What to say to testers and leads after your startup fails?

I recently decided to end my startup project. I've been working with a few testers and communicating with many potential customers via email blasts. They are expecting us to release a production version of our software. I don't think I'll revive this project, unless I think of something really amazing soon.

I'm wondering how I should handle this? Should I just fade away? Be upfront and tell them? Point them to competitors?

A side point is that I'm going back to doing freelance development work, which several of these leads would also be leads for my freelance work.

I think my best option is to be upfront, give them the competitor options and let them know that I'm going back to freelance work. What do you think?

If I were you,

I would invite them to a round table conference. Tell them, you called for the meeting, because of the challenges you are facing (which you are). Tell them the truth, about the challenges you are facing: that is like : not a viable business idea, market base seems small, not enough traction, etc etc....

Brainstorm with them, what should we do to make this better, AND discuss does it make business sense to quit while we are ahead?

That way, you are mentioning them the notion of quiting, and it does not come as a surprise, it shows you still have a fighting spirit and that you are not an easy quitter. Some may agree with you, better to close the startup, some may genuinely come up with better ideas at this tipping point juncture.

In a couple of days later, you can say you have decided to close after taking into account all factors.

With this approach, they feel involved, they know if was a hard decision for you and not something you came up with overnight. You will still have the respect of your team.

Good luck!

Your best option is to tell the truth; specially if some of the stakeholders will be related to your freelance work.

In order to do so, you have to be clear about the reasons for the ending of the startup (financial, personal...) and propose fair alternatives (if you close your company, they are not competitors any more).

If you have a big / enthusiastic enough community, you may even give them the code for them to continue it.