“If and only if we can’t find any market for our current vision is it appropriate to change it.”
Pivoting is a natural part of running a start-up. The lean startup theory and hypothesis-driven entrepreneurship practically demand that the entrepreneur pivot at some point in the early stages of the business. Usually, pivoting is referred to as something that a founder does in order to achieve product-market fit. Once the founder finds product-market fit, it’s time to scale. Or so the theory goes.
However, are there situations where it makes sense to pivot after product-market fit has seemingly been achieved? The textbook rental service Chegg is currently in the process of such late-stage pivoting. Chegg began as a rental service for physical textbooks and is just now beginning to feature e-textbooks, homework help, and flashcard apps on their website, looking more like a portal for college students than a textbook rental site. Arguably, Chegg achieved product-market fit with their rental service (see Steven Carpenter’s TC Teardown: http://techcrunch.com/2010/06/05/teardown-chegg/). If we believe Mr. Ries’ quote above, it is inappropriate for Chegg to change their business model as they’ve already found a market for their current model. What considerations should be taken into account when pivoting post product-market fit? Here are some questions a founder should ask him / herself:
- How will your investors react? They invested in your original business and may not be willing to risk a change since the original business model has proven itself out. Investor reaction will also impact your ability to raise the funding necessary to pivot.
- How will your customers respond? In Chegg’s case, they are pivoting from a proven current customer behavior (renting physical textbooks) to a hypothesized future customer behavior (using e-textbooks and participating in an online student education center). What if the hypothesized behavior never materializes? Will you lose current customers by pursuing this new pivot?
- How will the pivot affect you and your employees? At a time when a start-up is supposed to be focused on scaling (post product-market fit), a pivot introduces an added layer of complexity. Suddenly management and employee attention is divided between how to scale the old business while also trying to achieve product-market fit with the new business. Can the organization realistically achieve both goals? Can it achieve both goals and still function as a lean organization?
Clearly, there are many stakeholders to take into consideration when attempting a late-stage pivot. Pivots that occur before product-market fit has been achieved create less friction: investors want the firm to pivot so they can make money, customer opinion is less relevant because there are likely few customers, and the employees want the firm to pivot so their equity is worth something. However, successful late stage pivots can offer multiple benefits to the firm:
- Late stage pivots can pre-empt competition or imminent changes in consumer behavior. In the case where a start-up knows with some certainty that their market is changing, the firm may need to pivot in order to remain relevant. In the case of Chegg, it is a very reasonable assumption that their market (students) will transition to using e-textbooks in the near future, so a pivot to e-textbooks, although late-stage, may be necessary.
- Late stage pivots may help a company cross the adoption chasm (from early-stage adopters to mainstream). A company may achieve product-market fit with their target consumers, but, in doing so, may realize that their target market is but a small niche within a much bigger market. A pivot at this stage can allow the company to move past the chasm and into a larger market.
- Late stage pivots can improve the monetization model for a start-up. In particular, if a start-up has a particularly lumpy revenue model (e.g. due to seasonality) or if the business model has high fixed costs (e.g. inventory), then a pivot to a model with smoother revenue or lower fixed costs may be hugely beneficial to the business in the long run and help pre-empt competition.
Late stage pivots can offer large benefits to start-ups who handle them correctly and pivot for the right reasons. In reality, the line between scaling and pivoting is blurry. Is Chegg’s move to e-textbooks and a student platform really a pivot or is it simply scaling the business? When Rent-the-Runway began renting accessories and selling cosmetics, were they pivoting or scaling? Sometimes start-ups need to start with a simple business proposition like renting textbooks in order to achieve the scale and data needed to realize a larger vision. As Eric Ries puts it:
“Successful startups change directions but stay grounded in what they've learned. They keep one foot in the past and place one foot in a new possible future.”