Late-stage Pivot

by Lucas Suzuki

Many times it can be quite difficult to successfully pivot a company in its early stages; and with time, this only becomes more challenging. Looking at Chegg’s late-stage pivot example, people can say that after being founded in 2007 and building a successful book-rental business, the company had three things going for them: 1) Chegg knew enough about the book/education market and its customers (through a series of hypotheses and tests); 2) while still missing some key officers, it had recruited a team of seasoned executives to run the business; and 3) Being on their way to hit $130M in revenues in 2010, Chegg had enough resources to fund its late-stage pivot.

However, in deciding for a late-stage pivot, I see three main areas of concern that Chegg and other startups have to address: 

  1. Employees: while many people going to work for startups make their decisions based on their trust in the founders, the majority of employees still join startups based on the vision for the company that was sold to them. They joined because they believed in the idea and potential for the business, and changing it can cause frustration and anxiety in the team. Not only is it hard to have to sell the new vision to them, but also depending on how often and by how much a company pivots, it runs the risk of having to do a new round of hiring and firing, because they lack the necessary skills and experience to develop the new product. 

  2. Structure: The later the pivot comes, the more the company would have already invested in its business, both in terms of physical infrastructure and internal processes. This problem gets worse if the startup was not disciplined, and started scaling and investing before finding product/market fit. Having to adjust your structure makes pivoting more challenging. In Chegg’s case, just prior to the pivot, the company announced a $27M investment in an additional warehouse; while logistics investments are key for the core business, they are less useful for their future education platform approach. Also, while most startups, even at a later stage, are much less asset intensive than Chegg, all still have to cope with adjusting their internal processes to the new business model. Here, communication, flexibility, and coordination are the key challenges to be addressed. 

  3. Investors: being a key component in the decision-making process of any company, selling late-stage pivots to investors is challenging. I see two possible scenarios: in the first one, and most common, if the reason for the late-stage pivot is that the company’s business model failed, investors might oppose the new plan, and instead start asking whether it’s time to pull the plug and return the rest of the money to shareholders. In the second scenario, the company is looking to pivot despite success with its plan. However, in this case, success does not make the selling much easier. Success and the possibility of a big outcome give investors a big incentive to push the company to focus all its resources on scaling, while pivoting or investing in a new model will certainly steal management’s time and bandwidth. 

Perhaps a general rule for pivoting is: the later the stage, the more difficult, and therefore, the more clarity the new vision/strategy has to have. In any case, pivoting a startup and selling the new vision to employees and investors is difficult and takes a skilled CEO and a very compelling story. Chegg had both – Dan Rosensweig and the threat of the transition to digital books.