Planning for Failure: A Critical Lesson for Entrepreneurs

Statistics show that the majority of small businesses fail after launch. As an entrepreneur, have you faced one of your small businesses failing, and what was the biggest lesson you learned from the experience?

One of the most profound lessons I learned is how capitalism can be ruthless, robbing naive and ambitious individuals of the fruits of their labor. The common refrain is: Oops, we don't have the money to pay salaries. Oops, bankruptcy. Oops, the lawyer sold off all your intellectual property for a nominal amount, only for the buyer to sell it expensively and make millions.

Let's face it, sometimes you become a loser, and other times, you become a winner. So, you have to love this organized thievery, or as they say in Sweden, Tjysamh{".

Understanding the Risks

Remember, when you or your partners are incredibly optimistic about the financial plan, marketing strategy, marketing materials, location, product or service, and its value, you need to seriously plan for failure. No matter how distasteful and how much of a downer it may feel, failure can be a formidable reality.

A failing business can and has led to the complete bankruptcy and financial ruin of families. Throughout the process of opening doors and dreaming of success, you need to define failure for each part of your venture and accept these limits as indicators of when to cut your losses.

Defining Failure

For example, how much revenue is enough to continue without folding? What is the most debt you can carry? When does marketing cease to produce results? If the supply chain struggles to deliver goods at projected costs, what profit margins must you maintain to continue? What is the minimum comfortable income for the business? How long are you willing to tolerate the founder earning below this threshold?

Whatever you sell—meals, products, services—you need to define these metrics upfront and stick to them. This way, you can take the loss, walk away with dignity, and still have a home, a car, an intact family, and if any debt, a manageable and serviceable one with a normal job.

Planning Before You Start

The best time to define these failure points is before you start, when everyone is still enthusiastic. At this stage, their failure assessment is usually the most reasonable. Once the business is underway, people continuously recalibrate to reality, and their expectations can shift dramatically. For instance, we can't quit now, just another twenty thousand and we'll break even in three months!

But, of course, there is a 50/50 chance that it won't work, and what then? Another twenty thousand? It's essential to plan for failure from the start, as this is the best way to plan for success.

You need ironclad contracts that all founders understand and agree to. Meet the defined failure points or surrender.

Learning from Failure

It's crucial to acknowledge that it's okay to fail. Learn something, save up capital, and don't make the same mistake twice. Do not bet everything on succeeding your first time out of the gate. Initialization is a learning process, and each failure is a step towards success.

Conclusion

Entrepreneurship is a roller-coaster ride with its fair share of ups and downs. Planning for failure, however, can significantly reduce the harshness of the downs. By defining failure early and sticking to it, you can ensure that you emerge not just wiser but financially and emotionally sound. Remember, the hardest part of failure is not the failure itself, but the stigma associated with it.