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What is a Pivot in a startup: inspiring stories of successful backswings

Monday, September 27, 2021

Everyone who considered the idea of creating their own startup knows the harsh reality: 99% of startups are not able to survive. The ideas aren’t in demand on the market, the client is not ready to pay, the budget doesn’t converge, the level of service isn’t sufficient enough: and there is no way to predict everything, it can be only discovered by personal experience. But there is another good way not to fall into the abyss with 99% of startups: make a swing in time and continue working on a new concept. This manoeuvre is called a pivot and at one time it saved more than one company, which eventually grew into a "unicorn".

Startup Jedi

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Today, we’re going to figure out how this term appeared, what are the conditions to do the pivot of a startup and what it looks like, and, of course, we will set a few successful examples.

What is a pivot?

Pivot means turning or banking but in startup vocabulary, it appeared when Eric Ries published Lean Startup. This book can be named as the table-top book of the modern startup entrepreneur, and if you still haven’t read it then you’d better do it! In particular, in this book, Eric Ries introduces the term “pivot”: changing the concept of the company, which arises with the lack of real growth.

Any founder can reasonably note: the startup industry is constantly changing, so how is the pivot mechanism different from the other changes? The pivot has a few specific features:

  • Pivot is not just any change in a startup, it always checks the product hypothesis. Changing the buttons’ designs, slogans on the website or changing the communication strategy with the audience is not a swing, it’s just a common task.

  • The pivot happens with a product that has already entered the market, has received its audience and has some sales; there is a success, but not enough for scaling a microbusiness into a startup. Testing different hypotheses at the MVP development stage or, even more, at the idea stage is not a pivot.

  • Pivot always happens based on the knowledge gained about the audience and the work done by the startup team. Startup pivot is not a return to the zero point, but rather a game of "hot and cold": first sales, user interest, growth of the startup make it clear that "it is already warm", but to become "hot" (so happens a blasting growth), you need to do a bit more.

Why do startups need pivot?

If a startup has a strong team and the product is generally growing then why is it necessary to mastermind something else? Maybe, it’s better to wait a bit and the growth rates will improve?

A startup is not a common business; it is the creation of a product that can be scaled multiple times. This is precisely why startups are of great interest to investors, venture capital funds and entrepreneurs: in case of success, the initial investment can be recouped 100-1000 times. Therefore, a startup needs constantly accelerating growth in key economic indicators. There is even a well-known definition of "hockey stick": this is a graph of growth in a startup's performance (exponential growth).

If a startup grows too slowly, it runs the risk of being in the "valley of death" or in other words, among companies whose performance has remained at the same level of growth by several clients per day/week. These companies never became startups but turned into sluggish businesses. The main danger of the "valley of death" is for the startup team itself: it can take years to try to promote an unviable product and this is an invaluable time that no one will return.

On the other hand, it’s not an option to constantly make swings. A company backswing is a costly business, and it's not only about money but also about the nerves, the psychological state of the team and its belief in its own idea. Constant tossing from side to side can greatly deplete all of the resources. Therefore, each pivot must be done exactly at the right moment.\

When do you understand that you have to do the backswing?
  • Startup’s insufficient growth. This is the main sign that a pivot needs to be done. Key numbers like new user growth, startup revenue growth stop growing or grow too slowly.

  • The audience doesn’t need the product. This may become clear at the stage when the sales have already begun: for example, consumers use only one function or download an application but stop using it.

  • Negative product feedback from users. Customers don’t understand some functions, the product is too complicated for them, it seems insufficient to them and etc.

  • The feeling of a "dead wall", which the team has faced. All possible attempts to achieve growth have been made, but growth doesn’t occur.

  • The monetization model doesn't work. The idea is popular, there is user influx and good feedback; however, the startup doesn’t receive any real revenue: for example, users are actively testing the free version, but are not ready to buy a paid subscription.

  • Circumstances change. For instance, the production becomes too expensive, or after a real immersion in the market, the goals and objectives of the startup change.

 Pivot is a top-manoeuvre: difficulties and risks

Being late with a pivot. Many companies are hesitating to take the swing. Most often, a psychological factor is to blame for this as when the more work is done, the harder it is to drop it and start over. Sometimes delays can lead to a startup running out of funds and investors losing confidence in it.

Too frequent swings. Tossing from side to side demoralizes the team, hinders performance, and scares investors. This is why the swings must be agreed upon by all parties.

Conducting pivot without analysing competitors. Before spending additional resources on finalizing the product and testing a new concept, it is worthwhile to study the market: perhaps some of the competitors have already proposed a similar solution, and it hasn’t shown its effectiveness.

Team’s blind spots. The development team is often so immersed in their idea that they may not notice obvious signals from the audience or new market trends that are worth paying attention to. In this case, working with a tracker or involving external consultants helps a lot.

Misunderstanding of your own business model. If the startup team doesn’t understand what metrics compose the economy of the startup, what indicators should be taken into account and what is wrong with them; changing the concept won’t help. You can only get on the right road if you already know where you are now.

How to conduct a pivot in a startup
  1. Discuss with the whole team. Changing the concept is an important decision with a whole set of consequences, so it must be made by everyone involved: the team, investors, key employees.

  2. Carefully analyze all the data. You must be sure that the opportunities for growth with the previous model are exhausted and you understand all the metrics of the startup well and know what result you want to achieve.

  3. Don't discard past experiences. Ditching the current model doesn’t mean giving up all the work that has been done: on the contrary, try to maximize the experience of product entrance to the market and interact with the audience.

  4. Make the pivot open and transparent. Explain to investors and key employees why the swing is necessary: show numbers, analytics, market trends, pivot strategy levels. It is worth considering the opinions and ideas of each participant in the process.

  5. Monitor the team’s morale. The need to change everything and abandon the idea, on which has been spent so much time is frightening and demoralizing: at this moment, the leader must show his leadership qualities and human sensitivity.

  6. Save the mission. Don’t forget about the mission with which you initially created the startup; it is the thing that inspires you and the team, so the swing should fall into the mainstream of this global idea.

  7. No doubt. It is important to discuss all the pros and cons before making decisions and only then move in the chosen direction. The launch results of the updated product will show everything immediately, unnecessary doubts will only slow down.

Pivot types

The swing of the concept can be different, and understanding what pivots can be will help to analyze everything and make the right choice. A detailed classification of pivots is given by Eric Rees in the Lean Startup. Let's go over the types of swings:

  1. Increasing (Zoom-In Pivot): some of the features that was the most popular among the users scales and becomes a separate product.

  2. Decreasing (Zoom-Out Pivot): vice-versa, the initial product becomes a part of a new multifunctional product.

  3. Changing the segment of users (Customer Segment Pivot): transferring the same product to a different target audience; the classic example is transferring from b2c to b2b market.

  4. Swinging the users’ needs (Customer Need Pivot): customers have a problem in this area, but not one that the original product solves.

  5. Swinging business infrastructure (Business architecture pivot): changing the business model: high marginality and low sales or vice-versa.

  6. Changing the platform (Platform Pivot): transferring from app to platform and vice-versa.

  7. Changing monetization model (Value Capture Pivot): changing the main method of making a profit.

  8. Changing the models of growth (Engine Of Growth Pivot): the startup considers one of three models of growth(“sticky”, viral or paid) and chooses the most suitable one.

  9. Changing the distribution channels (Channel Pivot): it happens when the company sees that it is more effective to sell the product on another channel.

  10. Changing the technology (Technology Pivot): the product is realized with another technology.

Last but not least: real and inspiring pivot stories

Slack: the service has appeared as a corporate messenger for the Glitch game developers. The launch of the game failed, but the team didn’t give up and switched to developing a corporate messenger. Slack became a unicorn in 2014.

Groupon: the initial developer’s idea of The Point service was completely different: they wanted to become a platform for joint customer actions (petitions, events, promotions, and etc.). The large-scale project was going hard, but the team was able to spot the most interesting opportunity for users in time (unification for group discounts) and created a successful service, which began to grow at a fantastic pace.

Instagram: Initially, the team developed the Burbn app with a lot of features, including check-ins, content processing and photo creation after meetings with friends. But when they saw that from the extensive functionality, users were only really interested in sharing photos, Instagram swung in time and as a result, the world got the Instagram, without which it is difficult to imagine our life now.

YouTube: the team planned to create a virtual dating service where each member could easily upload a video with a story about themselves. But fate decreed otherwise, and instead of a dating application, we got the number 1 video hosting in the world. A year after the creation, YouTube was bought by Google for $1.65B.

Twitter: originally, Twitter was the internal corporate network of another startup — Odeo. Odeo suffered losses, and Twitter gained popularity and as a result, the social network became a separate direction in a startup, and eventually, a separate company.

Don’t be afraid to experiment!

Changing the direction and abandoning an old idea is one of the most difficult decisions to make. But if the pivot is used correctly, it can save a startup from the valley of death and its team from wasted years. A startup swing won’t be a "jump into the abyss" if you act in a balanced and rational manner: analyze all indicators, current problems along with possible solutions, talk to the team and make a decision together with investors and experts.

Don’t neglect previous experience and the work done but don’t waste time for doubts. In the end, a startup is about creativity, and therefore an experiment. The one who is ready to experiment wins!

27 Sep 2021

 

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