Successful startups almost never exit the way they started. Exiting — going public or getting acquired by a larger company — is the goal of all startups that receive external investments, and they almost always involve changing strategy or pivoting.
Negotiating a pivot at the right time involves business leaders keenly anticipating market changes and reacting to situations that may not have occurred yet.
Failing to pivot can sink a startup, but pivoting too frequently can leave employees discouraged and feeling directionless. Entrepreneurs need to finesse the situation carefully.
At the heart of every startup is the idea of a perceived problem or opportunity that the new product or service can address. In reality, that problem or opportunity may not exist, or some other company may address the problem in a better way.
Why a company needs to pivot
There are two reasons a company will need to change direction, says Matt Goldstein, associate at Trinity Ventures, a Menlo Park, California, venture capital firm. “No. 1 is you have not achieved market fit. There is a market, but your product is not the right one, and No. 2 is the market is not there. Reason No. 1 is more common. Reason No. 2 is what happened with Docker.”
Trinity successfully helped Docker pivot. The company now makes a very popular open source development system.
Previously, the company, then called dotCloud, rented the full set of hardware and software necessary for developers to build distributed applications. But these rental services, called Platform as a Service, never really took off. Organizations are willing to subscribe for whole applications on the Internet, but they prefer not to rent the underpinnings and then develop their own products.
Companies can discover they’re in the other situation where a market exists, but they’re not addressing it correctly by looking at their churn rate, according to Goldstein. If customers are signing up for the service, but are not staying, it indicates there is an interest, but customers are disenchanted with how that product meets their expectations, he says.
Clues that it’s time to pivot
Another factor is enthusiasm. A core group of really enthusiastic customers could be a clue to refocus the company in the direction of whatever it is they seem to like.
Sometimes another company will appear on the scene with a similar product that addresses the same need. Then, it’s time for business leaders to assess your resources, says Hank Lucas, professor of information systems at the Robert H. Smith School of Business, University of Maryland.
“If it’s another startup like yourself and you think your product is better than theirs, then you might want to go ahead,” he says, warning, “The best product doesn’t always win.”
Here are some signs a startup may need to pivot:
- A major player introduces a competing product or spins the product’s functionality to one of its existing products.
- A technology or market the product depends on hasn’t come to fruition.
- Customers are dropping subscriptions to your services faster than you can acquire them.
- The cost of acquiring a new customer is higher than the earnings from the average subscription term.
- The product isn’t a huge general success, but a few customers really like one aspect of it.
When a startup should pivot
It’s important to actually have customers and to have introduced a product to real customers before pivoting, says Lars Leckie, managing director of Silicon Valley venture capital firm Hummer Winblad.
“The worst thing you can do is do a bunch of pivots before you engage with the market,” he says. Doing so can leave employees directionless, but can also delay the time it takes to successfully get a product to market, according to Leckie.
Making sure workers are on the same page with a pivot can be challenging. Business leaders may realize it may not be possible to bring everyone along. One way to deal with that situation may be to lay off large numbers of workers as Docker did.
But there may be another option. The University of Maryland’s Lucas, who has researched how established companies weather industry disruption, has suggested that those companies create entirely new parallel divisions for the new projects.
“You innovate by separating out the innovators,” he says.
Even with careful leadership, pivoting deftly requires grace, but paying attention to trends, and shifting directions, even radically, can mean a successful exit.
Tags: Business Leadership