Work backwards from failure to increase your chances of success. Why pre-mortems are an important, yet overlooked, practice for startup founders (and their investors).

How pre-mortems increase chances of success for startup founders (and their investors)

Work backwards from failure to increase your chances of success. Why pre-mortems are an important, yet overlooked, practice for startup founders (and their investors).

In the venture capital world, much of the discussion and most of the behaviour revolves around the power law—the idea that a few companies will deliver extraordinary returns in any given fund. This creates an optimism bias towards believing in highly improbable outcomes that every company they invest in will grow from $1 million to $100 million in revenue within a decade, despite the slim odds. 

Pre-mortems help counteract this rose tinted bias by forcing us to acknowledge failure and the ‘white hot risks’ before they happen and to help prepare strategies to mitigate them, ultimately increasing the likelihood of success and more realistic outcomes.

Historical examples, like NASA's Apollo 11 mission, illustrate how anticipating problems and developing contingency plans can lead to successful outcomes​​.

Startups like Dropbox, Slack, and Airbnb similarly benefited from pre-mortem-like thinking by identifying and mitigating potential issues early on, such as user experience challenges, market fit, and scalability problems​. The term "white hot risks" was popularised by Marc Andreessen (of course it was). Andreessen has spoken about the concept in the context of identifying and addressing significant and critical risks that can determine the success or failure of a startup. This approach emphasises the importance of focusing on the most crucial challenges that a company faces, which, if not mitigated, could have catastrophic consequences.

But the practice is often overlooked in the sugar rush of rapid growth and strong VC-fueled cash reserves.

The practice of pre-mortems has multiple benefits - not just identifying the white-hot risks - by fostering open communication, promoting disagreement, debate and open and honest conflict - and thereby developing robust strategies, but also increasing team resilience and of course potential for growth.

In order to lay the groundwork for a pre-mortem, we start by working forwards and creating the rose-tinted, optimistic version of the future:

  • Envisage the future outcomes; what needs to be achieved in terms of revenue and goals.
  • Explore the gaps in your knowledge and ability; what information needs to be gather, what needs be learned, what needs to be proved
  • Discuss the capabilities you need to build, the people you need to hire; the skills you need to develop; 
  • Establish what needs to be true for a successful follow on investment; and
  • Agree the strategy and resources you need in order to fulfil your goals. 

And more besides. All quite typical so far.

Now the hard part; imagine it's “all gone to shit.” You are way off plan.  You said you would have $5m revenue in 18 months and you have less than $1m. You thought you had nailed the ICP, but sales cycles are long and exhausting. You thought you knew how to make customers successful. Repeatedly. But Implementations are even longer and painful. Customers are demanding changes to the product that are stretching you thin. Customers are unhappy and threatening to churn. You are running out of cash. Meanwhile a competitor is storming ahead.

As a NASA 11 scientist in 1969 you would have been facing the fact that life support systems had failed and everyone was dead. What didn’t we anticipate? 

So imagine your startup has failed in the simplest conceivable way. It is 18 months from now and you are running out of cash with no hope of additional investment. Ask yourself this. Why? What went wrong? What happened that we really could and should have anticipated.

Start digging and go deep.

  1. What assumptions are we making and what if they are wrong?
  2. Do we truly understand our market and the competitive landscape?
  3. Do we have the necessary information to make good strategic decisions?
  4. Do we really know who our best customers are and how to find them?
  5. Do we understand how and why they will buy?
  6. Do we understand customers' expectations and how to meet them?
  7. Is our product differentiated, offering 10X value?
  8. Do we know how to communicate that value up front and deliver the necessary impact when we go live?
  9. Do our people have the skills? Are they real A players or are we compromising?
  10. Are we creating a culture that encourages people to challenge and be challenged?

What then? 

  1. Agree on the ‘white hot risks.
  2. Consider the likelihood and impact.
  3. Prioritise and make trade offs. 
  4. Agree on mitigations.
  5. Agree the appropriate steps to monitor.
  6. Share widely across the company. 

A few things to watch out for…

Don’t over emphasise the negatives; don’t stop believing!

Beware group think; encourage intellectual honesty and diversity of thought 

Don’t get overwhelmed by a long list, be clear on the priorities

But also don’t ignore the low probability high impact risks.

Don’t set and forget; keep going back to these topics at least once a quarter.

A final thought. 

VC-backed startups are typically solving a problem that has never been solved before. There is no rule book. Risks are plenty. Mistakes are many. But this process can help you avoid the most common mistakes, the ones so many make. And maybe you can make that improbable outcome, slightly more likely.

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