Is Pivoting a Last-Ditch Effort or a Sound Business Strategy?
The term “pivot” has become a buzzword referring to a significant business change -- ranging from mild to dramatic. A pivot is usually intended to help a business recover from a tough period, or survive after experiencing new competition or other factors that make the original business model unsustainable.
But, are startup pivots really a sound business strategy, or merely a last-ditch attempt to save a failing business
Anecdotally, there are countless examples of startup pivots, some of which succeeded while others failed.
For example, Twitter originally started as a platform called Odeo, meant to serve as a distribution channel and social network revolving around podcasts. When Apple launched iTunes podcasting, Odeo couldn’t compete, so Odeo’s co-founders Evan Williams and Biz Stone partnered with an Odeo employee (Jack Dorsey) to create Twitter from scratch.
In response to competition, the founders shifted their original model.
Of course, there are also examples of failed business pivots. Flowtab was a great idea in theory -- it allowed bar patrons to order and pay for drinks quickly using their smartphones, with a central tablet at the bar managing orders.
Unfortunately, neither bars nor patrons wanted to pay extra for the service, so Flowtab attempted to pivot to sell advertising to alcohol producers. After that failed, it tried yet another pivot, pitching to sports stadiums, but another competitor had already beaten it to the punch.
Studying successes can lead to survivorship bias, so let’s look at some of the failures. CB Insights’s collection of 242 startup post-mortems can illuminate the problem to some degree.
According to that study, approximately 10 percent of failed startup entrepreneurs surveyed attributed their failure at least partially to a “pivot gone bad,” while 7 percent attributed it partially to a failure to pivot. These stats don’t give the complete picture, of course; a business that needed to pivot in the first place is a business with other, more complex problems (and motivations for failure).
Similarly, a business that “failed to pivot” must have been pushed out by other challenges. For example, 42 percent of businesses cite a lack of market need as a reason for startup failure (by far the most common citation).
Still, the prevalence of both a missing pivot and a pivot gone bad indicates that pivoting is an important option to consider for growing startups -- but one that can go wrong. Given that a pivot could feasibly fix almost any other failure motivator on the list, pivoting shouldn’t be considered an act of desperation, but rather a reasonable response to some fairly common issues and conditions.
The business reboot
Few entrepreneurs pivot for the hell of it. Oftentimes, entrepreneurs face a tough decision in a situation with mounting challenges; they may be losing money or facing insurmountable competition. Accordingly, they know their startup can’t survive the way it is. A pivot is sometimes the only logical option if they want the business to survive.
Pivots are also fairly common. According to venture capitalist Fred Wilson, “Of the 26 companies that I consider realized or effectively realized in my personal track record, 17 of them made complete transformations or partial transformations of their businesses between the time we invested and the time we sold.”
Though the sample size is small, this suggests a two-thirds probability that a business will require a pivot at some point to succeed.
What you lose
So what are the downsides of a pivot? If your business is already starting to fail, the radical overhaul of a business model is a way of cutting your losses, designed specifically to limit losses rather than accrue new ones. Still, pivots can be expensive; if you invest $1.5 million in a business up-front, you may need to pour in an additional $1 million for the resource, staffing and infrastructural changes necessary to sustain the change.
There’s also a reputation cost. If your business experiences hardship and needs to pivot, it’s an understandable situation. If your business has already pivoted and experiences hardship again, requiring a second pivot, a pattern has appeared; and very few startups survive a second pivot. Investors will have lost two funding rounds, and will blame poor decision-making and personnel for the loss.
So, is pivoting a sound business strategy? That’s a subjective and open question, but the sheer number of successful business pivots and the expectations of venture capitalists indicates that there’s more to a pivot than merely a last-ditch strategy to escape certain death.