Startup Pivot Strategy: When You Know It’s Time
If intended for use on a blog or website, here are a couple example headlines:
Pivoting in Business: When To Do It and When Not To Startup Pivot Strategy: When You Know It’s Time
- Pivoting is a healthy and natural occurrence in business. Business models will always evolve. Founders need to ensure that they recognize pivoting as not “failure” or “conceding defeat.”
- Pivots can be led by either exogenous factors (e.g., competition, industry or market forces) or endogenously (e.g., lack of passion, team is better suited to execute a different plan).
- When it is time to pivot, you will usually know, given one or more of the following is occurring:
- revenue is declining
- important metrics relevant to your business are diminishing (e.g., traffic, leads)
- problems with customer/employee retention
- products/services are no longer needed as they may have been previously
- you’re not keeping up with market trends
- you’re experiencing apathy or perpetually negative emotions associated with working on the business
At some point, most startups must go through a “pivot” in order to find the right target customer, market position, and/or value proposition for their business. Pivoting is far more common than never pivoting at all. This article explains how companies typically come to the realization that a pivot is needed.
Pivoting is a natural part of a business’s evolution in that it is virtually impossible to exactly predict what the future will hold. Markets change and business is fundamentally about giving customers what they want. Founders come into a project with a business model in mind, encounter obstacles or opportunities that they did not anticipate, and have to make a change.
It is a mistake to view a pivot as strictly a negative phenomenon. Pivots do not always mean that a company is failing financially or operationally. It’s not always about the competition beating you, a lack of talent to turn the idea into a commercial success, or basic misjudgment. Moreover, it’s important to get past the psychological barrier of interpreting a pivot as synonymous with “quitting” or “failure.” It is simply about rationally looking at the situation and seeing what’s working and what isn’t.
Oftentimes pivots are firmly positive and entail exploring an untapped market opportunity.
For example, there’s the well-known pivot story of Instagram. The app initially had started out as a check-in service similar to what Foursquare was in the midst of developing. Not wanting to compete in a market that had likely already been conquered (or at least very difficult to compete in), Instagram pivoted to photo- and video-sharing.
It’s rare that a pivot comes to entrepreneurs as a type of “rude awakening.” It’s usually a natural progression that becomes increasingly more apparent and up to the founders to recognize, diagnose, and execute. That said, a pivot is generally a requirement when you notice the following:
– revenue is declining
– peripheral metrics have stopped growing (e.g., traffic, leads)
– customers and/or employees are leaving and migrating elsewhere
– products or services provided are no longer needed as they once were
– your passion for the business is declining
It’s also not always a matter of cold, objective calculations. Companies with seven- and eight-figure annual revenues regularly pivot if they’re no longer passionate about what they do.
Failing to recognize when to pivot is much more material issue. Consider the retail washout brought on by the rise of Amazon. This has fundamentally destroyed or greatly impaired the business models of brick-and-mortar companies that sell products that are easily available and sold online.
Many founders, who have been so involved in the company from the very beginning and are likely to have some level of emotional attachment, are particularly at risk because they might fail to see the company in the most objective light possible. In these cases, it’s helpful to have a business partner onboard, ideally with a different skill set, that can help provide useful advice.
If you know that some part of your business is working and another is not, it would be prudent to invest more resources into what is. Businesses eventually need to turn a profit if they can legitimately run on their own merit. The value of a business is fundamentally the amount of cash you can extract from it over its life discounted back to the present.
Pivoting also doesn’t necessarily mean developing anything new, but rather recognizing what you already have.
For example, when Yelp first started out it served as an email-based referral network to find local businesses that could help users of the platform. Nonetheless, the idea fell flat when it was found that user growth was limited and those who were part of the network did not answer referral requests in a large enough quantity to make the concept work.
However, the founders noticed that users were choosing to write reviews of local businesses on the site. Though unexpected, the founders saw the potential to pivot the business to a third-party business directory and Yelp became the company it is today.
Shopify is another high-profile pivot. The company originally started as a snowboard equipment retailer in 2004 under a different name. One of its founders, a computer programmer by background, designed the site due to dissatisfaction with other e-commerce products available online.
The snowboard shop wasn’t successful, but the e-commerce platform they had designed was very compelling and easy-to-use. Therefore, the pivot, naturally, was selling this storefront design to other businesses and Shopify became the point-of-sale system today that’s worth, at the time of writing, over $15 billion.
Pivoting: Key Questions to Ask
1. Is revenue growing?
If revenue is growing, your costs are not growing in excess of the growth rate in sales, and this is an objective trend, you are likely on the right path.
2. Are peripheral metrics, such as traffic and lead generation, growing?
For example, if you’re a web-based business, is traffic growing? If traffic is not growing or declining and this is a trend, is this because there’s a correctable inefficiency or lack of execution that can be remedied? Or is it a function of a genuine shift in the market or industry?
Being up on all the relevant metrics associated with your business and current trends in your industry will help you decide the answer on whether your business strategy is where it needs to be.
3. Are you putting in the same amount of work (or more work) but seeing declining results?
If you are no longer getting the type of growth – whether that’s traffic, leads, revenue – it may mean there’s an execution issue. But it can also mean something operational or strategic is amiss.
4. Is customer or employee retention an issue?
Is customer churn increasing? Are you observing that customers are migrating to competitors? This is a classic sign that a pivot is vital.
Moreover, is employee retention an issue? Are team members losing faith?
5. Are customers demanding something else?
If through numbers or observations you are seeing that customers are turning away from the products or services you sell, it is time to pivot.
And more qualitative questions…
6. Is the passion you once had lacking?
Apathy and being an entrepreneur are not a quality mix. It is common to feel stress and other negative emotions associated with running a business. But if one feels dispassionate or perpetually negative about a business, is something changing within the business?
7. Are your personal goals and ambitions changing?
Businesses aren’t the only things that evolve. The goals and interests of its founders also change as well. Even if none of the abovementioned applies – revenue growth is strong, customer retention is robust, new business initiatives are showing promise, and so forth – it is important for the founders to as closely align their goals and passions to the business as possible.
Pivoting is actually not a particularly common reason as to why businesses end up failing.
In 40%-50% of cases, businesses fail because there was a lack of demand for their products or services. This can be associated with the failure to pivot or a pivot gone awry. But it is generally associated with something more along the lines of a “low-quality product” or “poor business model.”
In no particular order, here is a list of the most common reasons why businesses fail.