Preparing for failure: startup’s karma conundrum

To best describe an object, describe by what it is not than by what it is

– Unknown

In this post, by a startup I shall mean an upstart venture created by its founders with a vision to create an enterprise of value.

The law of causality simply states the relation between a cause and an effect. Every effect has three possible outcomes for an action: best, average, worst. The best case outcomes are always the happiest; there is champagne and there are more investors ready to pour money into the company. The average case is still good; it’s a lot better than the worst case; the current investors will still hopefully stay with the company. It’s the worst case that’s debilitating for a startup. The killer for every startup is the limited revenues available with it, there is always a cap on the amount of resources available to expedite. Every step is line a mine, a misstep and you as an entity don’t exist anymore.

Every entrepreneur always dangerously lives in a make believe world of assumptions, scenarios and checklists; living off on a heavy dosage of caffeine. In this highly charged potentially sensually overloaded environment of a startup, the entrepreneurs are either paranoid or optimistic. Optimism is a people magnet no doubt, but it can potentially shoot down the startup even before it has taken off. In cases where the other side is a body (institution/corporation/client/person) greater in stature than themselves, it should a good heuristic to go for the worst case to average case out come of the result.

Say you have a project coming your way. And your client is yet to send a complete requirements spec. Expect at least three times the delay in time for the version to reach you. Same goes to their response and maybe for the payment too. I have this friend of mine who constantly lives his life on the worst case scenarios and even prepares and plans for it. He consistently and diligently prepares for the worst outcome from everything he is involved with. And he has had a much higher rate of success in life than an average Joe boy. A startup too must prepare itself for the worst and aim for the best possible result. The final result is often midway through them.

The general rule of thumb.
For a given uncertain scenario expect the positive outcome to have a probability of occurrence as 1/10 as against a negative outcome of 9/10. Lets take a simple scenario and try to understand the point.Say you are in negotiation with a client for a project that you expect the response to come over to you within a week and project to run for 3 months. In this scenario always estimate the response to take three weeks time & the project to run for 6 months. And hence your idea of buying the new computer with the payment from the first phase can essentially be postponed or shelved.

The reason for this rule is simple: Startup entrepreneurs are a optimistic lot. In the rush of passion for `their` product, they forget about the most crucial aspect of the game: the market and its attitude towards their product. Not all ideas are groundbreaking and not all are welcomed by the market with open arms. In this case, the simple rule of the thumb of expecting success with a 1/10 probability. Remember, the general rule of the thumb is that only 1 startup out of 10 survives the haul. Every step in the problem must be broken down into a simple manageable piece and put all of them down on the storyboard. Now, for every step put down the probability as 1/10 for success and failure at 9/10.

Prepare yourself for only a 1/10 of the success possibility.

Whenever you approach the client from your side, expect the client have a meaningful conversation only 1 out of 10 times. After the first meaningful conversation, expect the client to show interest in your product only 1/10 times. Now that means only one client in a hundred will show interest in your product and would want to know more about it. Expect the deal to be made only 1/10 times. Now that means out of 100 clients you go to meet only 1 `might` turn into a real client.

Long term vision + short term survival strategy
A startup cannot afford a short term debacle to live and see its long term vision fulfilled. It has to survive every huge storm to be able to live another day. The startup experience is a sensory experience: it requires constant monitoring, evaluating, analysis and change. A huge company can easily afford a long term cut in its revenues to be able to fend off a short term debacle. A whale can stop flapping its fins and it will still stay afloat; the large lung capacity and the fat help it through. The sharks cannot afford to stop swimming; you stop and you go deep, very deep.

With such heavy odds against it every startup has to balance two visions of itself. Short term survival & growth on one side and long term vision. Each are important and must not be traded off for the other. Once the short term survival is compromised, it ceases to exist. The long term vision is important and must be carefully tallied by the founders regularly otherwise there is the danger of it getting just getting lost in the local minima and maxima for ever.

And its generally this very tendency of a startup to be extremely vulnerable to events outside of is sphere of influence that make its existence shark like. The lean muscle of a startup makes it extremely easy(compared to a well established corporate juggernaut) for a startup to be able to change its direction as per the demands of the situation. This however should not be understood as a change in the vision of the company. Its very easy to confuse vision with the direction and it can be fatal to misunderstand this difference.

This ability to quickly adapt and innovate is the basic survival tactic of a startup and will/should remain so.