The art of the startup pivot from a founder-CTO point of view
A risk management perspective
Yann Lechelle (LinkedIn, Twitter) is a Paris-based entrepreneur with a number of pivots under his belt. He was founder and CEO at Etheryl (acquired by private investors), co-founder at KickYourApp.com (acquired by Change), co-founder and COO/CTO at Appsfire.com (acquired by MNG), co-founder at Sonetin.com and currently COO at Snips.ai using AI to make technology disappear. Yann occasionally invests in and advises other startups, on pivots among other things!
TL;DR: this post discusses the generic notion of a startup pivot. Technically minded readers might prefer to focus on the product & tech sections, or anything else in bold.
Pivots are a fact of life in the startup world. Yet, very few founders, especially first-time founders, will provision for it. The founder mindset is typically focused on a single go-to-market strategy. The investors are sold on the potential based on that initial strategy, signing off a budget calibrated accordingly. Everyone sings the same tune until the shareholders realize, hopefully before it’s too late, that the strategy is going nowhere, and that a radical change is required. This scenario occurs more often than not, over 65% of the time according to Fred Wilson.
While this iterative process appears natural, and with the benefit of hindsight, accepted and even praised as part of the startup folklore, it remains a traumatic event from the inside, and possibly a direct cause for failure. Reversely, if done right, a pivot is almost inevitably cause for success.
Structurally, there can only be a handful of pivots within the lifetime of a company. Repeat entrepreneurs may have experienced it multiple times and therefore developed their art of the pivot… hence becoming pivot artists, a trait that VCs should consider as key risk management expertise! Here are a few awesome pivot artists:
- Multi-pivot repeat entrepreneur Stewart Butterfield: from video game to Flickr and from video game to Slack; product & vision pivot.
- One-time-pivot entrepreneur extraordinaire Mark Zuckerberg: from Hot or Not to The Facebook; product pivot, vision developed in hindsight?
- Multi-pivot co-founders Jean-Baptiste Rudelle, Romain Niccolini and Franck Le Ouay: CRITEO and its 3 pivots to become a (too rare) French Unicorn.
Let’s go back to our humble startups and itemize some of the issues that may arise during a pivot (with first hand examples):
- A sudden shift in business model affects the former revenue stream and structure, therefore affecting the operating budget;
For example, killing a revenue generating B2C product will certainly reduce the top line and increase the monthly burn. The lifeline suddenly becomes shorter.
- The team that had grown according to the needs of the previous product suddenly needs to be recast to the new configuration, leading to casting and head-count mismatch;
For example, a team that had built an architecture around complex and intertwined relational databases with a balanced mix of read/writes suddenly needs to reconfigure for a product that needs massive reads (100x) optimised for low latency with a noSQL-based and map-reduced architecture. Different skills, different architecture, new learning curve.
- Parts of the older product needs to be transitioned, phased out, or worse maintained to some degree;
For example, when the pivot requires to move from B2C to B2B, when do you pull the plug on the B2C product? Does it affect your revenue? It is probably a good idea to give reasonable notice to those users who have embraced your initial product; it is essential that those very users are onboard with the pivot and keep them as potential ambassadors of your brand equity. Who on the team can help maintain the legacy solution? for how long? should they instead focus on the new product?
- A new product needs to be developed, hopefully by leveraging existing infrastructure, skills, and capital, all of which are now more constrained;
For example, shifting the model from B2C to B2B may involve refactoring a single platform into a SaaS offering… resulting in multiple instances of the same product. Other examples may involve refactoring some of the code and accelerate the design of a brand new product, for example by going up or down the value chain), while at the same time keeping the same clients or partners to speed up the go-to-market this second time around.
- Worse of all, the time and energy considerations are now more constrained than ever: this is possibly the most difficult aspect to manage.
Here the founders need to lead by example, be on the ground and with the team at the same time; in a way, back to square one.
As you can see, most of the above issues are product related, and yet fundamentally anchored in the HR ability to turn things around. Indeed, entrepreneurs thrive on constraints, and a pivot may in fact correspond to “a second wind”.
How does one prepare for a pivot, or rather, how does one create the proper conditions to pivot properly?
Let’s break it down around three main pillars: product & tech, HR, and capital.
Product & Tech Challenge
The product initially defined by the founders typically emanates from a global vision. In some cases, founders will start with the product and later realize, on their own or with external help, that there is a greater vision. Either way, the team must strive to work towards the greater vision, and consider that the product itself is just a means for achieving a greater goal. This serves two distinct purposes: pitch investors at a higher level of ambition (helps with the valuation), but most importantly, helps the product and engineering team build a category of assets that will be reusable when pivoting the product within the general framework of their vision.
For example, building an architecture that isolates fundamental blocks of logic and imposes inter-process communication by way of a proper API supporting OAuth 2.0 may help migrate from a B2C product to a B2B offering that exposes those APIs to external entities. Building a B2C product that way may require a little more time and effort, but is in fact the correct way. Shortcuts or sloppy execution can easily turn into technical debt which is extremely penalizing in case of a pivot.
While the pivot is a general management directive, the CTO is a key decision maker in this process. Indeed, only the CTO has a global view on the existing architecture and the individual skills that the technical team possesses. Reversely, smaller technical teams may be better at instigating what the new product could be. Either way, at the board level, the CTO can steer the ship smoothly towards a new product that leverages the current skillset and architecture, or else agree to ignore those assets and embark on a radically new creation (at a cost).
It helps if the vision is both ambitious and not dependent on exogenous platforms like Facebook, Twitter, Apple or Google. With Appsfire, a company that I co-founded in 2010, our vision and mission was to solve “app discovery”. Unfortunately, that vision had very strong dependencies with the App Stores. Towards the end of 2013, changes within the App Store guidelines made our model unsustainable… forcing us to pivot both at the vision and product levels; a much harder feat.
Reshuffling the business model, or reshuffling a number of technical assets to re-define the product is much easier than having to start from scratch, in addition to helping keep the momentum and timing to achieve the holy grail: the product-market fit.
It’s the people, stupid! It always boils down to the people doesn’t it? Indeed, a startup isn’t a financial play on its own. It may be at the VC portfolio level, but at the micro level, within the startup itself, it’s all about energy and productivity, about beating the odds and overachieving, it’s about the core vision and the ability for the founders and the rest of the team to bind to it.
To that effect, to ensure that the team is effectively able to pivot, it should be composed of two key groups:
- the hard core team: founders and first employees. They must demonstrate charisma and the stamina to go the extra mile, especially during hard times and periods of doubt. They will lead by example and explain why the pivot is necessary, in full transparency.
- a larger group made of polyvalent engineers (also known as the talent): full stack, avid learners, passionate bunch, agile minds, sprinters (and not just in the agile sense), team players… typically people who are not too affected when their project suddenly shifts gears and they have to step outside of their comfort zone or preferred coding language or IDE.
A third group inevitably exists and is made of people who are either back-office (accounting, finance), sales and business development agents, or technical specialists. During a pivot, some of these people will see their workload dwindle rapidly: if the business model changes, there is perhaps suddenly no more invoices to produce, nothing to sell for a while, or at the technical no need for a specific expertise that made sense pre-pivot. In the US, it’s quite easy to thank people and let them go — a harsh reality and necessity. In France, the labor framework does not make it easy even though, contrary to popular belief, it is definitely possible and reasonable if done right. I would argue that if the reason is communicated properly, employees will understand that the pivot creates a “casting mismatch” and that they are often better off by leaving the company. Working with them on their transition to a new job, or mutually agreeing on a smooth “exit” will give them ample time to rebound at a reasonable cost to the startup (the rest will be covered by the government’s unemployment subsidies).
At the capitalistic level, the pivot brings an interesting paradoxical twist. While the team and founders may have found a way to better address the market, they will almost inevitably do so from the existing cap table, and without fresh capital. Pivoting means the board acknowledges a local failure, and yet, the action of pivoting, in fact allows a swift and more educated go-to-market approach, bearing less risk, and therefore value creating.
It could be argued that if the pivot is radical enough, then the team and founders should probably start from a clean slate: new company, fresh cap table, and funds dedicated to the new product. Call it emotional attachment, loyalty or ignoring the notion of sunk cost, founders will often honor continuity and momentum even if it means less than ideal capitalistic terms. VCs should probably acknowledge that and recognize that a pivot done right deserves a little readjustment or nudge towards the effort. Reversely, when comes the time to pivot, founders should perhaps approach their investors in earnest and plead towards a new set of terms and incentive: relution against cash if pivot succeeds, dilution otherwise.
In reality, entrepreneurs keep at it and pivot within the capitalistic framework inherited from the pre-pivot period. To that effect, I only have one piece of advice: raise more funds if you can by adding some padding to your budget. In short, within your fundraising round, provision for a pivot by allocating an extra 50% of your initial budget. Early stage investors (seed or series A) will be more interested to discuss this notion of padding for a potential pivot rather than discuss unrealistic 3 year projections.
Pivoting is in fact a corollary to the fail fast doctrine. Execution and focus are key ingredients to a successful path until you reach that dead end. Yet, nothing prevents startup founders to think in broader terms, provision for the (almost) inevitable pivot by creating financial padding, recruit polyvalent talent, and finally productize around the vision rather than digging a grave around a mono-product approach.