In 2009, a group of founders launched Tote, a location-savvy mobile shopping app that could track prices of clothes, shoes, and so forth. The shopping app did not take off – in part because they were too early in the game. But the founders made an interesting observation: Although people were hesitant to shop from their smartphones, they seemed very interested in compiling their dream collections and sharing those with their friends. This insight was the genesis of Tote’s hugely successful pivot to Pinterest. The success of Pinterest is there for all to see.
Eric Ries, the bestselling author of The Lean Startup, describes a pivot as a “structured course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth.” Stated simply, a start-up pivots when it changes direction in ways that are inevitable for business survival if the market realities have changed. For a pivot to be successful, founders need to make sure that pivoting is indeed necessary, and they should not simply get swayed by the flavour of the season. When Tote staged a successful pivot, Pinterest emerged, taking the company in a new direction that users valued.
In my post on creating opportunity, I talked briefly about what I call bright shiny objects (BSOs). These are attractive business ideas that you see floating around while you’re already pursuing your original idea. An encounter with a BSO often makes entrepreneurs wonder if they should give up their current pursuit and chase the BSO instead. After all, it is bright and shiny and therefore attractive.
I recall an example of an Indian IT services company back in the late 90s, at the peak of the dotcom boom. The company was doing fairly well for itself, and was often spoken of in the same breath as some of today’s IT services giants. The company launched an extremely ambitious consumer portal that created headlines and attracted considerable investments. But when the dotcom bust brought the portal crashing down, the company nearly had a kiss of death because it had lost ground in its primary business of IT Services: Clearly, it had taken its eyes off the ball.
That brings us to the question: How do you know that the new direction you are contemplating for your business is a successful pivot in the making, and not just a bright shiny object? I would propose three pitfalls to avoid.
Unequal information makes success probabilities hard to compare
When you find yourself considering a new opportunity while you are already pursuing the current one, it is important to compare the two opportunities dispassionately. That will help you evaluate if the new opportunity is indeed more promising. These situations often present the problem of unequal information: You know much more about the current opportunity, and relatively little about the new opportunity. Having unequal information makes it hard to compare success probabilities.
Often, a case of unequal information can lead to flawed decisions. The grass is always greener on the other side, right? The barriers you encounter in your current project tempt you to abandon it in favour of a seemingly clear path offered by the new opportunity. The truth is that the BSO has its problems too – you just don’t know them because you haven’t trodden far enough down that path. Stated differently, there is a case to be made for sticking to the opportunity you are currently pursuing, because you are further along and therefore better informed in that pursuit. One might even argue that your encounter with obstacles is a sign that you are closer to crossing the barrier that others may not yet have discovered.
Unequal information skews our decisions not just when it comes to investing in new products or technologies, but also when exploring new geographies to market your product. A certain market may look attractive because you simply don’t know what problems exist there.
Seemingly small changes can turn whole business models upside down
One way in which many founders rationalize chasing a BSO is to view it as being simply an extension of what they are already doing. However, such similarities can be deceptive and superficial. That seemingly innocuous extension can impact your business model. The business model describes how you create and deliver value, to whom, at what cost, and how you benefit from it. It has several components including value proposition, customer segments, key resources, revenue streams, and so forth. Just because your new direction delivers a similar value proposition to a similar customer segment it doesn’t follow that you’re equipped to enter the market: There may be several other components of the business model that may not be compatible with the new direction.
For example, National Semiconductor Corporation is a classic case in point. Till the 1970s, the company’s primary focus had been semiconductor design and manufacturing. Anticipating a growing market demand for gadgets, the company tried to make electronic consumer products in addition to the chip technology that went inside them. But it soon realized that its business model was simply not well suited for retail manufacturing. While digital gadgets did become popular in the US market, the company suffered huge losses.
Again, this is not to say that you must never diversify. Instead, if your pivot requires you to change your business model, make sure that you think through all consequences.
Stakeholder alignment is never a given
If you’re looking to change the direction of your business, then your investors and employees need to be aligned to the new purpose. If your investors put money into your business based on a certain promise, wouldn’t they expect you to get their buy-in before you change horses mid-stream? Similarly, if you hired employees to execute on a certain business model, you need to ensure that they are interested and equipped to contribute when the model changes. For example, if you are a discount retailer moving into the premium segment, the capabilities of your current sales force may simply not be aligned to that move.
This article doesn’t intend to discourage founders from pivoting if it makes sense to the business. But the problem is that, far too often, founders view business difficulties as a cue to trigger a change of direction, when that may not be required or even desirable. Pivoting can be a life-changing decision for your business. In many ways, it’s almost like starting a business with a new DNA. So, do it if only if it truly makes sense, and don’t ever expect it to be easy.