Building technology companies, Forum

Startups & Pivots

BGV General Partner Anik Bose shares his perspective on pivots in Venture backed startups. Wikipedia defines Pivot as the point of rotation in a lever system, more generally, the center point of any rotational system.  In 2011 Eric Ries designed Pivot as a method for developing businesses and products. Lately the term “pivot” is in vogue with VC’s and entrepreneurs.   In some cases it is even viewed as a badge of honor.  The reality is that pivots often cause early stage VC backed companies to burn through far more cash than originally planned along with founder/management change disruptions.  All of which can significantly reduce the probability of success and stretch out the time to liquidity.  It is little wonder then that 15,000+ startups get seeded every year but the number of successful exits every year – M&A or IPO ranges between 500-700.  Randy Komisar from Benchmark Capital explains in his book “Getting to plan B” that the business plan you fund is almost never the business plan that you end up executing.  The book argues for agility, continuous adjustments, fast learning, and the courage to change.  In reality, making continuous tactical adjustments is always necessary and often rewarded but this logic is often used as the justification for making a “strategic pivot”. There are two root causes that create the need for a VC backed company to execute a pivot:

  • Significant change in market and or competitive environment
  • Compensating for a poorly thought through market/customer selection strategy.
While the first factor is part and parcel of the VC/early stage investing business the second is due to an often misguided “build it and they will come” approach on the part of the entrepreneur.  The entrepreneur fails to do the necessary homework around understanding the pain point being solved by their product, the target customer/market who would value it and the competitive approaches to solve that specific pain point.  This problem is further compounded when the entrepreneur is able to raise seed funding from unsophisticated early stage investors to develop the product.  As a result the company may end up with a product looking for a market.  In this scenario rarely are pivots value creating moves, instead they end up as bad money being thrown after good money. Entrepreneurs can take several proactive actions to reduce the possibility of the second category of pivots from occurring.  These include:
  • When developing a new business concept begin with the customer – Invest time talking to potential customers to develop a fine-grained understanding of the pain point and the shortcomings of current competitive solutions.
  • Build in Product Marketing/Management DNA into the team (part time or full time) in the early days thus ensuring process discipline such that the above input is fully reflected in developing the Market and Product requirement documents that guide the product development effort.
Seed stage investors should conduct thorough prospective customer diligence and market/competitive assessment to avoid the second category of pivots from occurring as well.