Even with the latest technology software to manage a business, entrepreneurs can still miss catastrophic threats. When starting a business, unknown risks are implicitly assumed, unmanaged, and can lead to failure.
In 2010, Veinott, Klein, and Wiggins conducted a study for the U.S. Army. This research team performed a scientific analysis of the pre-mortem technique. Their study, “How to Catch a Black Swan: Measuring the Benefits of the Pre-mortem Technique for Risk Identification,” defines the pre-mortem technique as:
“…the theoretical opposite of a postmortem. The pre-mortem process starts by declaring that the project has failed. Pre-mortem makes it safe for the team to be critical of each other, question assumptions, share information, study interrelationships and address risk areas that may otherwise go unaddressed.”
This study used several data collection and evaluation techniques to evaluate the pre-mortem technique’s effectiveness compared to the time-tested brainstorming method. The findings included the following advantages of using the pre-mortem technique:
- An increase in the subject’s understanding of the plan
- Reduced overconfidence in an unproven strategy
- Teams gained more perspectives, enrichments, and critiques
- Teams exhibited a higher degree of collaboration
The research cannot conclude from the data that the pre-mortem generates more original risk ideas than brainstorming. However, building and owning a business is inherently risky as most startups fail. Acknowledging that unexpected circumstances will arise provides founders more time to raise defenses or even avoid them entirely. Playing out scenarios and possible outcomes can improve the business’s chances of success.
CB Insights, a tech market intelligence platform, has been updating a compilation of startup failure post-mortems since 2014. CB Insights found that 70% of upstart tech companies fail — usually around 20 months after first raising financing (with approximately $1.3M in total funding closed). For consumer hardware startups, the stats are especially brutal, with 97% of seed or crowdfunded companies eventually dying or becoming “zombies.” The lessons and pitfalls learned from startups that have been killed include investor dropout, no market need, running out of runway, logistical missteps, inferior product, timing, and legal challenges. More and more founders are penning postmortem essays detailing reasons why their respective startups failed.
Zen99 shut down because they uncovered a user acquisition problem due to a newly launched competing product, stating:
“We had a user acquisition problem, and the best route involved a competitor…The best acquisition method I saw was tapping into an existing network of people who had filed 1099s: like Intuit’s hundreds of millions of tax returns, many with 1099 income. Unfortunately, Intuit released an identical competing product to us. It’s not ideal when your best user acquisition strategy is partnering with a company that has a competing product.” — Tristan Zier, Zen99 CEO
Zen99 raised $2.5M from Y Combinator, Upside Partnership, SV Angel, Fuel Capital, A-Grade Investments, and others before deciding the market opportunity had changed and returned the majority of its capital to investors.
I think it’s good for startups to share their stories to prevent others from making the same mistakes. However, instead of examining the causes of what went wrong, maybe more startups should consider taking Veinott et al.’s advice by conducting pre-mortems.
The pre-mortem is a managerial strategy in which a founder imagines that a startup has failed and then works backward to determine what could lead to its failure. Far too many startups fail for preventable reasons. They ignore the possibility of something going wrong, and many don’t set contingency plans. Most entrepreneurs neglect to take into account that you have to make concessions for the world around you. According to Harvard Business Review, prospective hindsight — imagining that an event has already occurred — increases the ability to identify reasons for future outcomes by 30%. A typical pre-mortem runs like this:
- Gather a team for a 90-minute meeting announcing that the startup is going under.
- Make sure the team is aware that this is an exercise in hindsight in advance.
- Brief your team on a plan.
- Have your team members write down reasons for why it failed. Make sure they are honest and open because, in reality, the startup hasn’t died.
- Ask your team to read reasons off their respective lists.
- Review the reasons.
- Develop decision trees and an overall backup plan for each setback.
Although there are many methods to assess risk, a pre-mortem might be the best defense against hard-to-predict threats and stimulate creativity by enabling the business to connect the dots going forward. Imagining unexpected disappointment will help you think through outcomes while allowing you to be prepared for failure and ready for success. Maybe pre-mortems can cause entrepreneurs to pause before becoming too invested in their solution. “Halt and Catch Fire’s” Series Finale scene: ‘Phoenix,’ when protagonists take a nostalgic trip to their old company’s headquarters and fantasize about what their future could hold, is an excellent example of what this process might entail.