Duet Partners
Tel: +44 (0) 20 7416 6630 / Email: partners@duetpartners.com

Is it time to pivot your startup?

6th May 2020

As Covid-19 forces many companies to rethink their business models, these are the key steps that will help turn the ship around

For some companies, the impact of Covid-19 poses an existential threat. When customers stop returning calls and orders dry up, founders are potentially faced with a ‘change or die’ decision.

For others, the impact might not be so immediately felt, but they can sense the downward slope of customer demand. Meanwhile, cash is slowly draining away and the prospect of being able to present a compelling proposition to investors is fading. Something has to change, and fast.

But adversity drives innovation, and already we have seen a slew of startups undertake a significant business model change - a pivot - to address new opportunities.  Many have repurposed their technology or market position to build new products and services to see them through the pandemic and beyond.

Even in the best of times, pivoting in early stage businesses is common practice and often leads to better outcomes. Our insights are that startups that pivot once or twice raise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2 times or not at all.

Pivoting is not failure, it's normal.

Despite these unusual times, our best practice insights remain the same: rapid impact assessment, keen market insight, and sound financial modelling are the core elements. Plus, to start, a clear plan of attack to galvanise the team and, before launch, a plan to communicate with all stakeholders.

In recent weeks we’ve helped a raft of early stage tech businesses implement such plans. Some are led by experienced founders and some by first timers. Most with less than 12 months of cash on hand and a few with much more. But the approach remains the same.

Here are our top 5 takeaways.

1. Steady the ship: have a clear plan

When the future looks very uncertain, keeping the team focussed and motivated is a priority for all leaders. For established businesses, the strategic review process that business schools teach provides the template.

But for early stage businesses a more agile approach is needed. Effective founders keep things simple and move quickly. Less time for everyone to brood over any uncertainty.

Founders that can quickly formulate a plan and rally the team around it will help steady the ship. Frantic action without a plan just creates anxiety. The first step is a rapid situation analysis.

2. Covid impact assessment

You will have already updated your financial model and your cash flow forecast will be driving your sense of urgency.

But before you know where you want to end up you have to be clear on where you are. Sounds obvious, but this is often overlooked. You need to come to terms with where the business is in its life cycle to understand the scale of what you are about to do.

The later in the lifecycle the more disruption there will be. But this will be managed disruption and you will be controlling it. For example;

A pivot for a venture stage business that has recently undertaken a scale up investment round can be a far more radical step than for a seed stage business still building its first MVP (minimum viable product).

Or, if you are a growth stage business and customers suddenly turn off the taps before the business is break-even, your costs will quickly start to eat you alive. You’ll be managing a bigger team, and just dealing with peoples’ anxieties will fill your day.

None of this is easy, so quickly building a picture of the scale of the task is key: In particular, will this be a full or partial pivot? A visual picture can really help here:

In an earlier blog, Startups evolve through discrete stages of development, we described the Customer Development Process. Over the years this approach, originally pioneered by Steve Blank in The Four Steps to the Epiphany, has been implemented by thousands of entrepreneurs worldwide. Many have built upon it and it forms the basis of the Investment Analysis Process we use at Duet to help startups prepare for a capital raising.

Our particular take on the model is shown diagrammatically below; this aligns each stage with a particular funding event. We use specific criteria for exiting each phase and these criteria are tailored for specific sectors and business models.

This particular example depicts a startup approaching the first scale up round (Series A).

The company is in the final stages of confirming Product/Market fit, nailing down the Go to Market strategy and validating the economics of the Business Model. If this is the point where the world suddenly changes, a great deal will depend on the extent of the pivot required:

Full pivot: The key insight here is that if the fundamental premise upon which the business is built has been swept away then the Problem/Solution thesis is no longer an imperative to companies in our target market. We are truly in full pivot territory.

Partial pivot: If, however, the original thesis is still sound and any impact is just temporary, we should be able to rework Product/Market fit and the Go to Market strategy as the dust settles, provided we have the means (cash runway) to survive to that point.

3. Gather your opportunity insights

Next, we need to know where we want to end up. What opportunities lie before us that will enable us to leverage as much of our current capability as possible? This is the hard part and requires fresh insight. What and where is the emerging potential that we can uniquely (and quickly) address? 

In his inspirational essay, How to build a breakthrough”, Mike Maples, Co-founder and Partner at US VC firm Floodgate, discusses the concept of 'backcasting': “Getting out of the present and standing in the future is the first key to finding a breakthrough.” Maples talks about ‘inflections’ and how these precede new markets:

Technology inflections involve exponential improvements in the price/performance of technologies like computation, sensor accuracy, bandwidth, and the like.

Adoption inflections involve nonlinear changes in the adoption rate of a technology.

Regulatory inflections involve changes in regulations that open up massive new opportunities.

Belief inflections involve contradicting long-held beliefs. Some ideas that are now considered heresy but might someday be viewed as reasonable.

In our Covid world, there are many such inflection points that are being accelerated, such as video conferencing (adoption inflection), and telemedicine (regulatory inflection).

Gathering such insights has become significantly harder under lockdown, yet this is where much of the ingenuity of effective founders lies. The process of discovery has changed and, in our ‘work from home’ paradigm, relies as much on remote research as it does on 1/1 customer interaction.

The importance of gaining such insight rather than undertaking a deep analysis of particular problem that already exists, is where the real value lies. As Maples says, “Insights are future scenarios that are exponential and surprising”.

Some of these future scenarios have just been catapulted forward by Covid.

4. Model the revised plan

As ideas emerge, trade-offs may need to be made. For example, quick wins may generate cash but may not form the basis of a longer-term growth story that will appeal to investors. But if the runway is under immediate pressure, tactical moves may be necessary.

To critically assess options with the team, two tools are vital in our view: a business model canvas and a financial model.

The business model canvas is a one-page summary of the key elements of your strategy. It’s your satnav for the path ahead and we have expounded on this in detail in an earlier blog. The real power of this tool is that it’s simple and visual; the management team can easily create and debate new ideas, quickly identifying knowledge gaps.

A sound financial model is critically important to then quickly run the numbers on new ideas. A well designed model is a scenario planning tool that enables the CEO and senior management to quickly see the economic implications of different business model assumptions. It's also a critical item for fundraising when the time comes. Again, this is covered more fully in an earlier blog.

Through the modelling process, you will sift out the new plan that will enable you to start executing on your insights.  

5. Communicate with all stakeholders

After an intense and highly focussed effort to get this far, a common mistake is to underestimate the importance of keeping stakeholders informed.

The key here is not to present your plan as a fait accompli. Explaining the process, your insights, the key assumptions, your financial analysis, and the risks, is essential. This is open book time – you are almost certainly going to be asking staff, the board, and your investors, for significant support.

Keeping your investors fully in the loop is critical. Firstly, their consent may be required before any changes are made. Secondly, you may need a bridging round to fund the changes necessary.

As you then launch into your new plan, external positioning becomes vital. Even though marketing budgets may have been drastically curtailed, some messaging is essential. As an absolute minimum keep your website up to date and use your blog, LinkedIn, and other free channels to post your news.

In summary:

  • Have a plan. Frantic action without a plan just creates anxiety. Pivoting is not failure, it's normal.
  • Make an impact assessment. You need to come to terms with where the business is in its life cycle to understand the scale of what you are about to do.
  • Gather your opportunity insights. Insights are future scenarios that are exponential and surprising. Find the points of inflection.
  • Capture the revised plan using a business model canvas and a financial model. Don't jump out of the frying pan into the fire.
  • Communicate to stakeholders, seek their buy-in not just their consent.

About the author: John Hall is CEO and co-founder of Duet Partners, a corporate finance firm that provides specialist funding support to high growth technology companies. His 30-year tech career began with major US semiconductor and software companies, and was based in the Valley during the late '90's. Before Duet he was CEO of a VC-backed consumer electronics company, sold in 2009 following several rounds of capital raising. In the past 10 years he has advised dozens of founders on the startup to scaleup journey and is a retained Board advisor to a number of UK technology companies.

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