The Power of the Pivot: Why, When and How Startups Pivot
This post is written by one of Thinktomi’s thought leaders, Joan Wrabetz who is an experienced engineer, entrepreneur, and venture capitalist. You can read more about her in her introduction post and read her full series here.
Ya gotta love entrepreneurs, they are always so optimistic. When entrepreneurs fail, they just call it a "Pivot". The great thing about this is that venture investors fall for it every time. But, in actuality there is a very good reason why this is not as dumb as it sounds. In this blog post I will talk about why the Pivot might be the best thing that could happen to a startup.
Why Startups Pivot
The problem starts when you find that your great idea is not taking the market by storm.
There are many possible reasons for this to happen:
You gauged the interest of customers incorrectly;
Your feature list isn't right;
You can't explain the product successfully to customers;
You haven't found a distribution channel that gets the product to your customers;
Your product doesn't work very well.
There are also external factors that can cause this, factors that you have no control over:
The whole market takes a dive
Your chosen market segment is in a downturn
Gas prices soar
Investors don't think that your chosen market segment has enough growth potential
What do you do? The answer is "you pivot". This is, of course, assuming that you have any cash left in the bank when you figure out that your product is not a hit.
What is a “Pivot” for Startups?
Pivoting is the process of identifying the problem with your current business plan and then adjusting the business plan to eliminate the problem. You might go back into development and fix the product problems; you might choose a different initial target market segment; you might change how you charge for the product or service; you might sell your product in a different way or through different partners.
How to Pivot
Step 1: Admit You Have a Problem
The first step is to identify that you have a problem. As GI Joe reminded us after every episode, "because knowing is half the battle". And surprisingly, this is very difficult for many startups to do. It involves collecting data from customers and analyzing what that data tells you. The data you collect needs to come from customers and prospects -- especially the ones who do NOT buy your product. It can also come from your selling partners and your salespeople about what they are hearing from prospects.
Step 2: Analyze & Act
The next step is to interpret the data and try to change the business plan to get around the problems. Executing that new plan is the essence of "the pivot".
Let's take an example. I was a consultant for a company that had a very high performance networking switch based on a new technology called Infiniband. Though they were the first mover in their market and also had the best technology, they were not the most successful competitor in their field.
In fact, they were in third place among the three vendors building switches in that market. In addition, while they were developing their product, one of the major vendors supporting the technology, Intel, pulled out of the market. This meant that their market opportunity went from Billions to Millions. The market also went through a major downturn and all technology startups suffered because venture funding shrank dramatically. So, everything that could go wrong -- did.
Yet, one of the chief competitors who entered the market late with inferior technology got bought for over $300 Million.
I was hired to help assess the situation and identify the problem(s). We collected a lot of data. We did a technology assessment, evaluated every partner bid that they had participated in (and lost), and talked to all of their customers. We learned a lot. First, we learned that the market was very immature and that most customers were not yet ready to deploy large switches in production.
Thus, the lucrative OEM bids that they had lost really weren't that lucrative. We learned that customers loved the product, but they loved the company's service and consulting help even more. We learned that most customers really didn't understand the technology and that in order to sell to the wider market, the company would have to invest in a lot of "missionary selling" to educate prospects about the technology. We also learned that in all cases, the company was losing its big partner bids because it wasn't good at setting pricing and lacked the "political" acumen to sell at the highest levels.
Because of the market downturn, getting more financing and just sticking it out was not an option for this company. They needed to get revenue fast. So, what was "the pivot"?
We cut the product line in half and kept only the high end of the product line. We stopped working on big partner bids completely and just picked one vertical market to sell to -- the oil and gas market. This was one of the only markets that was not affected by the economic downturn. It was also one of the markets that needed the performance of this new technology most (in other words, they had the highest level of pain).
We completely changed the sales model to sell direct to the top 10 oil and gas companies in the world. This allowed us to cut sales and marketing costs, cut development costs (by reducing the product line breadth), and to get really focused on understanding and educating only one small group of customers.
The results were great. We were able to sell 5 of the top 10 oil and gas companies over 12 months. Revenue went from $0 to $20 Million. These customers forced one of the large distribution partners to agree to carry the company’s switches(Dell). This in turn caused one of their competitors (Qlogic) to acquire the company. All of this happened in 18 months.
Why You Should Pivot Fast
Of course, not all pivots are successful. In many cases, by the time the startup figures out that they need to pivot, there is no time or money left to execute the pivot. For this reason, one of the most critical things for startups to do is to "pivot fast". We will talk about this in a future blog under the topic of the "Lean startup".