Why anticipating failure could make startups successful

It’s important for startup founders to anticipate likely challenges before they launch their business.That’s according to Noam Wasserman, a former Harvard Business School professor and the current dean of Yeshiva University’s Sy Syms School of Business. He’s studied 16,000 startups, focusing on entrepreneurs’ early decisions and how they turned out.At a Business Insider Prime Live event, Wasserman said founders should have a plan for addressing any issues that may arise down the road.Click here for more BI Prime stories.Anticipating failure may be the key to founding a successful startup.That’s what Noam Wasserman concluded after studying 16,000 startups over the course of 20 years.Wasserman, a former Harvard Business School professor and the current dean of Yeshiva University’s Sy Syms School of Business, has focused his research on the early decisions that founders make and how those choices affect the likelihood of their company’s success.At a Business Insider Prime Live Event hosted by BI correspondent Shana Lebowitz, Wasserman said that taking a proactive approach — by mapping out possible reasons why your business might fail — can help founders prepare to address those challenges.Wasserman’s advice is relevant given that most startups today are at a high risk of failure. At least half of all startups fail, according to research from global investment firm Cambridge Associates, meaning they provide investors with a 1x return or less. And data from the US Small Business Administration shows that only half of all small businesses last at least five years.If you can prepare yourself in advance for the challenges ahead, you’ll be better prepared to address them, if and when they come up.Founders’ early decisions often affect their company’s success years laterWasserman said it’s important for founders to think carefully about the choices they make even before launching. That’s because most entrepreneurs will “see echoes” of their early decisions later on.For example, Wasserman has found that one-third of startups split equity evenly. While this might seem fair, it’s important to consider what will happen if a member of your founding team decides, years later, that they no longer have the time or interest to dedicate to the business.Wasserman recommends that founders instead create a “dynamic” agreement, which lays out what will happen to each founder’s equity in the case that, for whatever reason, they start contributing less than the others.Whether you’re deciding how to structure your team or how to launch your first product, a thought exercise called a “premortem” can help you anticipate potential roadblocks. Writing in the Harvard Business Review, psychologist Gary Klein defines a premortem as the opposite of a postmortem (in which medical professionals try to figure out what caused a patient’s death).Here’s how the postmortem works in a startup context: As you’re preparing to found the company, imagine that it’s years into the future and the business has failed completely. Try to come up with every possible reason for the failure. The goal here is to prepare your team to pick up on early signs of trouble, instead of assuming everything will be fine.A business plan can help you stick to your original visionOne important component of planning ahead is drafting a business plan. Preliminary studies of thousands of startups indicate that having a business plan can boost the odds of success.As Deepak Hegde, associate professor of management and organizations at New York University, previously told Business Insider, having a business plan can help founders attract investors. “In order to scale, you need money,” he said. “But in order to get money, you need to show proof of scalability.”Even if you’re not raising outside capital, it still helps to develop a business plan. Before she left her job as a bank executive, Cate Luzio wrote a business plan for her collaboration startup, Luminary NYC. Luzio bootstrapped Luminary, and she said the plan helps her stay committed to her original vision: creating a space where professional women can learn and work.”For me, it’s staying focused on what you set out to build and not letting the noise get to you,” Luzio previously told Business Insider. “You had a reason for starting your business, so go deliver.”Luminary now has more than 600 individual members and more than 20 corporate members.Even if it seems unnecessary to create a business plan, or to start a conversation with your cofounders about a dynamic equity split, you may thank yourself for doing those things later on. Wasserman emphasized that a business’ shaky foundation will affect its chances of long-term survival.In the later stages of entrepreneurship — when you’re trying to expand internationally or launch a second product — your very first decisions will come back to haunt you.Wasserman said, “Only then can you appreciate the early stages.” 

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