What to do when you lose faith on a project?
puzzle-out: This may sound odd, but in a way everything you have said suggests you are on the right path. Yes, you may have to ditch this particular project, but the fact that a) you are open and real about it and b) you have a respectful attitude towards your partner, suggests that you have a good team, which is really important.
Be open with your partner and suggest you both work together on another idea - theres lots out there.
In the past I have lost faith in a project, it hurts a bit but you get over it. Much worse is losing faith in a startup partner.