With seed stage companies, most everything is mutable. The founders are forever The Founders but the team will grow. The product will morph. And the name will probably change too. That this all happens is a good thing. It should be encouraged amongst both founders and company advisors. The best seed stage companies are creatures of learning. I’ve written about this before in a post on pivoting.

At First Round Capital, this is something we talk about a great deal. Every year, we review more than 2500 plans and presentations on ideas for new businesses. We typically invest in 20 new companies every year, but we continue to follow the development of many companies that we have chosen not to fund. While doing so is often humbling, this has allowed us to develop a tremendous amount of institutional knowledge on business building.

We recently carved out some time to review and discuss some of the data we have collected. This involved checking our old notes from company meetings and revisiting their original pitch decks. It’s a staggering exercise actually. Seed stage companies become successful through paths that nobody can imagine. Many of the companies which grew to be most successful, identified their initial market correctly but missed on the specifics. Often, they knew to target a certain type of user or community, but were off in identifying the growth engine of their business.

The currency of an early stage business isn’t revenue or profit, it’s learning. Products and features are tactics employed to test and reach a market vision. After our data review, I’m more convinced of this than ever. When product roadmaps are spec’d and fundraising is planned, they need to be done so with the intent of discovering what is and what is not working in a business. Every feature / pixel / byte is a chance to take another step to a market vision. When they don’t another tactic is needed.

The best entrepreneurs know this. I’ve seen the data.

• Seed Magazine Findings Log: Fascinating briefs on general science topics. My favorites including an overview on how Earth’s magnetic field was crucial to enabling life; in great news for doctors, patients and gamers, brain-computer-interfaces (BCI) become easier to implement; weed killer and hermaphroditic frogs
• Pinpointing Disease with Genomes: NY Times article covering what scientists are learning from full gene sequences. A surprise finding: common diseases can now be linked to uncommon genetic mutations. There’s still so much to be learned here. As the price of a full-genome sequence falls from $500 million to $25k to sub-$5k in just a few more years a mind boggling amount of data is going to be collected and analyzed. Excited to have a front row seat to this as part of First Round’s investment in DNAnexus.
• The FCC Plan (and Stimulus): Earlier this year, my friends at GigaOm invited me to join them for a roundtable discussion with FCC Chair Julius Genachowski. After the session, I tweeted “Broadcast TV spectrum is wasted on broadcast TV. Let’s allocate it to wireless carriers instead.” I’m heartened to read that I wasn’t the only one thinking this way and it may very well be part of his proposal.

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.

Some background on the story. The September issue of any fashion magazine is the most critical issue of the year. It is the issue that sets off the fall and holiday buying season. September is to the fashion publishers what December is to retailers. Of course, in the world of fashion magazines there is no publication more important than Vogue and no person more important than the iconic Wintour. Wintour is known for scaring and scarring both designers and her team alike. In this regard, she does not disappoint. But “The September Issue” is also an opportunity to witness the best in their field prepare for their biggest moment.

Some of the start-up related lessons from witnessing the Devil herself:

• Delusion is Good. There is a revealing scene in which Anna Wintour discusses her siblings and what they do for a living. One is involved in non-profit work, another is an Editor for the UK’s Guardian newspaper. She then says, “I think my family is amused by what I do.” But she is not. The world of couture is not frivolous to her. Vogue is important to the world. It is easy to laugh at this notion, but for those outside the tech world  it’s also easy to laugh at the notion that creating better online ad platforms, communication systems, shopping experiences is important. If you are going to start a company, start by believing that what you are setting out to do is important.
• Love what you do. If you succeed in convincing yourself that your idea is important, chances are you will love creating it. There is a scene in “The September Issue” in which Grace Coddington, the Creative Director of Vogue, just having been dressed down by Wintour muses “Well, of course, I want the issue to be a success. My job depends on it.” Coddington will never have difficulty finding employment. She isn’t speaking about employment. She has long and storied career in the fashion industry and many would fight to hire her today. Vogue clearly is not a “job” to her. You can see the way in which she revels in her work (its struggles) and colleagues she is passionate about Vogue. It is her life.
• Refine, Release, Repeat. Here’s the plot of the film. They set out to produce an issue of magazine. They struggle with production. They fight. They refine what they want the issue to be. They reshoot. They find new inspiration at the latest possible date. And then they release their creation to the world… And then, just before the credits role work begins on the October issue. Sound familiar?

Many venture capital funds will tell prospective entrepreneurs, “If you take funding from us, you won’t just have one person working on your behalf, you’ll have our entire team pushing for you and opening doors for you every day.” As you might expect some firms are truer to this mantra than others. For founders choosing their funding partners, this is one of the most important areas on which to perform diligence. Ask other companies in a VC’s portfolio how often they interact with multiple members of a VC firm. The answer will reveal an enormous amount about the health and culture of the partnership. As a founder, you want a VC that acts as one team of many people, not many people acting as many individual teams.

Since joining First Round Capital, I’ve always been amazed at how well the group functioned as one team. It took me a while to figure out who was “on point” for some of the portfolio companies because all of the team members were working for all of our portfolio companies. This past Wednesday at week at our annual CEO Summit in San Francisco, I was treated to some great reminders of this culture. As Steve Jobs was saying across town, “It was really amazing.”

When I arrived at the Summit a little before 7am, a few members of the First Round team were already going through the last minute checks before kicking off the day. I asked what I could help with and went to work. One by one, as each and every member of First Round arrived, they did the same thing – our awesome backoffice team, our Principals and our Partners. No questions, no complaints, no being above the work. Everyone was moving chairs, sliding tables and doing page checks in binders. It was a small moment but one of my favorite of the day. It says a lot about our culture. Like the companies in which we invest, we’re a start-up too. There’s no room for ego if you want to get things done.

We had some terrific speakers throughout the day, but the most engaging sessions were the eight breakout sessions which were often led by the attendees.The topics ranged from “Building a Great Culture” to “Running a Platform Business” to “Knowing When to Pivot.” These discussions were where the conversations were really happening. Being a Founder or CEO can be the loneliest jobs, so as gratifying as it was to see our portfolio Founders and CEOs leaning on and learning from one another, I think they were even more fired up. The conversations they started will continue far beyond the day. And for First Round portfolio companies, this is one of the greatest competitive advantages we can offer.

So if you’re raising capital, do your due diligence. Ask about your potential VC’s culture. If you ask about First Round, you’ll find that you won’t just work with a single partner. You will benefit from the hardwork and advice of our entire team – the best backoffice in the business, eight investment professionals, and access and insights from the ass kicking founders and leaders of our nearly 80 portfolio companies.