Understanding the possibilities and pitfalls of startup pivots

Pivots are hard; founders who have navigated them successfully share their learnings

Pivots are something of a rite of passage for startups. Giants like Slack, PayPal, and Instagram all pivoted their way to unicorn status. However, a radical redirection of a startup is hard to embrace and even harder to pull off. The stories of these founders offer lessons on when a startup may benefit from a pivot and how to navigate it successfully.

Charlie Javice, the founder and CEO of Tap’d, was on the brink of signing a $10 million Seed round to launch her new business focused on providing an innovative credit scoring solution for college students. Tap’d had built a team of 11, developed a prototype, and secured coveted office space in Manhattan, thanks to a friends and family round. Credit industry experts had validated the concept and the business appeared to have strong momentum.

Then, the unexpected: Due to industry regulations, the credit score agency envisioned would only work if re-incorporated as a credit union. The restrictions and slow growth of a credit union ran counter to everything the team had worked on. It was time for a pivot.

“I walked away from that term sheet and re-envisioned the business plan to focus on helping students directly to get better loans,” Javice says. All but one of the team members were abruptly let go. An investor helped to cover the outstanding payroll and rent. “Then we started from scratch,” she says. Today, the company, rebranded Frank, is a 25-person startup backed by $15.5 million in venture capital. Another round of investment is expected later this year.

Despite her success, Javice says she “wouldn’t wish a pivot on anyone.” The experience was painful and soured relationships with members of her team. “It’s not always pretty,” she adds.

Making the Right Call the Right Way

Launching a business in a new direction isn’t for the faint of heart. It’s also not uncommon in startups.

Pivoting tracks with concepts of developing a minimum viable product and rapidly iterating to find product-market fit. Many founders start with one idea and evolve the concept into another. It can pay off: Slack started out as a gaming site; Instagram’s founders initially built a location-based app. Pivoting grew these companies into giants.

More than anything, a successful pivot hinges on execution. Javice moved quickly and decisively once she realized the regulatory hurdles were impossible to overcome. Many employees were surprised and left slighted — a lesson she takes on the importance of clear communication in critical times.

There are difficult questions to be answered and tradeoffs to assess from start to finish: Can the challenge be overcome? What will it cost in resources, time, and money? What are the hurdles and costs of chasing the new opportunity? Should the team focus on work outside normal scope? Is this just a distraction or a potential new market? Does the product have value to others, and if so, is it worth tearing up the business and starting fresh? Is there even a choice?

The answers, of course, will vary depending on the situation. Recognizing the dynamics that demand a pivot and understanding the journey that follows are crucial survival skills every entrepreneur should know.

Recognize and seize new opportunities

Not all pivots are driven by crises. There are times when an original idea has traction, but a new, better opportunity presents itself. The trick is to spot it early and commit.

Consider Nearsay, a hyperlocal publisher launched in 2011. The company quickly won over users and local businesses, capitalizing on the trend for niche content at just the right moment. Nearsay was staffed, marketed, and funded around this idea.

However, as Google, Twitter and Facebook were becoming necessary platforms to reach local customers, many of Nearsay’s customers had no idea where to begin, and leaned on the company for guidance on digital marketing campaigns. While that pushed Nearsay beyond its intended scope, it became clear that guiding customers through this new digital landscape had lucrative potential. “We quickly realized we had a service business,” says co-founder Trevor Sumner.

Once Sumner and his team recognized the opportunity, they moved quickly to reshape the company. Significant changes would be required to team infrastructure, mission, branding, and messaging. Nearsay would revert to its parent company name, LocalVox, and become a marketing services business. The team of editors would largely be replaced by marketing and sales talent.

The root of LocalVox’s success was an unwavering commitment to the new opportunity. Perhaps the biggest challenge was in rallying employees around the new mission. “The inertia people have is tremendous,” says Sumner. “You have to be really, really diligent to look for the before-pivot behaviors and snuff them out with real fervor.”

The effort was ultimately worth it. LocalVox grew into a leading marketing services business and was acquired by a subsidiary of the Blackstone Group just three years later.

Think Broadly About the Value Already Built

A pivot doesn’t necessarily require a completely new start. Often, legacy products or features prove highly useful — just not the way imagined. Slack’s original gaming product never gained traction, but the internal messaging tool the founders created became the foundation for the office communications behemoth that Slack is today.

As a founder, be open to the possibility that new ideas and opportunities may present themselves as byproducts of previous efforts. When they do, think through smart applications and business models. Josh Anton, the founder of Drunk Mode, an app preventing users from making embarrassing late-night calls, did just that after his original plan hit turbulence. Drunk Mode gained traction — mostly with college students — after MTV heralded it as “your new best friend.” The third-party location-tracking software built into the app, however, was draining users’ phone batteries. “I knew, there was no way the economic model for location would work if it was draining batteries,” says Anton.

The team set to work on developing its own, more efficient location-tracking software. Soon, they realized that for all its success, the market for Drunk Mode was limited. “We had validated our product-market fit, but we may have overestimated the [size of the] market,” Anton says.

As the new location software topped expectations, Anton began thinking about what he could do with it. He quickly identified dozens of location-based marketing companies as potential competitors and mapped out their areas of focus. In doing so, he uncovered an open opportunity to capture location data from a network of publishers. The company changed its name to X-Mode and now reaches 30 million people a day from the apps, websites and out-of-home media that leverage its location data.

Getting Everyone on Board

Of course, in any major business overhaul, buy-in from key stakeholders is imperative, starting with the investors and board. Javice’s board happily supported her decision to pivot Tap’d and came back with a term sheet once the new business model had been proven. For Nearsay, a healthy new revenue stream easily convinced the board to get behind the new direction. X-Mode’s Anton waited to tell the board until the company had spent nine months developing the new product. “They thought it was amazing,” he says.

Other stakeholders can be equally important. Javice, for instance, alienated her initial team by continually peppering them with good news, only to suddenly lay off most employees. She partly blames herself, acknowledging she handled the communication poorly, sparking surprise and hard feelings.

Sometimes, the founder is the last stakeholder to come around. “The trickiest part for founders is walking away from your baby and starting fresh,” says Ivan Gaviria, a partner at Gunderson Dettmer, a Silicon Valley law firm that has advised startups for decades. “Being able to say, ‘Hey, what we’re doing is not going to be big enough or fast enough.’”

That was the case for Anton: “For me, the hard part was shutting down Drunk Mode, hard for my ego and my soul, but I had a fiduciary responsibility to our investors. So I made the hard call.”