Out of business: how to prepare for failure ☠️
I’ve been giving more attention to the Post Mortem exercise in any project. Basically asking from the start: “how does this fail?” and preparing for the worst-case scenarios gives you a good overview of what you should be prepared for.
So why not assess the option of winding down operations for your business?
Let’s face the facts: the probability of a startup’s failure is much higher than its success. It’s more than prudent to have a plan about the steps you'd be taking in case the company needs to seize operations.
In essence, startups are experiments in the business context to validate a hypothesis -so the hypothesis may not be viable. Let’s go through a few considerations on assessing the possibility of shutting down your business.
Be aware of the early signs: consistent and frequent bad financial performance (drop in sales and revenues, declining profitability, slow pipeline) indicates that there is a problem in the business that you need to address. An assault on business model doesn't meant it's entirely worthless. Changes in the existing model could become self-sustaining while innovative ways could still be found to exploit opportunities in the existing market.
Assess your options: Once you have identified the early signs of a foundational problem in your business, you are better positioned to assess your options. Here they are:
Is there a left strategy that is worth pursuing by extending runaway and try to save the company? If so, go for it - I will never advise giving up. Being able to fundraise when things are not going well is a extremelly hard thing to do and if you have a compelling plan that brings people to believe on it, you already have a great leading indicator that there is validation (at least from investors) that the plan may work.
Alternatively you can consider being acquired. Map all the assets you have built in your business: IP, talent, brand and take advantage of that. But you have to act early to avoid being without any options but to accept whatever terms the acquirer would put on the table.
There is also the option of putting operations on hold. Communicate to vendors and clients that situation in the market have changed and temporarily the business model may not be viable. Petal - a hardware tech startup that produces a germ-freezing trash can -, for example, launched a few months after COVID-19 was announced a pandemic and decided to stop operations given the demand for refrigeration of vaccines.
By being prepared for the worst-case scenario way before it happens will give you a much better structure to face it - or avoid it altogether.
🎧 Podcast recommendations
▶️ Tim Ferris Show: Alisa Cohn on Prenups for Startup founders: Probably the inspiration for this post, I love Alisa Cohn's approach to mapping what could go wrong and preparing for it - instead of just being a victim of circumstances.
▶️ The Knowledge Project: Robert Cialdini - Principles of Persuasion: The mastermind in persuasion and sales talks in a very actionable and structured way about the 7 principles that will help you to improve your sales, negotiation, and ultimately relationships. Good recap of the concepts.
This is Open Books - a weekly newsletter carefully curated by me, Leticia Souza. Every week I’ll be compiling relevant topics around finance and financial strategy - from choosing your first accounting system to how to successfully close a fundraising round to your business.
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See you all next week 👋🏼
Leticia
Important topic to consider