Pivoting in the Pre-Seed Phase: A VC Prospective in the GenAI Days

Determining when a company should change direction and move away from its original idea can be tricky. Each situation is unique, and the founding team must decide whether it’s time to pivot or keep going. But how?

There is no one-size-fits-all approach when it comes to making a change. When a team faces this kind of challenge, the stress level is very high, and the fatigue of fighting every day to find a profitable and scalable spot in the market doesn’t make the decision easier. I don’t think it is possible to fully understand the dynamics of a company struggling with its core idea if you are not part of the team. Still, sometimes, everyone feels that something needs to be revised in order to conserve the remaining people’s energy and investors’ capital.

These days, we observe many more pivots than just a few years ago. It could be because the GenAI wave has just started, and only some user needs are ready to be fulfilled or are urgent needs at all. Organizations are still in the process of testing the integration of their systems with LLMs and AI-powered services. Sometimes, the new AI way of doing things benefits the customers or the organization itself, but the cost is prohibitive at scale.

In other cases, startups are under much pressure to deliver valuable results to investors and the market, and they can become overwhelmed by this pressure. As a result, they may decide to change direction two or even three times within the first twelve months.

It’s important to understand that pivoting is not always the best solution when the original product falls short of expectations. Embracing a pivot is a formidable task, and in many instances, dissolving the company and returning the remaining capital to investors is the most favorable choice for all parties involved. Even if pivots are so common nowadays, I feel like people should value pushing forward no matter what and adapting the business day after day more.

How do you decide what course of action to take when things don’t go as planned after creating the company and raising funds?

I can’t decide for you, but I can offer insights from my 15-year experience as an investor in Silicon Valley and 21 years as a tech entrepreneur. I’ve seen many companies deviate from the initial concept, sometimes just a bit — Soft Pivots — and some others perform strong turns — Hard Pivots. Not all types of pivots are created equal, and those two broad categories require different skills and levels of team energy to be pursued successfully.

Hard Pivots

The hard pivots include all cases where the team drastically changes its focus and aims for a completely different sector. Usually, in these situations, the decision is influenced by a lack of user interest, a weak attachment to the original concept by the founding team, or a loss of essential skills within the core team, making it impossible to continue with the original plan. Hard turns commonly happen very early in the company life cycle, when much capital remains in the bank account, and the team’s energy is high. Losing faith in the original direction a few months after the fundraising is not uncommon, but it’s definitely not an easy pill to swallow for those who backed the company on the original plan. I have seen some companies succeed after changing direction, but many others fail to meet their objectives. The truth is that completely changing your goals can be complicated, and one of the most evident risks is breaking the company apart.

What I consider essential as an investor when a company faces a hard pivot is to be reassured of a few things:

a) The founding team is all on the same page, and all of them are genuinely passionate about the new direction. Losing your co-founder during the process makes the challenge almost impossible. There are always exceptions to this rule; sometimes, the true outliers emerge from stressful situations like these. Most of the time, simply, it won’t work.

b) There must be a reason, beyond “passion,” to embrace a totally new direction. The team should spend time by validating with evidence or user experiments before deciding on a different approach. Otherwise is much better return the capital left or keep going and look for the right angle to approach the market.

We prioritize the quality of the founding team when making pre-seed investments. While the idea and the market are important, believing in the potential of the founders is critical. In this scenario, changing direction is generally acceptable, and we will provide ongoing support. Nevertheless, we appreciate when the founders seek our input before making a final decision about hard pivoting.

Of course, pivoting after a few months is not happy news for any investor because it might signal a potential lack of persistence in the founders — a crucial trait of their character if they want to succeed. On the other hand, being quick to decide is equally essential, so it’s unclear which of the two characteristics we appreciate more. Typically, it depends on a case-by-case basis.

Hard pivots are the most uncertain in the pivot space and the most challenging to pursue. But if the team is excellent and can stick together, I’m sure results will come eventually.

Soft Pivots

Soft pivots are a slight turn in the company’s business. Like any other change in company strategy, they are extremely hard to face, and, compared to hard pivots, they can happen at any time in the company journey. They are also much more common and, in many cases, welcome. Nearly every venture capital-backed company has undergone at least one minor strategic shift sooner or later. They typically emerge because the business is not performing as expected, even if initially it seemed to. The initial product gained traction but not at scale. In a soft pivot, there is always at least a part of what the company created that is more promising than the rest. It may be just a tiny — non-core — portion of the business or a component underneath the software infrastructure that, once open-sourced, generates an enthusiastic response by the community. In other cases, it’s simply because the company understands that the market is changing fast, and the initial product won’t sustain the much-needed growth over the years. The latter are always tough decisions to make: adding another line of business when the current product is doing fine to anticipate the future is a considerable risk — one that could save or fail the company. But in any case, multiple soft pivots are almost inevitable during the lifetime of a company, and they are practically a sign of the founders’ ability to adapt to a changing world. So, in a way, soft pivots are positive and necessary for the company’s good, even if they can generate unexpected consequences. Successful founders take risks, but pivoting is never taken lightly. Threatening changes take time to materialize and become an action plan.

Is a Pivot a Good or a Bad Thing?

Every major change in the company’s history has presented its own set of challenges. These include potential issues in the company’s capital structure, the possibility of starting over or taking a step back, which could pose a problem for investors, and an increased likelihood of disagreements among the founders who initially came together to work on the original idea.

On the other hand, there are also many advantages.

• A company stagnating in its business objectives lowers the morale of the team and, in many cases, shuts down after a long agony.
• When founders stay together after a pivot, that is remarkable evidence of an excellent fit, and it will be beneficial for facing future challenges.
• If the pivot is successful, as an investor, you have evidence of the team’s responsiveness in challenging times.

Conclusion

When a groundbreaking revolution like GenAI emerges, it can be both exciting and overwhelming as it integrates into our lives and businesses. During these times of rapid change, it’s important for everyone to stay calm and accept that things will be in flux for a while.

On the other hand, in the fast-paced world of startups, change is the only constant. Startups thrive on challenging the status quo and taking risks that bigger companies might avoid.

In this GenAI era, that spirit of experimentation is crucial. Many projects will explore GenAI’s potential, and while not all will succeed, the ones that do could have a massive impact for years to come. As we embrace this revolution, let’s remember that pivoting is part of the game—now more than ever.