# Failure Mode Taxonomy

## Comprehensive Categories for Systematic Risk Identification

---

## The Two Primary Dimensions

### 1. Internal vs External

**Internal failures:**
- Under your control (at least partially)
- Organizational, execution, resource-based
- Can be prevented with better planning

**External failures:**
- Outside your control
- Market, regulatory, competitive, acts of God
- Can only be mitigated, not prevented

---

### 2. Preventable vs Unpreventable

**Preventable:**
- Known risk with available mitigation
- Happens due to negligence or oversight
- "We should have seen this coming"

**Unpreventable (Black Swans):**
- Unknown unknowns
- No reasonable way to anticipate
- "Nobody could have predicted this"

---

## Four Quadrants

|  | **Preventable** | **Unpreventable** |
|---|---|---|
| **Internal** | Execution failure, bad hiring | Key person illness, burnout |
| **External** | Competitor launch (foreseeable) | Pandemic, war, black swan |

**Premortem focus:** Mostly on **preventable failures** (both internal and external)

---

## Internal Failure Modes

### 1. Execution Failures

**Team/People:**
- Key person quits
- Co-founder conflict
- Team burnout
- Cultural toxicity
- Skills gap
- Hiring too slow/fast
- Onboarding failure

**Process:**
- Missed deadlines
- Scope creep
- Poor prioritization
- Communication breakdown
- Decision paralysis
- Process overhead
- Lack of process

**Product/Technical:**
- Product quality issues
- Technical debt collapse
- Scalability failures
- Security breach
- Data loss
- Integration failures
- Performance degradation

---

### 2. Resource Failures

**Financial:**
- Ran out of money (runway)
- Failed to raise funding
- Revenue shortfall
- Cost overruns
- Budget mismanagement
- Fraud/embezzlement
- Cash flow crisis

**Time:**
- Too slow to market
- Missed window of opportunity
- Critical path delays
- Underestimated timeline
- Overcommitted resources

**Knowledge/IP:**
- Lost key knowledge (person left)
- IP stolen
- Failed to protect IP
- Technological obsolescence
- R&D dead ends

---

### 3. Strategic Failures

**Market fit:**
- Built wrong product
- Solved non-problem
- Target market too small
- Pricing wrong
- Value prop unclear
- Positioning failure

**Business model:**
- Unit economics don't work
- CAC > LTV
- Churn too high
- Margins too thin
- Revenue model broken
- Unsustainable burn rate

**Competitive:**
- Differentiation lost
- Commoditization
- Underestimated competition
- Failed to defend moat
- Technology leapfrogged

---

## External Failure Modes

### 1. Market Failures

**Demand side:**
- Market smaller than expected
- Adoption slower than expected
- Customer behavior changed
- Willingness to pay dropped
- Switching costs too high

**Supply side:**
- Input costs increased
- Suppliers failed
- Supply chain disruption
- Talent shortage
- Infrastructure unavailable

**Market structure:**
- Market consolidated
- Winner-take-all dynamics
- Network effects favored competitor
- Platform risk (dependency on another company)

---

### 2. Competitive Failures

**Direct competition:**
- Incumbent responded aggressively
- New entrant with more capital
- Competitor launched superior product
- Price war
- Competitor acquired key talent

**Ecosystem:**
- Complementary product failed
- Partnership fell through
- Distribution channel cut off
- Platform changed terms
- Ecosystem shifted away

---

### 3. Regulatory/Legal Failures

**Regulation:**
- New law banned business model
- Compliance costs too high
- Licensing denied
- Government investigation
- Regulatory capture by incumbents

**Legal:**
- Lawsuit (IP, employment, customer)
- Contract breach
- Fraud allegations
- Criminal charges
- Bankruptcy proceedings

---

### 4. Macroeconomic Failures

**Economic:**
- Recession
- Inflation
- Interest rate spike
- Currency fluctuation
- Credit crunch
- Stock market crash

**Geopolitical:**
- War
- Trade restrictions
- Sanctions
- Political instability
- Coup/revolution
- Expropriation

---

### 5. Technological Failures

**Disruption:**
- New technology made product obsolete
- Paradigm shift (e.g., mobile, cloud, AI)
- Standard changed
- Interoperability broke

**Infrastructure:**
- Cloud provider outage
- Internet backbone failure
- Power grid failure
- Critical dependency failed

---

### 6. Social/Cultural Failures

**Public opinion:**
- Reputation crisis
- Boycott
- Social media backlash
- Cultural shift away from product
- Ethical concerns raised

**Demographics:**
- Target demographic shrunk
- Generational shift
- Migration patterns changed
- Urbanization/de-urbanization

---

### 7. Environmental/Health Failures

**Natural disasters:**
- Earthquake, hurricane, flood
- Wildfire
- Drought
- Extreme weather

**Health:**
- Pandemic
- Endemic disease outbreak
- Health regulation
- Contamination/recall

---

## Black Swans (Unpreventable External)

### Characteristics
- Extreme impact
- Retrospectively predictable, prospectively invisible
- Outside normal expectations

### Examples
- 9/11 terrorist attacks
- COVID-19 pandemic
- 2008 financial crisis
- Fukushima disaster
- Technological singularity
- Asteroid impact

### How to Handle
**Can't prevent, can:**
1. **Increase robustness** - Survive the shock
2. **Increase antifragility** - Benefit from volatility
3. **Widen confidence intervals** - Acknowledge unknown unknowns
4. **Plan for "unspecified bad thing"** - Generic resilience

---

## PESTLE Framework for Systematic Enumeration

Use this checklist to ensure comprehensive coverage:

### Political
- [ ] Elections/regime change
- [ ] Policy shifts
- [ ] Government instability
- [ ] Geopolitical conflict
- [ ] Trade agreements
- [ ] Lobbying success/failure

### Economic
- [ ] Recession/depression
- [ ] Inflation/deflation
- [ ] Interest rates
- [ ] Currency fluctuations
- [ ] Market bubbles/crashes
- [ ] Unemployment

### Social
- [ ] Demographic shifts
- [ ] Cultural trends
- [ ] Public opinion
- [ ] Social movements
- [ ] Consumer behavior change
- [ ] Generational values

### Technological
- [ ] Disruptive innovation
- [ ] Obsolescence
- [ ] Cyber attacks
- [ ] Infrastructure failure
- [ ] Standards change
- [ ] Technology convergence

### Legal
- [ ] New regulations
- [ ] Lawsuits
- [ ] IP challenges
- [ ] Compliance requirements
- [ ] Contract disputes
- [ ] Liability exposure

### Environmental
- [ ] Climate change
- [ ] Natural disasters
- [ ] Pandemics
- [ ] Resource scarcity
- [ ] Pollution/contamination
- [ ] Sustainability pressures

---

## Kill Criteria Templates

### What is a Kill Criterion?

**Definition:** A specific event that, if it occurs, drastically changes your probability.

**Format:** "If [event], then probability drops to [X%]"

---

### Template Library

**Regulatory kill criteria:**
```
If [specific regulation] passes, probability drops to [X]%
If FDA rejects in Phase [N], probability drops to [X]%
If government bans [activity], probability drops to 0%
```

**Competitive kill criteria:**
```
If [competitor] launches [feature], probability drops to [X]%
If incumbent drops price by [X]%, probability drops to [X]%
If [big tech co] enters market, probability drops to [X]%
```

**Financial kill criteria:**
```
If we miss Q[N] revenue target by >20%, probability drops to [X]%
If we can't raise Series [X] by [date], probability drops to [X]%
If burn rate exceeds $[X]/month, probability drops to [X]%
```

**Team kill criteria:**
```
If [key person] leaves, probability drops to [X]%
If we can't hire [critical role] by [date], probability drops to [X]%
If team size drops below [X], probability drops to [X]%
```

**Product kill criteria:**
```
If we can't ship by [date], probability drops to [X]%
If NPS drops below [X], probability drops to [X]%
If churn exceeds [X]%, probability drops to [X]%
```

**Market kill criteria:**
```
If TAM shrinks below $[X], probability drops to [X]%
If adoption rate < [X]% by [date], probability drops to [X]%
If market shifts to [substitute], probability drops to [X]%
```

**Macro kill criteria:**
```
If recession occurs, probability drops to [X]%
If interest rates exceed [X]%, probability drops to [X]%
If war breaks out in [region], probability drops to [X]%
```

---

## Failure Mode Probability Estimation

### Quick Heuristics

**For each failure mode, estimate:**

**Very Low (1-5%):**
- Black swans
- Never happened in this industry
- Requires multiple unlikely events

**Low (5-15%):**
- Happened before but rare
- Strong mitigations in place
- Early warning systems exist

**Medium (15-35%):**
- Common failure mode in industry
- Moderate mitigations
- Uncertain effectiveness

**High (35-70%):**
- Very common failure mode
- Weak mitigations
- History of this happening

**Very High (>70%):**
- Almost certain to occur
- No effective mitigation
- Base rate is very high

---

### Aggregation

**If failure modes are independent:**
```
P(any failure) = 1 - ∏(1 - P(failure_i))
```

**Example:**
- P(regulatory) = 20%
- P(competitive) = 30%
- P(execution) = 25%

```
P(any) = 1 - (0.8 × 0.7 × 0.75) = 1 - 0.42 = 58%
```

**If failure modes are dependent:**
Use Venn diagram logic or conditional probabilities (more complex).

---

## Monitoring and Signposts

### Early Warning Signals

For each major failure mode, identify **leading indicators:**

**Example: "Key engineer will quit"**

**Leading indicators (6-12 months before):**
- Code commit frequency drops
- Participation in meetings declines
- Starts saying "no" more often
- Takes more sick days
- LinkedIn profile updated
- Asks about vesting schedule

**Action:** Monitor these monthly, set alerts

---

### Monitoring Cadence

| Risk Level | Check Frequency |
|------------|----------------|
| Very High (>50%) | Weekly |
| High (25-50%) | Bi-weekly |
| Medium (10-25%) | Monthly |
| Low (5-10%) | Quarterly |
| Very Low (<5%) | Annually |

---

## Practical Usage

**Step-by-Step:** (1) Choose categories (Internal/External, PESTLE), (2) Brainstorm 10-15 failure modes, (3) Estimate probability for each, (4) Aggregate, (5) Compare to forecast, (6) Identify top 3-5 risks, (7) Set kill criteria, (8) Define monitoring signposts, (9) Set calendar reminders based on risk level.

**Return to:** [Main Skill](../SKILL.md#interactive-menu)
