Why it’s important for entrepreneurs to think about their plan Z

I recently came across an interesting article in the Financial Times (FT) which covers the question Reid Hoffman, the co-founder of LinkedIn, has been asking entrepreneurs: “What is your plan Z?”

We all have plan A’s in our business. Even those who purport not to plan have some idea of the overall vision, direction and immediate business model. We are all also prepared to make a significant change (“pivot” in lean startup jargon) to one or more elements of the business plan if new information guides us to do so. That is a plan B.

But the Plan Z to which Reid refers is considering the worst case scenario for the future of the venture.

This means looking at the very worst case situation. For instance your company fails after you have spent every penny. What do you do and what is your survival strategy?

It is uncomfortable and goes against the optimistic grain of most new business founders. But you owe it to yourself (and your dependents if you have them) to do so. The process also should help you put a limit on how far you are prepared to go before you decide to throw it all in and try something else — like a job at Starbucks, the Times article suggests.

How much of your savings or how much credit card debt is the limit at which you stop?

These are tough questions — but easier to ask before the fan starts spraying the stuff that is going to hit it. It is similar to what Gary Klein (the pre-eminent behavioral economist) termed the “pre-mortem”. This is generally used in the corporate world and asks a group of people — when about to launch a new project — to consider five years hence and imagine that the project has failed disastrously. Then start thinking about the issues why this might have come about.

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That might raise reasons to not start the project or at least allow for the building of some contingency plans. More importantly, it allows individuals in the group to think negatively, without being chastised as naysayers or a pessimists.

Similar principles apply in buidling a plan Z. At least give yourself and your co-founders the chance to review the scenario and consider what you would do under the circumstances. Perseverance is one of (if not the most) critical elements of entrepreneurs.

Stories abound of people who eventually became successful when others would have thrown in the towel. But there does come a time when perseverance crosses the line into stupidity. You are more likely to recognise that moment if you have visited the situation in your minds eye in advance.

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FT mentions alternative views. Some well-known entrepreneurs prefer the concept of burning your boats when you hit shore, meaning there is no turning back. That might add that much more deermination to a team that has other options open to them — no matter how dire!

The reasons VC’s and most angels insist on founders working full-time has some similar roots too. That awful 9-to-5 job might start appearing quite pleasant at the end of another 90 hour week with no end in sight. However, although some founders are against a plan Z; it seems that many would agree with its rationality.

Our advice is to do this exercise early on in the ventures life-cycle and work it through with your co-founders and family. It requires courage to stare into the abyss, but once done you have at least gone some way to assessing the risk and uncertainty that you are facing. Hopefully that abyss will never be reached; but if it does and you still decide to persevere — at last you are doing it consciously!

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This article by Simon Gifford originally appeared on Mashauri.com and is republished with permission.