With little argument, there has been much written recently on the revival in consumer internet. While there is no shortage of micro-themes behind the current innovation boom in companies focused upon the consumer sector, one area of particular interest has been on “older”, Web 1.0-vintage companies that have succeeded in two critical ways – (1) navigating and surviving the bruising post-2000 tech downturn; and, (2) continually innovating against rapidly changing market dynamics and consumer behavior to emerge as market leaders.
In many cases, the characteristics behind succeeding at point #2 lies in the ability for a company to pivot–jettisoning an initial business model, hypothesis or core focus for another approach or business that appears more likely to be successful. A quick scan of leading companies in the Web 2.0 sphere, broadly defined, reveals a high number of companies already on their third or fourth business model. Some of these pivots can be considered modest iterations on a principle strategic direction while others were wholesale changes to an earlier business model and a dramatic shift in focus.
Athleon, an online suite of coaching and team management applications focused upon the collegiate and prep sports market (where I serve on the Board of Directors), executed a fairly mild but ultimately essential pivot in late 2009 as it abandoned its freemium model for an all-pay platform. Predictably, some feathers were ruffled and there were early adopters upset at the change in policy and direction. That said, customer churn was modest and the change proved essential for the success of the business.
In an example of a more extreme pivot, a Citron Capital company which began life as an image recognition software provider applying neural nets technology to eCommerce (i.e. finding every e-tailer offering, say, red cardigan sweaters with black buttons) dropped the eCommerce focus in the aftermath of 9/11 and became a security software company applying its facial and image recognition technology to help screen passengers and automobiles at high security checkpoints (i.e., airports, border crossings, etc.)
Cases of successful pivots are myriad. As such, given the frequency with which early stage companies are often faced with the challenges inherent in pivoting, it is important to explore this topic to uncover lessons from successful pivots and best practices to follow when contemplating a pivot. Here are a few things to consider:
1. Everybody pivots. There was a time not long ago when the notion of pivoting was perceived in some quarters as an unmistakable sign of failure. Fortunately, with the recent and open discussions by founders and early employees about pivoting that went on at some of the biggest names in technology, this stigma has seemingly passed. There is seldom anything more destructive to a company’s long-term prospects than a management team clinging to a failing business model for fear that changing direction would be perceived as weakness.
Companies no less esteemed than Flickr and PayPal started off in very different businesses but pivoted to what the market was responding to and went on to become juggernauts in their respective areas of focus.
2. The initial idea/hypothesis about the business is probably wrong. Yes, this is true whether or not the founders raised capital against the strength of that idea or not. Experienced angel and venture investors understand that a fair degree of iteration will occur at an early stage company and will, in most cases, support management’s plans to allow the company’s strategy and even its purpose to evolve dramatically provided those plans are well-reasoned. Just as there is seldom anything more destructive to a company than a management team clinging to a foundering strategy, there are few things more damaging than investors that insist that the company pursue the strategy that was the basis for the investment when all evidence seems to support that that strategy is not winning in the marketplace. Fortunately, most investors are properly aligned, first and foremost, with seeing the company succeed regardless of whether the strategy that ultimately works was the one that persuaded investors to initially commit capital to the company. (As a side note, this is why entrepreneurs hear so often how important the team is to an investor. The right team is what motivates an investor to participate in a company. As I like to say, ideas are easy; execution is hard.)
3. Align Motivations, Not Just Incentives. In start-ups, particularly those with a prominent engineering-driven culture, one common problem can be that some at the company become enamored with building “cool” products first and a successful business second. This, of course, is never actually verbalized. Instead, it is something that becomes evident when the products are built, they are indeed “cool”, but few consumers outside a niche-y, tech-savvy community really care about them. As such, the management team might have succeeded on a technical level — i.e., can they build great products that actually work? — but at the expense of developing a business that is filling a market need and appealing to a broad base of paying customers. In these cases, the pivot has to happen simultaneously with a candid examination of company culture to ensure that everyone at the start-up has the proper goals in mind and are defining success along the same lines. Those that are not “on board” with the new strategy inherent in the pivot are not likely to be happy with the new direction and should be allowed to leave the company.
4. Once the pivot is determined, it should be executed quickly. While careful deliberation is critical before a pivot, once that analysis has occurred, and a new approach is determined, and the team is re-aligned or reconstituted along the lines of the new strategy, the pivot should be put into action quickly.
5. It’s OK to focus the business more narrowly . In many cases a pivot involves honing down a business to fixing a particular problem or serving a particular need. This does not mean the business opportunity is smaller, however. Often, a company launches (and receives funding) because of its focus upon a large market that is in dramatic transition. Almost by default, this means that the company is awash in opportunity. As the company evolves, however, it begins to learn the idiosyncrasies of its market and begins to identify areas where its solution will be most successful and where it will find its raison d’être. This allows the company to avoid the problem of boiling the ocean and/or trying to do too many things. Few start-ups fail because they were too focused.