How to avoid start-up failure: Pivots gone bad

A pivot is a change in strategy without a change in vision. Eric Ries

You will likely have to execute a pivot during your early stages. A pivot is when you fundamentally change your business’s direction. Not many entrepreneurs get their business 100% right the first time.

CB Insights ranks a pivot gone bad as the 11^th most common reason for a business failure. This is a contributing factor in 6% of start-up closures.

Pivoting, in itself, is not a bad thing. There have been many examples of successful pivots. Arguably one of the most famous and most successful was a company called Confinity that underwent several pivots before emerging as PayPal.

Confinity started as a provider of encryption on mobile devices. Developers would use Confinity’s product to provide encryption for their App. But the founders quickly saw that their success would be tied to the success of others. This led to the first pivot.

Confinity decided to use its own encryption technology to develop an app enabling financial transactions using a mobile phone. Again, the founders recognized that mobile phones were not ready to handle such transactions and would not be ready in the foreseeable future. Hence the second pivot.

They would add e-mail payments to their product offer. PayPal had emerged. Soon it became clear that the demand for e-mail services far outweighed the use via Palm Pilots. The Palm Pilot service was dropped to focus on email.

PayPal’s timing was excellent, the growth of the online auction service E-Bay gave the business real traction. Buyers and sellers were using PayPal to complete their transactions. PayPal’s leadership team recognized that these folks were their ideal customers and decided to focus on buying and selling things online.

The business was so successful that eBay dropped its online payment services and bought PayPal for $1.5 billion.

You will have probably noticed that each pivot was customer focused. The product each time to make it more useful for the user.

An example of a pivot that went bad. Aria was a manufacturer of drones noted for their long flight times and ability to withstand harsh weather conditions. As you would expect, given these capabilities, typical customers were law enforcement and the military. After the original founder left Aria decided to pivot towards providing AI services to help their customers analyze the vast amounts of data the drones were capturing and using data to develop actionable insights.  This appeared to make sense. Adding new ways to help your clients is a healthy sign. Unfortunately, what Aria missed was that although their customers had a demand for such services, that was not true of the drone market as a whole. The fact that no one else was providing such services could have provided Aria with a clue that there was limited demand for such services. It was another case of a company developing a product no one wanted.

For an example of a pivot that went horribly wrong, listen to Week 8 episodes 29-32, which will be broadcast on 20 February 2023. Subscribe to my podcasts to be sure you do not miss any episodes.

When should you pivot?

It may seem obvious, but a clear rationale for a pivot is when your business is not financially viable. Unfortunately, many founders are so wedded to their original idea or do not have sound financial reporting systems that they fail to see that their business is heading for the rocks. Ensure that you can review your business progress rationally.  Paul Graham, the founder of Y Combinator, says he can size up a company by whether they are “default alive or default dead.” If the status quo of revenues and expenses is maintained, will the company live or die? Amazingly 50% of founders do not know the answer to this question. Make sure you know the answer to Paul’s question for your business.

If the market did not react as you had expected is another reason to consider a pivot. The demand may not be what you had anticipated. Possibly the problem you are solving is not as common as you thought. Perhaps people are not willing to pay the price you are charging. Again, the ability to be dispassionate is critical. Where were your assumptions wrong? And is there a viable alternative? And if there is, are you able to deliver it?

If the competition is eating your lunch, it’s time to change direction. If this is the reason for your pivot, it will be challenging. You may have to radically re-engineer your product to be better than the competition’s offering. Possibly you will need to drastically change your cost structure to undercut your competition.

How to pivot successfully.

Anticipate the pivot. I mentioned Netflix earlier in this episode. Netflix founder, Reed Hastings, anticipated the arrival of streaming services, and he described the purpose of Netflix as offering the best home video experience for everyone. Not DVDs by mail which was the company’s launch product.

This is an important lesson for entrepreneurs seeking external funding for their startup. Do not paint yourself into a corner by being very specific about the purpose of your venture.  You may be criticized for being vague but if your pivot is in line with your originally stated goals there will be less explaining to your investors why you are changing direction.

In their article “When it’s time to pivot, what’s your story” published in HBR in 2020, Rory McDonald and Robert Bremmer give an extreme example of change in business direction. Magic Leap was a pioneer in augmented reality. But when they realized that developers’ and consumers’ take up of augmented reality was going to be slower than expected, they began to seek alternative markets. They made a bid to supply the army. In an article published in Quartz, Magic Leap was ridiculed for pivoting from “delightful consumer tech” to “lethal military gear”.

Apart from keeping investors and other stakeholders informed, there other things you need to do to achieve a successful pivot.

Identify what works. There are no sacred cows in the startup world. If something is not working abandon it. This is what PayPal did when they dropped supporting Palm Pilot applications to focus on buyer and seller transactions.

Act with speed. Each day you stick with your old failing model is one day less you have to achieve success with your new concept. You only have so much cash, stop throwing good money after bad.

Be decisive. No one in your organization should be under any illusion about the new business direction.

Identify if your pivot requires new skills that are lacking in the current organization and either train up your employees or hire the skills needed from outside.

Does a pivot equal failure?

There are some folks who equate a pivot to a failure. Yes, the business has not worked out as you anticipated; change is necessary. But everyone launches their business on assumptions and hypotheses. As John Maynard Keynes is reported to have said, “When the facts change, I change my mind” When the facts prove your assumptions wrong, it is time to change your business direction. As we have seen, successful pivots can move your business to even greater heights. Take the time to assess whether your business shows any signs that a pivot is needed. Especially the financial metrics of your business, as not understanding those will lead to failure faster than anything else.