At some point in most startups, the company will hit a wall in its growth. Revenue and user numbers will start to plateau, and no change in marketing can seem to move the needle. This is a sign that you need to pivot the company to a new direction.
It is unlikely that you have come up with the perfect business strategy right off the bat. Navel gazing rarely produces the best solution. Once you actually get out into the market, you will discover all kinds of unexpected realities. I like to think of everything we do in business as an experiment. Every time we talk to a customer or watch an interaction, we are getting new data.
Trying new business directions is like playing Battleship. Each time is another shot on the board. If you see traction, that is a hit. By making smaller changes, you can explore this direction to see how fruitful it might be. However, you don’t want to just sink the little boat, you want the aircraft carrier. Small changes can only optimize around the same general direction while a much bigger opportunity could exist if you take a greater leap.
Most successful companies have a major pivot in their past. PayPal is a great example of this. Back when they were raising seed capital, one of my investors asked me to look at their business plan. It focused on allowing people to send each other money using the infrared link on Palm Pilots. Users would then have to sync with their computers to complete the transaction. This looked like a dumb idea to me because of the complexity of the process and the low penetration of Palm Pilots in the market. Fortunately for him, my investor ignored my advice. Somewhere in the back, Pay Pal’s business plan included a work around using email for people without Palm Pilots. Of course, that was the winner and the company quickly pivoted to focus exclusively on that, and dropped the whole Palm Pilot endeavor.
The photo-sharing site Flickr made an even bigger change. It started out as an online RPG called Game Neverending. Within the game players could upload and exchange photos. While the game itself never took off, the founders realized that the image-sharing feature was quite popular with players. Leaving everything else behind, they pivoted to focus exclusively on that and quickly grew to massive size.
Ironically, the founder of Flickr, Steward Butterfield, later tried to launch a similar game that also failed, but in the process created a collaboration tool that he released as Slack. Another massive pivot to incredible success.
My company, Anonymizer, also needed a major change of direction to find product/market fit. We started out focused on consumer privacy and anonymity. Surveys and research showed that people were very worried about online privacy. However, we discovered that the worry did not translate into action or money. The pain point of losing privacy was too abstract and diffuse to drive a large fraction of people to purchase a solution. In 2001, we realized that some of our heaviest users were government organizations. Once we started talking to them we discovered that their pain point around anonymity was literally life and death. Within just a few years our specialized government solutions made up over 95% of our revenues and the consumer privacy service became an afterthought.
A company I am advising is in the middle of a pivot right now. They started off making wearable devices with cutting edge features and capabilities. As they explored partnerships and marketing channels, they quickly found that what excited those people was not the device itself. In addition to the wearable, the company created an open platform to manage the hardware and to integrate with third party devices. That open platform was what created all the enthusiasm. They are now in the process of refocusing their limited development resources around the software platform, and considering if and how the device still fits in to the business model.
When considering a pivot, the “sunk cost fallacy” can pounce on unsuspecting entrepreneurs. Having invested significant time and effort on software, websites, marketing, and such it can be hard to just abandon it. However, the only valid question to ask is, what investment of time and treasure will have the greatest positive impact on the company going forward. Past investments should have no weight in the analysis. In fact, large investments in a failing direction is a strong sign that you should cut your losses and move off along a new path.
In many cases, you will find successful aspects of your business that you can leverage. In all of the examples I gave, the pivot involved taking something the company was already doing and putting it front and center in their strategy. Often close observation of user behavior will show what the market wants and point the way forward.
It is important to pivot as early as possible. It takes time for a new strategy to prove out, and you don’t want to run out of money before that happens. If you need to raise additional capital during or right after a pivot, you will look to investors like a brand new idea stage company. That makes the process harder and lowers valuations.
The moral of the story is: don’t get too attached to your initial, or current, business model. By always keeping your eyes and mind open you can spot opportunities to grow faster in new directions.