Later-Stage Pivoting: Preemptive Turnaround Management?

The challenges of a later-stage pivot are BIGGER than thoseof an early-stage pivot. Thestakes are bigger, and a company that is achieving scale has already foregone asignificant amount of flexibility and nimbleness. More than ever before in the company’s life, innovation thatis more than incremental becomes very challenging.
Chegg, the online textbook renting platform, is currentlyundergoing a late-stage pivot that builds on its core business into anexpanded market opportunity with a new business model. Since thetextbook renting business is capital-intensive relative to other onlinebusinesses, the company faces unique challenges in the pivot process.

While pivoting at a later stage in the development of a techventure like Chegg is not exactly a turnaround situation, turnaround opportunitiescan lend some important insights into the challenges encountered in such asituation and the expanded skill set that a manager may need to be successful.

Length of the Runway
Like in any change situation, the amount of time availableto execute a late-stage pivot is very important. Usually, the amount of cash available to support theoperations of a business is the first issue that comes to mind when thinkingabout the amount of time left before a company has to shutter its doors. For a tech venture that has decided todo a late-stage pivot, having enough cash to pivot will most likely mean needingto raise more money. For manyreasons, including the capital intensiveness of the business model or howleanly a venture has been run, a company may not have the cash resources toexecute a late-stage pivot. Giventhe heightened risk profile of the company, raising money at this point willlikely involve a down round in terms of valuation. In turn, a down round involves a slew of headaches that the companyfounder / manager will have to grapple with.

Operational andFinancial Leverage
Leverage can severely complicate a late-stage pivot. A company that has crossed the chasmand has begun to scale the business, such as Chegg, has likely startedincurring fixed costs that enable it to benefit from economies of scale. Also, it may have already raised debtfinancing. Whether operational orfinancial in nature, leverage limits a company’s nimbleness and exacerbatesboth the company’s cash needs and the potential decline in valuation during apivot. Hence, undertaking a late-stagepivot requires a management team with both conviction and humility.

Re-sizing andRe-alignment
A company that has begun scaling has likely achieved bothproduct-market fit and, to some extent, alignment between its strategy andorganizational structure. A late-stagepivot, if large enough, implies taking a few steps back and unraveling some ofthe progress made along these lines. This may involve layoffs and new hires, even at the management level,asset sales, and significant resource re-allocation. Managing the re-sizing and re-alignment of a company whileensuring that it is moving ahead fast enough on the new opportunity can be verychallenging, requiring a talented management team.