltz, a Chicago-based serial entrepreneur. “There’s a very thin line between optimistic and delusional.”

From interviews with entrepreneurs, here are a few classic signs that the best choice is simply to close your small business and start fresh.

You draw blank stares

In retrospect, Frank pinpoints his company’s trouble to the series of meetings Drei Tauben had with the traditional print publications that knew the ins and outs of the advertising business as well as the clients that paid for job ads. They just couldn’t understand why anyone would go online to look for a job instead of opening up a newspaper. At the time, the Internet wasn’t anything like it is today.

When you cannot convince your strategic partners nor your customers of the logic behind your business model, it doesn’t matter if you’re ultimately proven right. No matter how big the potential market may be, you first need real, live customers to write one check, and then a second.

“When you’re trying to make that decision, should you stay or should you go, you can’t base it on the macroeconomics,” Frank says. “You need to assess your local market and your target audience. Is there revenue to support the business? Who are your customers?”

You’re pushing a boulder uphill

Another bad sign: you keep sinking more money and time into a venture — and it doesn’t get any easier.

Michael Paolucci spent three years building Solvate, a New York-based peer-to-peer labor market, but kept falling short of the momentum and growth he needed to continue attracting venture capital. Instead, the company showed flat growth and was shuttered late last year rather than seeking another round of funding.

“We were ahead of the market,” Paolucci says. “It’s a little early for people to be transacting in certain ways for certain kinds of work through the network. I think what we tried to achieve is going to exist at some point.”

MORE: The 4 hardest computing problems on earth

By contrast, Paolucci is now co-founder and chairman of Slooh, a small, profitable company that connects telescopes to the Internet, broadcasting celestial events like lunar and solar eclipses. This company is on a slow-and-steady upward trajectory. “It doesn’t fit the venture mold. We see it getting a little bit better every year,” he says.

New or newly discovered roadblocks

For Jill Cartwright, founder of Boston-based Go Gaga, the recession came on like a brick wall. She’d launched the ergonomic diaper bag company in 2007, and it quickly became profitable, with distribution channels throughout the U.S., Canada and Australia and business partners like Babies R Us,,, and eBags.

But by the last half of 2010, Cartwright was losing an average of three independent boutiques a month, due to bankruptcy. With a virtual supply chain and minimal overhead, she could have dramatically scaled back and kept limping along. Instead, she decided to halt production last October.

“Like so many entrepreneurs, I wanted the business I created to be something dynamic that was constantly evolving,” she says. “I found myself so bogged down in the nuts and bolts of running the business that I wasn’t growing it. This wasn’t what I had envisioned for myself.”

Similarly, CEO Patrick FitzGerald was optimistic about the prospects of Reproduct, a Philadelphia-based company that recycled greeting cards into office furniture and carpets. That is, until he met with the U.S. Postal Service and learned that it would take an act of Congress to reduce the postage required for customers to return used cards for recycling. Without a lower postal rate, his business model fell apart.

MORE: A startup founders’ story slam

“When the 800-pound gorilla says, ‘No, it’s never going to happen,’ you have to say, ‘Okay it’s done, it’s a failure,’ ” says FitzGerald, now a lecturer at The Wharton School at the University of Pennsylvania, who previously founded successful companies including Recyclebank. “If you embrace failure, you say, ‘I’m going to shut this down and I’m going to use it for my next company.’ You wasted your time if you didn’t learn anything from it.”