In our analysis of growth-stage technology companies, a surprisingly common thread we see is how frequently a pivot can drive success.
Pivoting – changing or tweaking – a business model is common, especially in early growth-stage companies. There are several circumstances that may spur modifications to a company’s business model:
- After investing large amounts of money and time, the business isn’t making much progress, or the progress has plateaued.
- The business is not getting the traction expected from the targeted audience.
- The market is too saturated with competition.
- Customers are unwilling to pay the price for the business’ products or services.
- The operating costs are too high.
- The company’s value proposition doesn’t connect with customers, or only one feature resonates.
- The industry, or the business’ perspective of the industry, has changed.
When considering an iteration or pivot, a company should ask a few important questions to determine if a change to the business model will result in overall success.
- What is the timeline to change strategies and gain traction on a new path? After already having invested significant resources, one would expect the pivot to build on any existing successes to propel the company forward and breaking even sometime in the second year should be attainable.
- What adjustments will improve margins or profitability? After all, profitability is perhaps the one non-negotiable element to a company’s success.
- Will the pivot solve a known problem with some level of customer validation? Unvalidated assumptions can lead to failure, even with a great product, and customer validation is one of the easiest and lowest-cost ways to reduce that risk.
In the real world, a pivot could look like a manufacturer updating its business model from material fabrication to a licensing model, enabling the company to scale without huge capital expenditure and significantly improving profit margins. Or, a device maker may shift its focus to one component instead of the whole. It could also be a sales-focused company refining its strategy to sell its product to large organizations serving its consumers, rather than a direct-to-consumer model – or vice versa.
For technology companies pursuing financing, a pivot can make a business more attractive to a lender or institutional investor, if a few things hold true.
- The patent coverage remains relevant. This is key because it ensures the technology investment to that point will support the new business direction. Some patents are written broadly enough to withstand a pivot, but if that isn’t 100% the case, the business’ leaders should focus on confirming patent coverage for any new areas.
- The ability to continue leveraging existing business relationships also allows for a smoother pivot. This can mean maintaining key partnerships, utilizing the same supplier, or even targeting the same customers.
- The marketing strategy must change to reflect the specific modifications to the business. While a business wants to maintain consistency across its patents and relationships, marketing is the one area that almost always must shift.
- There must be customer validation for the pivot. This could come in the form of an increased pipeline, upsurge in contracts, or a solution to a pain point, for example.
Bottom line: market feedback is valuable. It can provide the roadmap for a successful pivot or business iteration, which are common in growth-stage companies. The key is using that information to improve the business model and margins, as that data will be significant in seeking financing during a transition.