There are a thousand ways that a business can go off track – a thousand ways to fail. And as miserable as it seems, thinking about failure is as important to your business planning as budgeting and marketing.
How to Plan for Failure
Every startup has weaknesses and investors expect you to cover the “big 6 business risks”: Product or Technology; Market Acceptance; Key Employees; Competition; and Financing. These risks are important enough to be covered thoroughly, each in their own sections of your plan. There are plenty of other articles about these typical business risks, so let’s go beyond the basics.
Take your strategy to the next level by including less obvious risks in a separate section of your business plan simply called “Risks”. Thinking through the less obvious risks will strengthen your business – and your chances with investors.
Don’t hold back. This is one place in your plan that you can let your imagination go wild. So put on some gloomy music (Amy Winehouse? Pink Floyd?) and imagine all the ways that your business could come crashing down:
- Supplier Dependence? Sure. If making and delivering your product or service relies on a single key vendor, describe how you will find alternatives.
- Natural Disaster? Absolutely. If your business would be mortally wounded by an earthquake, hurricane, tsunami or tornado, write it down.
- Government Regulation? Uh-huh. Just look at Amazon’s battle with sales tax. What could Congress do to your company?
- Technology Changes? Oooh boy. Now you’re talking. What if Microsoft launches a new version of Windows? What if people switch from PC’s to Tablets? Think about how streaming is killing DVDs.
You get the idea. There is certainly a long list of risks – things that could go wrong. Brainstorm as many as you can, then include your top 5 or ten in the business plan document.
Dodge the Bullets
The point is not simply to list these threats, but to understand how you can (a) avoid them; or (b) adapt
to and overcome them. If an earthquake would disrupt your internet-based servers… you better look at
hosting in multiple cities sooner rather than later. If you are sourcing key parts from just one supplier,
describe where you will find a secondary source if the first one fails to deliver.
Every plan A needs a plan B… and maybe a C, D and E too. The more important a piece of your business
plan is, the more you should reinforce it with contingency plans.
Presenting Failure to Investors
Identifying failure points in your business plan is one way that you are reducing risks for your investors.
But this process can backfire if your contingency plans are too different from your original concept – no
investor wants to hear that Plan A is selling organic vegetables, but Plan B is to host websites.
A great Plan B leverages everything you know and have already accomplished. Remember, Plan B is a
pivot, not a retreat.
Startups are inherently risky. No entrepreneur or investor believes they are not. But there’s a
difference between starting a risky business and starting a business after you’ve identified and planned
for the risks.
So give your business the fighting chance it deserves. Consider your risks, your risk avoidance strategies,
and how you will adapt in the worst-case scenarios. Your investors will thank you, and your business will
be stronger for it.
Dedicated to your (Risk-Adjusted) success,
David Worrell provides strategy and finance help for small and medium-sized businesses… and he loves
the business planning tools available at enloop. Give your business a rock solid strategy by visiting David