Open Frog is an informal forum where anyone can ask and answer questions, or discuss anything related to innovation, entrepreneurship and start-ups. Earlier this month, there was a discussion about the timing and relationships between pivots, investors and revenues.
Pivots and Startups
The idea of a pivot comes from the lean startup methodology. Pivoting is a strategy for iteratively searching for a repeatable and scalable business model. The practice goes against the conventional model of creating and sticking to a conventional multi-year business plan.
Our mentor Bernard started the discussion by summarising in his blog post some common situations where companies find themselves pivoting:
- You have a working model with your product generating “bad revenues”, meaning revenues that are not scalable or it do not work in another geography.
- You need to pivot by building another product or service that might have a shot in generating good revenues.
- You might have nearly no money left and have to either ask existing investors to sink in money or find new investors to continue the story.
Is there a best time for a pivot?
Meng reminds us of what JFDI mentor Scott Rafer said in his mentor session with our teams: Pivots are for before you raise funding. After Series A, nobody wants to see a pivot.
In the old days things were more forgiving, but with the falling costs of software startups, teams should do their pivot at seed stage. Or accelerator stage. Or even pre-accelerator stage. Which is what JFDI has been doing lately, and it seems to be working: our pre-accelerator program Discover dumps startups into the hotpot to cook for as long as they need. We accept them into the regular Accelerate program when they float to the top. Then we focus on traction.
By the time you’re done with accelerator stage you should be able to demonstrate that you have peeled these particular layers of the onion:
a. product risk: can we build it?
b. problem/solution fit: do people care?
c. product/market fit: do they care enough to pay for it?
d. business model risk: are we making money or losing money on every unit sold?
e. team risk: is the team going to blow up because they can’t work together?
But that still leaves growth and scale:
f. market risk: how big is the market really and what distribution channels help us to reach it?
g. competitive risk: why is our competition kicking our ass?
Advice for mitigating risks and revenues
Bernard had 3 pieces of advice for founders thinking of pivoting:
1. Think about whether bad revenues sustain about 50% of the burn rate of the company while you work on the pivot.
2. Be critical about the pivot’s product-market fit.
3. Manage team morale. For me, this was the most important piece of advice he gave.
“Asian startups are not as well equipped with as compared to their Silicon Valley counterparts. Essentially, if the business team are not bringing revenues and are trying to pivot, it leads to the rest of team thinking that they are on a sinking ship.”
How to deal with investors when pivoting
There is a reason why everybody says startups should raise twice as much money as you think you’ll need: because the first idea won’t work out, and you need to survive long enough to try the second idea.
To answer the investor question of “how do we know the second idea will work better than the first?” The usual answer is that the failure of the first idea earns the domain expertise and insight needed to launch the second. But sometimes there is no second. Honesty about this element is an important part of the discussion you have with the investors.
You can read the full discussion from this Open Frog thread.
– Written by Joyce Huang
Thinking of starting your own business? JFDI Discover will help you find out if you really want to be an entrepreneur. It will reveal if your team is aligned to deliver results. And it will show you how to solve a real problem for customers who are willing to pay thus moving closer to a “problem-solution fit”.