Pivot, a Startup (and Business) Buzzword
A pivot happens when a startup team shifts its core focus and fundamentally changes direction. It can occur early in a startup’s life or after it has raised capital. I frequently hear about “pivoting” during funding pitching, where the entrepreneur is scrapping their product and/or pursuing an entirely new market.
When I started, I envisioned providing a B2C platform for a market need, becoming a market player. Engaging with customers, we realized a need to recalibrate the journey; to the same destination with intermediate milestones. This meant using the product as a B2B product, making it the industry's digital backbone, before venturing into becoming a market player.
Was it hard to recognize that we needed a “radical” course correction (B2C to B2B - SAAS)?
The struggle was recognizing that persevering on the earlier path may not have given results quickly. And believing that the “turn” towards a new customer will yield results. The original direction was a “failure.” The new course was a “belief” that the B2B use case would find customer acceptance; a stronger conviction that grinding it out will yield results. We had realized that the industry had a need. At the early stage of the startup, we were balancing resource use – time and money. The team was small. Our mindset change was enough. We did not have the guts (capital) to stay the course.
I empathize with entrepreneurs when they say it is challenging to recognize when they need a radical course correction. Startup teams are focused and psychologically invested in creating a product to miss the initial signals that something is not working.
It took a while for us to work with our small team, make them believe we knew what we were doing, reorient their thinking to make changes in the product. I can only imagine doing it for a larger company. The risk of a “pivot” is that it can sap a startup team of its motivation. It is like starting a startup afresh. In my startup, my co-founder and I were on the sales team. We needed to change all our pitches for B2B customers. Most importantly, we had to be patient with a longer decision-making process, different players' involvement, and evaluation of the value proposition and pricing.
I hazard a guess that seed-stage companies may find it easier to pivot when discovering their product-market fit than late-stage growth-stage companies.
When to Pivot
Based on my experience, what drives a pivot decision? When the entrepreneur reflects and notices.
1. Too little progress for lots of hard work and deployed resources (people, money, and time)
2. Cash is running out.
3. Limited Response from customers to the product offering. They are not buying the value proposition (startup's definition of the problem and the solution). And it is necessary to go back to basics and reassess assumptions.
4. The change required is fundamental; their assumptions/beliefs have changed, requiring a shift in mindset.
5. A company (late-stage startup) stops growing, a scaling-up problem in a new market. Numerous factors may cause it – product requires tweaking, a new strategy, a new team, etc.
What is “Pivoting”?
Pivoting is be done when necessary and when all other options are exhausted. It is a thought-out decision because it will change a startup in many ways.
A startup can pivot (when it changes the startup – a new product, market, and team), or startup pivot can involve changing the revenue model, product, or target market?
It is my view that pivoting is primarily a mindset change.
Mindset is another word widely used in business discussions. When I ask people what it is, I am usually referred to Carol Dweck book “Mindset” which popularized “Growth and Fixed Mindset.” The book does not define “mindset.” I thought it was another word for “disposition.” But it is neither “mentality” nor “disposition.
A mental model is an image of the world that we carry in our heads. It influences how we look at the world – what we see and notice, what we hear and listen, how we think and interpret, how we decide what to do and how we behave. Our view of the world, of ourselves, of our capabilities, depends heavily on our mental models that are formed based on our ideas, beliefs, and past experiences.
Mental models are both like a ‘lens’ and a ‘toolbox’ to see, understand and interpret a complex world. They edit what we see by framing what we look at. We focus on what we notice and ignore what is outside the frame. Mental Models influence how we understand and interpret the edited data and information. Looking at new information is akin to looking at a piece of a jigsaw puzzle; looking at an individual piece of a jigsaw doesn’t enable understanding of how the pieces fit together. To complete the jigsaw, we need to understand the relationship of each piece with a complementary piece. To understand new ideas, information, and observations, we need to position them in the context of other existing ideas. (Figure - Anchor)
Our decision of what to do is influenced by our ideas, beliefs, experiences and interpretations, the mental models that we use to bring to the task.
A mindset is a set of assumptions, principles, and methods held by one or more people or groups of people that are established - or well-accepted based on prior experience - that it creates a powerful influence for the people to continue to make choices and adopt (and accept) previous behaviors.
Mental models of organizations and business decision making
Mental models used in business context encompass the beliefs that individuals hold about what drives success in their industry - what customers to serve, what those customers want, how to price, how to organize, and which distribution channels to use, etc.
Every industry and each company has a dominant logic (assumptions/belief system / mental model) that ‘governs’ how industry participants ‘decide’ and ‘behave.’ The prevailing logic is how things ‘ought’ to be done. This influences key managers of the company – what they look for, what they perceive, how they interpret and decide.
Mental Models of startups
Entrepreneurs establish mental Models of startups.
Startups are nascent organizations. An entrepreneur starts with just a “belief” to “unsettle” an industry by making “space” in the market. They build a team of people who come from diverse backgrounds. To motivate them, the entrepreneur shares their understanding of what they are trying to do - the industry they are entering, how it works, how different they are, and why and how they will win (their “vision” and “mental model” of how the industry works). A startup's journey is the entrepreneur communicating their “vision” and “mental models” to all stakeholders - investors, team members, customers, etc.
Pivot as a change in mental models
In a pivot, the entrepreneur (and the team) changes direction, realizing that their beliefs about “establishing” space in the industry, “creating value” for customers, and “realizing” a price have changed. A pivot challenge is to change the team's mental model or craft a new mental model of the organization.
A pivot has a behavioral dimension that involves mindset change. And this has to factor in the mindset shift.
How to Pivot?
I recap the situation when the pivot decision is made.
1. One day, all an entrepreneur has in a new venture is a new set of untested hypotheses.
2. The odds are that one or more of the new assumptions may again be proven wrong. Pivots have uncertainty and risk. How does one know the shift in strategy will work?
3. You have to figure out what to do with the sunk capital. What will be salvaged or written off?
4. Does the pivot present growth opportunities? Why? How?
5. How much capital will be needed to implement the Pivot?
An entrepreneur who decides to pivot is restarting a business with more significant challenges – new uncertainty, the need for time, capital, managing stakeholders if money has been raised, and challenges of managing team members (motivating them to the same energy level).
For Pivots in late-stage businesses, entrepreneurs must identify the specificity and magnitude of change with well-defined success criteria, measures, and expectations. Gut-based decisions only burn cash. Benchmark metrics can be created using achieved performance metrics - market size, market access metrics, cost structure, margin.
I am a believer in capital efficiency metrics, even for startups. Pivoting isn’t an efficient choice because it consumes resources. Pivots delay scaling and lengthen the path to profitability. And may not always result in better outcomes.