Later-Stage Pivoting: Preemptive Turnaround Management?

by Jesse Garcia

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.

Read More

The Late-Stage Pivot: Some Considerations

by Jocelyn Whittenburg

“If and only if we can’t find any market for our current vision is it appropriate to change it.”
—Eric Ries

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:

1. 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.
2. 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?
3. 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:

1. 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.
2. 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.
3. 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.”

Read More

The Varsity Entrepreneur

by Trina Spear

Imagine a high school football field.  Fall 2009.  Division Championship.  Sean Murphy, starting quarterback at Riverview High, throws the 80-yard touchdown pass to win the most exciting game of his young career.  Sean has been a very successful quarterback exploiting this exact play, the long pass.  As the clock runs up, the team hoists Sean onto their shoulders and carries him around the field.  As he struts through the halls, he feels the eyes on him and grins as people pat him on the back.  He is on top of the world – he is the star on the football team, has earned straight A’s, has recently received football scholarships to Northwestern, Wisconsin and Harvard and to top it all off, his girlfriend was just voted homecoming queen.

The following month Sean finds himself in a tough position playing for the Conference Championship: down by 4 points, 45 seconds left in the game, forty yards away from the end zone.  Unlike in other games, worry and uncertainty consume him.  Thoughts pour through his head – what if I mess up the play, what if I get injured, what if my girlfriend leaves me for a lacrosse player, what if I lose my scholarships?  Coach Kypriss pulls Sean aside to go over the upcoming play.  He tells Sean to throw the ball down the field to wide receiver, Bobby Hunter.  Sean slams his helmet onto his sweat drenched head and walks back onto the field, confident on what needs to be done.  He has executed this play a million times.  Fourth down and five.  Hut hut hut.  The ball is snapped into Sean’s hands.  As he runs left to get into position, he notices Bobby is covered on all sides.  Sean quickly shifts his mindset from the potentially blocked pass to other opportunities on the field.  Sean dodges two line backers and catches a glimpse of wide receiver, Jonathan Warren.  He quickly pitches the ball to Jonathan, who runs the distance for the touchdown.  Riverview prevails.

Although very few areas in life mirror the types of fanaticism surrounding high school football, I hope to make the comparison that start-ups feel much of the same trepidation that Sean felt once they attain success.  Success can be much more stressful than failure.  Once you are the big time quarterback on the best team or the founder of the top company on TechCrunch, everyone is looking to see your next move which makes that move appear riskier than it actually is.  The stakes are higher and success can paralyze entrepreneurs if they do not use it to fuel continual improvement. 

In this vein, it is easy for successful athletes and entrepreneurs to get stuck on a path and not adapt, to try to shift the environment to fit a business instead of the other way around.  Businesses like Chegg and foursquare have gained much initial success – lots of angel and VC money, millions of users, and extraordinary PR.  At this crucial point, these companies, among others, should not fear moving away from their core businesses if they need to in order to remain competitive.  In the end, if the right move is for Chegg to shift into the digital business, they should do so and not fear the sunken investment made up until this point.  If the right move is for foursquare to target and monetize local merchants, they should do so and not worry about alienating their current user base.  Not all is lost in changing directions – these start-ups are much better positioned to find new opportunities given their experience, current set of overlapping capabilities, and better understanding of the changing landscape.

I urge entrepreneurs at whatever stage they are in to continue to improvise – it’s the only way to keep winning the game!

Read More

You Can Always Extract Something From Scraping

by Alvaro Febrel

More often than not, startups are ignored by big companies when seeking help. To make things worse, sometimes a startup’s business model relies on established players to succeed. “Data Aggregators” are a good example of this, as they use other companies’ data to provide new services for customers (Tripadvisor, Kayak, Cake Financial and Chegg are examples of companies that in one way or another aggregate data from different sources). The issue is, what can a data aggregator do if its sources of information don’t collaborate?  The answer: scrape!

The term “Screen Scraping” is used to describe software that reads and extracts information from data that was intended for display to an end-user, as opposed to reading and extracting the same information from “non-manipulated/machine-oriented” data. Screen scraping is usually considered an inefficient way to get information, as it depends on how the end-user output is displayed. For instance, if you want to know today’s oil price, you could i) connect to a broker database and extract the value from there or b) create a program that logs into the broker’s website, looks up for the commodity, and reads the number that is placed in a graph, for example. If the broker changes the layout of its graph or website, we would have to tweak the program to extract the correct value.

Despite being a buggy solution, I believe data scraping can be very useful and could be a lean way to go when:

1. There is low fragmentation in the market or most of it is concentrated with a few players - Using the 80-20 rule, scraping would give us a fast foothold in the market.
2. The industry is stable and not evolving too fast - Otherwise, the likelihood of having to constantly patch your code would increase.
3. There is little multi-homing - Customers who use multiple sources of information would demand them to be aggregated in the same place and hence it increases the number of sites we would need to scrape, which becomes inefficient.
4. The market has network effects that would fuel virality- Scraping would lower the customer acquisition costs and solve the classic chicken-and-egg problem that many platforms face by “acquiring” cheaply one side of the platform. When the other side of the platform buys in, then the company could “pivot” and would have bargaining power to negotiate a more seamless data supply. 

I tried to test these hypotheses through the lens of 2 companies that used scraping: Cake Financial (website for consumers seeking to improve their investment portfolio performance) and Chegg (website for student book rentals)

	Cake Financial	Chegg
Low Fragmentation, High Concentration?	My guess for this is that the market was fairly fragmented with no online broker having a particularly big market share	My hypothesis is that by 2010, with only a few online book retailers such as Amazon, you could provide 95% of the books in the market.
Is Industry Stable?	Yes. I would say there’s been little innovation in online brokerage in the last years	Yes. By 2008-2009, I believe online bookstores did little experimentation
Is There Multi-Homing	Yes. Steve Carpenter, Cake founder and CEO, mentioned how individual investors had many accounts and they were requesting to have all their accounts linked to Cake Financial.	No. There are many online retailers that customers may use to buy their books, but this cannot be considered as multi-homing.
Are There Network Effects?	Yes (in theory). Although there was no virality as top performers had no interest in sharing their portfolio strategies.	Yes. Indirect Network effects of a 2 sided platform. Besides, both word of mouth and the “plant a tree” initiative propelled virality.

For Cake Financial screen scraping turned out to be the wrong decision as it consumed a lot of the company resources (multi-homing increased the number of sites that had to be screened) and the payoff was small given its little virality. For Chegg, screen scraping was a tool that allowed them to grow quickly and gain market power.

To summarize, I would say that data scraping may not be the best way to run a company long-term, but it can definitely be a good intermediate solution that could propel the growth of a start-up under certain conditions.

Read More

Post-Product Market Fit: Happily Ever After or Just the Beginning?

by Andrew Perlmutter

Until yesterday’s class on Chegg, I thought all of the complicated dimensions of lean startup methodology revolved around getting to product-market-fit. These issues include (1) the tension between being hunch-driven and being data-driven early on, (2) having difficulty determining whether you have actually achieved product-market-fit, (3) pivoting too much (or too little), (4) identifying whether your business fits into the special set of companies that should scale prior to achieving product-market-fit, and (5) knowing when to raise additional capital.  However, I thought everything cleared up once the business reached product-market-fit. You raise money, scale the business, and become a significant business. Game. Set. Match.

Of course there are several aspects of the business that still need to be sorted out once you start scaling. For example, as the class learned from a very insightful presentation given by David Skok, the business must figure out how to build a cost-effective sales and marketing machine. And the Mochi Media case revealed that even after scaling, some businesses must add features that better monetize their customers. Addressing these issues involve action-steps such as tweaking the business’ conversion funnel and adding virtual currency to the business’ product set. While these actions are important, they are tweaks rather than fundamental changes to the business model.

And then we discussed the development of Chegg. Here’s my version of Chegg’s history thus far:

1. Chegg started as a marketplace for college students but was not successful.
2. With funds running out, Chegg pivoted to exclusively renting textbooks and saw positive results in 2007.
3. With these results, Chegg raised more money and fully proved that the business had reached product-market-fit in 2008 by generating $10 million in revenue.
4. At that point, Chegg raised “foot-on-the-gas-pedal” money and scaled the business to revenues of $135 million in 2010.
5. Yet, despite scaling in a major way, Chegg faces great uncertainty both because new competitors have entered its market, and more importantly, because the market and its entire value chain is about to undergo a major transformation.

Step 5 completely upended my view of lean startup methodology. Once the business scales, everything is supposed to work itself out. However, it is only a matter of years before Chegg’s core business of renting printed textbooks vanishes entirely. This situation is very problematic because Chegg has already sunk a lot of money into the ground to scale this soon-to-vanish core business. Running it’s massive warehouse and intricate infrastructure is very expensive and necessarily influences all of the decisions the company will make. For example, even though the founders seek to transform the business into a one-stop shop for all of the academic needs of college students, they still plan for textbook rentals to remain at the core. But of course this is the plan: no one would build an expensive and currently scalable operation only to turn around and blow it up (exceptions: Netflix, IBM, others?).

And it is precisely this fact that slows them down and creates the opportunity for new startups to step in and eat their lunch. In other words, the founders know they must pivot, but because they are no longer lean, they are unable to pivot with speed and agility. Even if the founders do decide to blow up their current operations to meet the changing landscape, they will have to build a completely new set of capabilities. This is a scary prospect because it is very difficult for an established business, with personnel and processes tailored to specific business needs, to reinvent itself. Once again, this opens the door for new entrants.

Perhaps I am overstating the severity of situation that Chegg currently faces. The business is viral, provides high-quality service, and has garnered great customer loyalty. This suggests that switching costs may be very high. Moreover, it may be a decade before eTextbooks make the printed variety obsolete. In other words, it is entirely possible that Chegg will be a big winner.

However, the threat / opportunity created by the digital frontier has made be realize that successfully scaling the business is nowhere close to being the end of the startup story.

Read More