Every industry has its cliches and the term ‘pivot’ is one that is used ad nauseam in startup and venture capital.
Pivot has become synonymous with a spectrum of decisions and acts committed by founders.
A minor course-correction can be classed as a pivot. A change of heart by a founder can be referred to a pivot. And then there is the data-driven, wholesale change in company strategy due to a lack of product/market fit which is, in fact, a pivot.
Every once in a while a conversation about a topic is started by people with deep, lived experience. That happened this week about the pivot. Two VCs, Fred Wilson and Hunter Walk, shared their perspective on what it means to pivot. I have reposted their thoughts below because I enjoyed their perspectives, am aligned with their philosophy and think more founders should consider their advice.
The Pivot is celebrated in startup land. Huge successes like Twitter and Slack are all the results of pivots. So surely pivoting is a good thing, right?
Well, I am not so sure. And I certainly don’t want entrepreneurs to think that pivoting is the right thing to do when their original idea fails. It may be better to let the failing startup fail and start over again from scratch.
I am not talking about the slight pivot; making a change in business model with the same product, selling a slightly different product to the same customer, going up market to a different customer. Those are not really pivots, they are evolutions that every startup company goes through.
I am talking about the hard pivot. Changing the product, market, and business entirely. Essentially starting over from scratch.
And I am not sure hard pivots are good for anyone.
Here is why.
If you raise funding for a startup idea, you will take some dilution and you will have a bunch of investors who backed you and your idea and are believers in it. You will have assembled a team that you built with the original idea in your mind.
If that idea fails and you pivot into a new idea, you will take all of those investors, team members, and dilution with it, whether or not they are excited about it.
You can always swap out old team members for new ones, and so the team issues are real but probably not as significant as your investor and dilution issues.
If you choose the pivot approach, you will have investors for the life of the pivot who did not choose to back your new business and may have no interest in it other than their financial interest.
But the bigger issue is the dilution you take into your next startup. I have never understood why entrepreneurs would want to use a company and a cap table that they no longer own 100% of to do a new startup. They are just carrying baggage that they don’t have to and probably should not carry.
I understand the argument that starting a new company by pivoting with cash in the bank and a team that is already built is attractive and giving those back and starting over from scratch is harder. But the harder path is often the best path.
And the easy path is often the harder one.
If you were able to do a startup from scratch once, I would imagine you can do it again. And doing it again allows you to keep a lot more of the new company and custom build it from scratch, putting together the ideal team and the ideal investor group.
I have always suspected that entrepreneurs also choose the pivot over some sort of loyalty to their investors. If that is the case, I would like to say that this investor does not want any of that misguided loyalty.
The truth of seed and early-stage investing is that the failure rates are very high. We write off investments in failed companies in every one of our funds at USV, usually multiple times. The Gotham Gal, who invests much earlier than USV, writes off investments at an even higher rate.
So early-stage investors are used to failing. It is built into our business model. What we want in return for accepting this high rate of failure are the spectacular successes that we get when everything clicks; the right idea, at the right time, with the right team, the right investor group, and the right execution.
And while pivots can deliver all of the “rights”, I am not sure that they do that at the same percentage as the startup from scratch, given all of the baggage that they are carrying.
And there is nothing I dislike more than carrying on with something when I’ve lost interest, and worse, the founders have lost interest.
So my view is if you’ve failed, accept it, announce it, and deal with it. Shut the business down, give back the cash, and rip up the cap table. Then do whatever you want to do next. If it is another startup, do it from scratch and keep as much of it as you can. If it is something else, well then do that too.
Startups are not indentured servitude. And I have been around some that feel like it. That sucks. I would encourage everyone in startup land to reject that approach and focus on a better one. There are so many options for things to work on that everyone should make sure they are working on the right thing and excited about it. Anything that gets in the way of that is suboptimal in my view.
Fred Wilson’s ‘Pivot or Fail‘ post earlier this week was especially timely for me. Now that my friend Jason Jacobs shared his own experience of winding down Two Way Labs
, I can more easily contribute my opinion with a specific example. As Jason wrote:
I made the hard decision at that point to give the remaining funding (~87% of the initial capital) back. This was not an easy decision. And I feel terribly for the false start. But if I was feeling this run down already (which I was), and this confined and uninspired, there was no way I was going to have the stamina to see this process through to a successful enterprise. If I hadn’t made that hard decision, I am convinced the outcome would have ultimately been the same, only with me a lot more run down, the team more frustrated, and ultimately returning even less investor capital. Sometimes the hardest decisions are also the ones that are most necessary to make.
Across our first 45 core investments (Funds I and II), we’ve had three wind-downs which come to mind. One was the result of a cofounder breakup. The other was a combination of struggling to find PMF and the realisation by the CEO that she didn’t want to run this type of business. And most recently, Jason’s, which he describes in the link above. All three were very much the right decision.
Only Jason’s was in the “hard pivot” category that Fred describes (“Changing the product, market, and business entirely. Essentially starting over from scratch.”) but we’ve definitely had some “soft pivots” which probably should have just been shutdowns and some “soft pivots” which resulted in tremendous successes. When they’re at seed stage, we’re deferring to the founders’ decisions but also trying to help them understand the challenges associated with a hard pivot if their cap table isn’t supportive of the direction.
Sometimes founders think their VCs want the hard pivot – that the goal is to keep the company alive no matter what – or that if they don’t show ‘grit’ they’ll never get funded again. My opinion? Startups are really hard. If you don’t have a mission or problem you’re passionate about, where investors are aligned on the business, and it’s still early stage, you’re better off returning the cents on the dollar. We’re prepared to take the risk and redeploy.
At the same time, investors should give the founders some space to figure out if they want to push on or not. A “hard pivot” sometimes requires laying off the rest of the team and getting back to the garage days of idea generation. Doing that for 30, 60, 90, 120 days isn’t a waste if the founders are inspired and want to continue working together. But I’d suggest at the end of that they “re-pitch” their lead investor(s). If they’re not supportive it can be easier to restart the business altogether with the new idea than it is to push onward.
One last thing…
Expect to course-correct
on most if not all aspects of your company as you learn but don’t mistake those evolutionary events as pivots.
Pivots are data-driven, wholesale strategic changes that require calculated consideration. They are painful to live through but they can catapult a company to success proving the timing is right, luck is in your side and as Reid Hoffman says if you slash and burn everything that isn’t working.