Editor’s note: Micah Rosenbloom is a venture partner at Founder Collective, a seed-stage venture capital fund.
According to Eric Ries, a pivot is a “structured course correction designed to test a new fundamental hypothesis about the product, strategy and engine of growth.” The rise of the Lean Startup methodology, however, has led entrepreneurs to indulge and glorify the pivot without fully weighing the consequences. Changing course opportunistically is a key part of starting a company, but the best startups only pivot when absolutely necessary.
As an investor, I love the lean startup methodology. In the early days, the risks of large pivots are small and the upside can be huge. Entrepreneurs should be focused on developing MVPs and proving or disproving hypotheses.
This changes once you take venture capital based on a particular strategy. The clock starts ticking and in my experience, pivots past a certain point can often be painful.
The Pivot, the Restart and the Hail Mary
Like “burn rate” the word “pivot” has been overused, often incorrectly. In basketball, a pivot is when one foot moves and one stays on the ground. Take another step and you’re called for traveling. The same goes in businesses.
Burbn becoming Instagram is a classic pivot. When the team behind the podcast platform Odeo recapitalized and changed course to create Twitter, it was a restart (a wildly profitable restart, but a restart nonetheless).
Recently, I’ve seen startups with millions of dollars raised moving to radically different markets or tech platforms, relatively late in the game. These feel more like Hail Marys. Perceived “sunk costs” and the entrepreneurs’ fear of letting down their team, family and investors drives this behavior. Often the founder embarks on the new plan with less diligence, insight and passion for the problem than their original business.
Why Are You Pivoting?
Before making any changes, understand the motivation for the pivot. Do you feel like you have a viable product, but you misjudged the go-to-market plan? Did you underestimate the complexity of the product you seek to build? These may be perfectly good reasons to pivot.
Or, have you learned that the thesis you used to attract an all-star team and millions of dollars in venture capital is fatally flawed? All entrepreneurs have these moments of doubt, but sometimes it’s more than emotion, it’s truth.
Be honest with your advisers, trusted investors and senior team. reassess your options. There is no shame in starting a company that fails to change the world, but a badly handled pivot can cause more damage than hitting the stop button.
Prepare for the Fallout
When I was starting Brontes, my cofounder Eric Paley and I were commercializing a 3D-scanning technology invented at MIT. Our original focus on industrial applications caught the attention of a prominent VC who scheduled us to present to several partners at a future meeting.
In the intervening period, we pivoted. We started researching the dental market, spending time at the Harvard Dental School, discussing partnerships with companies like Invisalign and talking to dentists. Our conviction on the dental opportunity increased.
We pitched this dental strategy at the VC partner meeting and it was a total disaster. We hadn’t properly guided our sponsor through the thinking behind the change and they didn’t invest. Brontes ultimately sold to 3M for $95 million dollars, proving that pivots can pay off. Nonetheless, I’m grateful that we pivoted to dental before taking the VC money or the outcome may have been quite different.
Manage Your Employees and Investors Through the Pivot
Six months after co-founding Sample6, I began considering diagnostic applications rather than the original application of the technology. After spending time with customers to validate the diagnostic approach, I casually floated the idea with one of our engineers. To my surprise, he had been thinking about the very same thing and explained how diagnostics would actually be easier to build and potentially more valuable.
The decision to pivot is largely in the hands of the CEO. Below are some of the best practices I’ve learned along the way.
Socialize the idea informally to trusted advisers. Pivoting might have been on your mind for months before you even consider implementation. Slowly and deliberately share the data that’s leading you to consider a pivot to your inner circle of managers and investors. Don’t distract your sales team. Some teammates may fear for their jobs, rather than consider what’s best for the company. Ask one or two trusted senior engineers to think through new development timelines. In many situations, savvy colleagues will come to the same conclusions you do.
Pivot fast and burn the boats. Once you have decided to pivot, do it quickly and cleanly. Straddling the old and new business is all too tempting, but not a good idea. Employees will be confused and the team will be stretched between two very different strategies. It’s never easy to kill the original dream, or any revenue associated with it, but startups can only execute on one plan.
Making a big change? Offer your investors their money back. If you’re making a dramatic change, the right move is to offer their money back. Most won’t take it. Good investors have backed the team no matter the change. But the offer shows an honest understanding of the scope of the change, and gives investors a chance to redouble their commitment.
You also might be asking your investors to write another check, or minimally, make introductions to new investors who might be more aligned with the idea. If the pivot fails, you’ll want their help negotiating an exit. If you ever plan on raising money again, or are looking for a gig at a venture-backed startup, their recommendation will be critical. Be careful with these relationships.
Signs It’s Time to Pull the Plug Rather Than Pivot
If you’re looking at a restart, or Hail Mary, ask yourself these questions first.
Do you have fewer than six months of funds? If so, manically focus on profitability or start looking for acqui-hire options or a sale of the intellectual property. Paul Graham has called this period in a startup’s life the “Fatal Pinch,” and massive changes at this point tend to look more like death throes than thoughtful recalibration.
Need to replace more than 30 percent of your team? At the early stage, team chemistry is critical and firing a third of your key contributors will mangle morale. And if you need to recruit new technical leads, just start over.
Are you pivoting more than a ballerina? If you don’t have a compelling vision to motivate your team, or you’ve lost faith, don’t try to fake it. Time is more precious than money. Just because you have some money left in the bank doesn’t mean you should spend it.
Sometimes the best thing you can do is pivot. Other times, banging your head against the wall because you believe it’s your life’s mission, despite the fact that the market is telling you otherwise, is an even bigger mistake. The self-aware entrepreneur knows when to hold ‘em, went to fold ‘em and when to pivot ‘em.Featured Image: ARENA Creative/Shutterstock (IMAGE HAS BEEN MODIFIED)