the cornice

It’s easy to adapt to challenges you face many times. It’s difficult to be good at the things you rarely confront. Knowing how to adapt to seldom seen circumstances is the key to driving a start-up forward.

This past January, we held our annual First Round Capital CEO Summit to bring together our portfolio company CEOs and founders for a day. Our goal is to keep the day focused on topics that the CEOs can use in the daily operations of their businesses. We’ve been luck enough to have some great speakers join us, but the meat of the day is in the breakout discussions. This year, I facilitated a discussion on “Knowing When to Pivot.” Pivoting is one of the most critical challenges a business can face. It’s also one of the most rare – not many folks have a great deal of practice in this arena – so I wanted to share some of the key takeaways from the discussion here.

So what is a pivot? It’s what you do when you’ve built everything according to plan and yet, the business and users aren’t materializing according to plan. For the record, I’m a huge believer in all aspects (engineering, customer & business) of agile development. No need to debate that here. Sometimes, however, it takes awhile to see that it just ain’t gonna work out. PayPal as we know it was built after a legendary pivot. And in our own portfolio, Like.com, took shape after originating as a very different business. Here’s what you need to know about pivots and why you shouldn’t be afraid of making them:

This is What Start-Ups Do

Pivoting is a good thing. It is the outcome of learning about your business and adjusting. The best run start-ups do this every day but they do it a little bit at a time. The graphic below, which I found on Hutch Carpenter’s blog, captures the seed company essence. But this is also the type of pivot at which companies excel. In fact, they see them so often, they rarely realize that they are pivoting. Instead, they are simply operating. It’s the more dramatic pivots which are more challenging, require greater commitment and longer runway.

There are Different Types of Pivots

There are three types of pivots. The first is the Daoist Pivot. It’s the type discussed above and could also be described as Agile Company Development. If you are running a business and you are not doing this, you are failing. The second type is the Strategic Pivot. In many respects, this is the most difficult type of change to commit to. Your business is already going well. It’s comfortable and progressing, and then, a brighter opportunity emerges. Maybe you realize that 90% of your engagement or revenue is coming from one product or technology. You don’t have to shift your business but if you focused a little more things could really accelerate. The third type of pivot is the Survival Pivot. There is no mistaking it. You haven’t found PMF (product market fit). There is no business model. Or maybe, just before you launched your MVP (minimum viable product) your market was “validated” by a large, deep-pocketed player with a major marketing advantage. Time for a new plan.

What You Need to Know

Knowing when to pivots starts with knowing the milestones of your business. At First Round, we believe the purpose of a seed stage investment is to prove / disprove / refine a thesis so we always work with our founders to outline the milestones they want to achieve with their financing. This is a living document and is never meant to be viewed in terms of absolutes and deadlines, but it provides markers against the original assumptions. As the progress against the milestones occurs, we look to understand both what is / what is not working and why. We then revisit the original assumptions and ask what we have learned. Together with the founders we ask, “Knowing what we know now, what would we do differently?” and “What can we do with the cash we have left?”

Fear is a Silent Killer

Pivoting a company is a big decision. For those who are faced with a pivot, it is likely the most meaningful decision they have had to make since founding. Employees and investors have committed time and capital to your vision. And while it’s never easy to admit that you were wrong, you have to do it. There is no place for shame if you want to be a leader. The sunk costs are sunk. Find a better path and move on. Chances are the employees and investors didn’t really invest in your vision, they invested in you. Now lead.

Managing Your Constituencies

Management teams have at least two constituencies when managing their businesses through a pivot – their board and their team. And, in many respects how you manage them through a pivot will depend on how you selected them. On the board member front, investors who backed “you + a nice idea” are generally more open to pivots then those who fell for just a technology or product concept. Identify the “you + a nice idea” board members and win them over first. They will be your ally when it’s time to convince others around the table. Managing you team can be harder. Being a CEO can be the loneliest job in the world. You have to show stoicism when your panicked. There are no shoulders to cry on. And it only becomes more intense during a pivot. Your team will be scared and look to you for signals. Show real commitment and do not allow yourself to waffle in front of them. One trick is to publicly declare your intention to pivot. It gives you no place to hide and makes your intentions explicit. After the pivot begins, expect some team members to walk. Likely these are the individuals who were more interested in working on a technology than on your team. It’s a bummer if they go, but really, it’s ok if they do. Expect that they will.

Your Next Round

It’s critical to make a pivot when you still have runway in the business. You will not be able to raise financing on a future which is completely disconnected from your company’s current business. Plan your pivot with enough time to show genuine progress against your new milestones. The good news is that it’s often easier to sell a dream than it is to sell data – nothing effs up a good story like data – and you are back to selling a dream. The bad news is that both new and existing investors will need to see a more granular set of milestones. They will want to know that you have learned to manage your business and are plotting your course carefully.

This is obviously just a brief overview on the subject. Please feel free to add your experiences in the comments.