Why Startups are Agile and Opportunistic – Pivoting the Business Model

Startups are the search to find order in chaos.
Steve Blank

At a board meeting last week I watched as the young startup CEO delivered bad news. “Our current plan isn’t working. We can’t scale the company. Each sale requires us to handhold the customer and takes way too long to close.  But I think I know how to fix it.” He took a deep breath, looked around the boardroom table and then proceeded to outline a radical reconfiguration of the product line (repackaging the products rather than reengineering them) and a change in sales strategy, focusing on a different customer segment. Some of the junior investors blew a gasket. “We invested in the plan you sold us on.” A few investors suggested he add new product features, others suggested firing the VP of Sales. I noticed that through all of this, the lead VC just sat back and listened.

Finally, when everyone else had their turn, the grey-haired VC turned to the founder and said, “If you do what we tell you to do and fail, we’ll fire you. And if you do what you think is right and you fail, we may also fire you. But at least you’d be executing your plan not ours. Go with your gut and do what you think the market is telling you.  That’s why we invested in you.”  He turned to the other VC’s and added, “That’s why we write the checks and entrepreneurs run the company.”

The Search for the Business Model
A startup is an organization formed to search for a repeatable and scalable business model.

Investors bet on a startup CEO to find the repeatable and scalable business model.

Unlike the stories in the popular press, entrepreneurs who build successful companies don’t get it right the first time. (That only happens after the fact when they tell the story.) The real world is much, much messier.  And a lot more interesting. Here’s what really happens.

Observe, Orient, Decide and Act
Whether they’re using a formal process to search for a business model like Customer Development or just trial and error, startup founders are intuitively goal-seeking to optimize their business model. They may draw their business model formally or they may keep the pieces in their head. In either case founders who succeed observe that something isn’t working in their current business model, orient themselves to the new facts, decide what part of their business model needs to change and then act decisively.

(A U.S. Air Force strategist, Colonel John Boyd, first described this iterative Observe, Orient, Decide and Act (OODA) loop. The Customer Development model that I write and teach about is the entrepreneur’s version of Boyds’ OODA loop.)

Pivoting the Business Model
What happens when the startup’s leader recognizes that the original business model model is not working as planned? In traditional startups this is when the VP of Sales or Marketing gets fired and the finger-pointing starts. In contrast, in a startup following the Customer Development process, this is when the founders realize that something is wrong with the business model (because revenue is not scaling.) They decide what to change and then take action to reconfigure some part(s) of their model.

The Customer Development process assumed that many of the initial assumptions about your business model would probably be wrong, so it built in a iteration loop to fix them. Eric Ries coined this business model iteration loop – the Pivot.

(One of the Pivot’s positive consequences for the startup team is realizing that a lack of scalable revenue is not the fault of Sales or Marketing or Engineering departments – and the solution is not to fire executives – it’s recognizing that there’s a problem with the assumptions in the initial business model.)

Types of Pivots
“Pivoting” is when you change a fundamental part of the business model. It can be as simple as recognizing that your product was priced incorrectly. It can be more complex if you find the your target customer or users need to change or the feature set is wrong or you need to “repackage” a monolithic product into a family of products or you chose the wrong sales channel or your customer acquisition programs were ineffective.

If you draw your business model, figuring out how to Pivot is simpler as you can diagram the options of what to change. There are lots of books to help you figure out how to get to “Plan B,” but great entrepreneurs (and their boards) recognize that this process needs to occur rapidly and continuously.

Operating in Chaos + Speed + Pivots = Success
Unlike a large profitable company, startups are constrained by their available cash. If a startup does not find a profitable and scalable business model, it will go out of business (or worse end up in the “land of the living dead” eking out breakeven revenue.)  This means CEO’s of startups are continually looking to see if they need to make a Pivot to find a better model. If they believe one is necessary, they do not hesitate to make the change. The search for a profitable and scalable business model might require a startup is make multiple pivots – some small adjustments and others major changes.

As a founder, you need to prepare yourself to think creatively and independently because more often than not, conditions on the ground will change so rapidly that your original well-thought-out business model will quickly become irrelevant.

Summary
Startups are inherently chaotic. The rapid shifts in the business model is what differentiates a startup from an established company. Pivots are the essence of entrepreneurship and the key to startup success. If you can’t pivot or pivot quickly, chances are you will fail.

Pivot.

Lessons Learned

  • A startup is an organization formed to search for a repeatable and scalable business model.
  • Most startup business models are initially wrong.
  • The process of iteration in search of the successful business model is called the Pivot.
  • Pivots need to happen quickly, rapidly and often.
  • At the seed stage, microcap funds/ superangels understand that companies are still searching for a business model – they get Pivots.
  • Most of the time when startups go out for Series A or B round, the VC assumption is that a scalable business model has already been found.
  • Pivots are why startups must be agile and opportunistic and why their cultures are different from large companies.

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53 Responses

  1. Another great post, and once again I have another fighting analogy. This is from the fights last saturday. Matt Hughes vs Renzo Gracie, Matt won the fight, and in the post fight interview, they asked him if he fought according to plan, Matt’s answer: “Not at all, I thought I would out box him, but he was too fast for me, so I decided to try the kicks”.

    Somewhere in the first round, Matt the CEO/Founder of his body decided to pivot, literally and figuratively in this case.

  2. Fantastic post as always. I think a great analogy is poker when you’re the short stack up against much larger opponents. The short stack is much more likely to throw their chips in the center and make what is for them an extreme bet.

    Jarrod

  3. Another great article in your series, Steve. Thankyou.

    I’m sure this is an over-simplification, but if a company was built to sell green pens and its first customer explains that they love the pens but want them in blue, the entrpreneur’s response should be “how many blue pens do you want?”

    Change in the world of business is constant, in fact, it’s the only constant. “Pivoting” is an inherent and practical activity/response to the pragmatic aspects of the entrepreneurial experience – from development stage, to startup, to maturity, etc.

    Recognizing the nature of this dynamic process helps all entrepreneurs in their quest for discovering viable business models that will, over time, naturally require adjusting as the marketplace creates a direction that is often different from the course that any given venture originally set out on, or may currently be on.

    As Betty Davis once said, “strap yourself in boys and girls, the ride is going to get a little bumpy.”

  4. [...] via Why Startups are Agile and Opportunistic – Pivoting the Business Model « Steve Blank. [...]

  5. Steve, do you recommend establishing a consistent tempo for pivot decisions, or do you just pivot whenever you think you need to?

    Mostly this is a question about tempo for the business and management/communications to your team. Continual pivots can be indistinguishable from management that just can’t make up its mind, especially to a Product Development team that’s heads down trying to build a product. At the same time, if you know that in a week or two at the scheduled Customer Development/Product Development synthesis meeting you’re going to pivot to a new direction, should you just go ahead and do it today?

    Pivoting today and saving a week or two seems like the obvious choice. But I can also imagine that the disruption caused by decisions made “out of cycle” would lower morale, cause confusion, etc. so that productivity slows down and you end up losing time on the next cycle.

    Advice welcome.

    • Troy,

      Pivots are not meant to be changes in feature sets or a new release of a product that expands on what you have already been doing. Pivots are meant to be actually quite dramatic in its impact on a business. If you go back to the business model diagram and take a look at the various components Steve talks about, a pivot would be dramatically changing one of these elements – changing the fundamental customer set you’re pursuing, scrapping your current direct sales model and using an inside sales model instead, or changing your product entirely to service a demand you’ve discovered along the way.

      Evaluation of potential pivots is the process a management team goes through when it observes its current business model and asks itself “Is this as good as it gets?” That means not only taking a look at the way the business model itself is functioning but the size of the entire market that you’re pursuing. It may be that in an adjacent space, you have more attractive customers or that you can alter your product slightly and demand a significantly more attractive pricing model. This process is time consuming and if implemented, significantly disruptive to the company.

      The management team should be *evaluating* the business model and available market size on a quarterly basis but a pivot as Steve has defined it here should only be *implemented* a handful of times.

    • Thanks Ann. I read this paragraph, especially the last sentence, to mean something different than what you’re describing:

      If a startup does not find a profitable and scalable business model, it will go out of business (or worse end up in the “land of the living dead” eking out breakeven revenue.) This means CEO’s of startups are continually looking to see if they need to make a Pivot to find a better model. If they believe one is necessary, they do not hesitate to make the change. The search for a profitable and scalable business model might require a startup is make multiple pivots – some small adjustments and others major changes.

      You’re saying only the “major changes” are really deserving of being called pivots. Maybe we’ll use the term “optimizations” for those “small adjustments” so that I don’t confuse things.

      So, the answer to my earlier question is that optimizations and pivots should go through a communication and decision-making process, but one that’s relevant in size for the scope of change being considered, i.e. pivots go through a larger process (e.g. quarterly board meetings) whereas optimizations through some process that is smaller and happens more frequently (e.g. weekly cross-functional team meetings).

      Sound about right? Again, much appreciated.

  6. This is brilliant Steve – thank you. So many of these principles & steps can be applied to other kinds of collaboration. In this ever more connected age, one’s capacity to collaborate around a sweet spot of mutual benefit (solve problem/capture opportunity) is probably the most vital trait other than one’s top talent.

  7. I’ve read many stories of people pivoting but have never seen a write-up on best practices for actually executing the pivot given how many people are likely to be shocked and disapproving (investors, customers, and employees).

    I was part of one of the most successful pivots of recent years, Odeo changing from a small potatoes podcasting directory into Twitter. There was no plan other than keep mum about what was going on until we were sure Twitter was going to be better than what we were already doing.

    Is it messy for everyone? Is the best practice to fail on your own terms and to ignore/avoid people who might be upset?

    Also, when do you pivot and when do you spaz? In your story, they’re reusing existing assets, so that’s a pivot. But in our case, we built an entirely different product. That’s not a pivot, that’s a spaz.

  8. Interesting topic. I would love to see some further exploration of the reactions the board members underwent. How typical is this mix of, “are you crazy?!” versus, “I believe in you, so give it a shot.”

  9. Long time reader, first time poster.

    At Aggregate Knowledge we lived through the story you told with one major difference. Our board was completely supportive and told us that we reached the conclusion faster than they expected us to.

    We set expectations on when we would come up with a new plan and we did. There were many bumps (and bruises) along the way and we’re not out of the woods yet but man – we’ve got a lot better shot at success than if we stayed on our previos path.

  10. Troy, the usual advice for pivots is “change one thing at a time.” So if you find you’re changing the product, the customer, the strategy, and toolset all at once, you’re probably in trouble.

    But if you change one thing at a time, you essentially get to do a controlled experiment, and you can reuse much of the work that has gone before.

    I was talking to a buyer last week, and realized—with a nasty shock—that our product wouldn’t be enough by itself, and it needs to be bundled with some overly expensive services. So we need to tackle the price of those services, and try to bring them down. Not what we set out to do, but there’s not a lot of choice if we want a good sales pitch for our main product.

    • Makes sense, thanks, Eric, that’s good advice. Especially given what Ann said about pivots, no one could make multiple changes of the size she’s talking about simultaneously anyway.

      Good luck. As to your problem, I wonder if you could “open source” the services somehow. Check out Logoworks and AdMeld as potential jumping-off points. You guys would think of yourselves as a sales channel for someone else’s services, not a service provider yourselves.

      Obviously I have no idea what your business is, really just wanted to return the favor. Cheers!

  11. [...] Why Startups are Agile and Opportunistic – Pivoting the Business Model « Steve Blank (tags: business entrepreneurship) [...]

  12. The willingness to recognize the root of a problem with the business model and correct it by iterative adaption has been drilled into my subconscious by now.

    What I’m most concerned with is fostering my own, and my teams awareness to the clues that will help rapidly recognize systemic errors. Fred Wilson’s MBA Mondays have proven to be great tools for identifying key financial metrics and business priorities.

    The complex creativity required is what makes the process of entrepreneurship so appealing, and dangerous. A severely wrong direction shift can cause you to run out of runway or derail team morale. Lack of action is even worse.

    Steve: What advice do you have for first time (no track record) founders in landing sufficient funding to build a quality beta. We’re building the alpha on our own time and will then market and modify to build a user base. I can’t imagine a more compelling pitch than a fantastic ascent in user metrics.

    • As an experienced investor, before I would consider funding any venture I would require answers to the following three questions:

      1. Why me?
      2. Why You?
      3. Why Now?

      For myself, it’s somewhat of an audition and similar to asking one out to a party or dance – convince me why I should accept your invitation vs. others.

      Lastly, where are you with your idea?

      Using an aircraft as an example, is it still sitting on a blueprint or is it ready for departure and just needs the fuel to get it off the ground? If it’s waiting for depature I’d have a serious interest, if not, better to chat with family or friends.

      Not really interested in anyone who is resource dependent.

      Tommy Jaye

  13. steve – it’s taken waaay too long for you to invoke Boyd on this blog! It’s pretty clear that he’s been a major source of inspiration – and rightly so. It’s all just a big series of OODA loops !

    • Ian,
      Hard to believe, but I had never heard of Boyd when I first started thinking about the Four Steps. After I gave a few talks (and before the book) multiple people recognized the pattern and pointed it out to me. After that I went back and read every scrap of Boyd I could get my heads on and all the biography’s. Amazing insights.

      I’m proud to say that Customer Development is nothing more than an OODA Loop for entrepreneurs.

      steve

  14. Steve you should take a look at the cynefin framework by Dave Snowden. See http://en.wikipedia.org/wiki/Cynefin
    I think startups explore novel practice in chaotic environments and refine it into emergent practice for complex environments.

  15. The Pivot is important to find the right Customer.

    But sometime you need to see other seas or industries to survive and meet the cash constraints. To change too often the business model i.e strategy of the startup may turn out costly.

    Being agile in operations with Customers rather than with Strategy?

    Questions raise: Idea, invention, innovation management, fuzzy front-end of innovation, time-to-market. (agile development).

    The entry is clear and well-thought. I am too a fan of this blog!

  16. “I think startups explore novel practice in chaotic environments and refine it into emergent practice for complex environments.”

    Yes, speaking from my experience with agile development, I think this is a fitting assumption. With a startup, you’re not following a recipe, but you’re in the processing of inventing that recipe.

    “A startup is an organization formed to search for a repeatable and scalable business model.”
    Found that thought really inspiring and true! We’ve already scrapped our entire business model once and made a fundamental change in direction with the second one. What I’ve learned so far from that is that you should only expect one thing in a start-up: change. And that’s probably a good thing.

  17. Vivaty is a company that is similar to IMVU, however vivaty is shutting down on April 16 because they didn’t get the business model right. I wonder how IMVU’s business model differs from that of Vivaty’s.

    Vivaty made this announcement on their blog http://blog.vivaty.com/

    “As one who has spent years making Vivaty a reality and then trying to make it a success, it pains me to announce that as of Friday the 16th of April, Vivaty.com will completely shut down. I apologize to our loyal users that this must be so. Vivaty.com is a rather expensive site to run, much more than a regular web site, and Vivaty the company has been running out of money for some time. Our business model was to earn money through Vivabux sales, but that has never come close to covering our costs. We tried for months to find a bigger partner that would support the site, but that didn’t work out. “

  18. Ther is an interesting book called “Finding Fertile Ground” by Scott Shane who teaches entrepreneuship at Case Western University.

    He has 10 rules of entrepreurship which are summarized here :

    http://www.fastcompany.com/bookclub/excerpts/0131423983.html

    He writes:

    “The second rule of technology entrepreneurship is to identify valuable opportunities. One of the ironies of entrepreneurship is that, despite the motivation of the world’s entrepreneurs, we do not really need many new businesses. Established businesses are already meeting most market needs quite effectively because, in the absence of some sort of external change, someone will have figured out already how to satisfy the needs of potential customers. Therefore, to be a successful technology entrepreneur, you have to find an external change that creates an opportunity for a new business.”

    “The third rule of technology entrepreneurship is to manage technological transitions. Entrepreneurial success is enhanced by starting a firm to transition from one technological paradigm to another because change in a technological paradigm undermines the advantage of established firms. For example, few entrepreneurs have ever been able to start new firms that challenge Kodak’s position in traditional film, but the shift to digital camera technology made it possible for many entrepreneurs to enter and compete with Kodak.”

  19. [...] do aprendizado adquirido com o mercado, faz parte da história da maioria das Startups de sucesso a mudança de estratégia de negócio, processo batizado como pivô.  Ao cobrar dos usuários desde o início, o grau de amarração que a Startup tem com o produto [...]

  20. Great stuff! I wish some french business angels were aware of this!

  21. They beauty of startups is that they can move and move quickly. The people on the board sometimes go with a top down approach and small companies sometimes change from the bottom up.

  22. I have had to pivot many times in my business. You learn to recognize what’s work quicker everytime you pivot. Change is pretty instant and you can see the next once things start to bog down or go the wrong way.

  23. You make many good points in this post. I’ve been an avid follower of yours for a few years and have given away many copies of your book.

    I work with a lot of emerging companies that are looking to find their market(s) and then to create systematic ways of growing them. In Fact, “The Four Steps to the Epiphany” was the inspiration for this web page I created: http://www.design-works.com/war. It speaks directly to the challenges companies face when trying to get through all of the noise and get through to people that can actually make decisions about their offerings.

  24. Glad I saw this article!
    presenting a business that was built with the idea of the pivot in mind but we didn’t have a phrase for it and now we also have a good reference to refer people to in addition to examples of companies that have successfully pivoted.
    Most appreciated.

  25. [...] Steve Blank在他的博客上发表了一篇很值得参考的文章,题为“为何新企业需要灵活、善于把握机会-调整商业模式” [...]

  26. [...] and be agile in developing your product. As Steve Blank and others attest, you have to continuously “pivot” your business model  and make quick adjustments to trigger commercial growth in your [...]

  27. [...] by Steve Blank’s  “startups are the search to find order in chaos” and influenced by Dave Snowden’s Cynefin [...]

  28. [...] I'm not sure hosted Eduglu is the right business model for that task but since a startup is "an organization formed to search for a repeatable and scalable business model", we'll give this business model a try for awhile as we look for ways to freshen the stagnant world [...]

  29. [...] we pivoted, and repositioned Mifos around hosted (“cloud”) services. Yes, pivoting is painful. I [...]

  30. [...] Steve Blank: Why Startups are Agile and Opportunistic [...]

  31. [...] Steve Blank says, inside the building are opinions, outside the building are facts.  So either we have to get [...]

  32. [...] As Steve Blank says, inside the building are opinions, outside the building are facts.  So either we have to get outside the building or we have to trick the facts into finding their way back to us.  Notables are a good way to trick facts into backtracking their way to the company when you are in a large ossified bureaucracy. [...]

  33. [...] Ries and Blank talks about the need for entrepreneurs ‘to pivot’ , authors of the book Getting to Plan B, John Mullins and Randy Komisar  argue a similar point [...]

  34. Hi Steve,

    I was watching a Stanford ETL podcast by Ann Miura-Ko a few days ago and something is really bothering me. Ann mentioned here firm looks for “Thunder Lizard’s” – people who have an unshakeable commitment to their goals. This makes sense and is a “common” trait amongst successful Entrepreneurs, but doesn’t this aspect conflict with the concept of a Pivot?

    Cheers,

    Toby

  35. I think you’ll find that businesses who run their business on their own money, don’t pivot as much. They tend to get it right sooner and don’t need as much ‘pivoting’.

    Its very easy to pivot on other people’s money.

  36. [...] is referred to as the pivot – the point where your business model makes a 90 degree turn. Here’s a terrific post by Steve Blank describing the process in more detail – you should read it. Here’s part of his [...]

  37. [...] Steve Blank has an amazing insight into this. He calls it pivoting. I never went to a B School so pardon me if I get too excited about it. But Steve suggests that entrepreneurs need to find a pivot – an actual point in the business lifecycle when something, anything, can be repeated. And repeated. And again. [...]

  38. Great Article , as always Steve.

    However, how do you know when is the best time to pivot. Many a times you may keep buying time thinking that the current model may work or sometimes you may pivot too quickly ?

  39. [...] business model. This means the brilliant idea you started with will change as you iterate and pivotyour business model until you find product/market [...]

  40. [...] done it once but he has now done it multiple times.  He creates great companies. It comes from a discussion about a board meeting where a VC finally stands up to the rest of the board to support a new [...]

  41. [...] are going to find out whether your product/service is viable is by asking, testing, and perhaps, pivoting. I love how Steve made this helluva great comparison, because that’s what your work might [...]

  42. [...] clear vision and build a common culture.  Two posts (Consultants Don’t Pivot, Founders Do and Pivoting the Business Model) from Steve Blank added the word “Pivot” to our [...]

  43. [...] can easily adjust to requests for changes from users.  I bought another book, this time about customer development. I read on a blog that it’s a bit of a clunky read but the guy, Steve Blank, seems like a bit of [...]

  44. [...] indeterminate, Startups need to diversify just enough to pursue different opportunities together (Pivots). Theming can also help direct team efforts along each of the key dimensions such as acquisition, [...]

  45. [...] data가 모이면 빠르고 효율적으로 그리고 정확하게 plan B로 갈 수 있는 pivoting 능력 이 생기게 되죠. 여기에 뛰어난 창의력과 고객을 이해하는 insight가 있는 [...]

  46. [...] 피보팅. 음.. 방향전환? 이정도의 뜻이다. 스타트업이 처음 비지니스 모델을 설정하고 사업을 시작했는데, 뭔가 처음의 가정이 잘 못되었다는것을 알고 사업의 일부분을 방향전환 하는것을 피보팅이라고한다. 예를들면, “사람들이 등을 간지러워하는데 등은 손이 잘 닿지 않아 긁는데 소비자들이 불편을 느낀다.”라고 가정을 하고 등긁게를 출시를 했는데, 예상보다 사람들이 등을 손으로 잘긁는거야. 그러면 이제 이 기업은 처음에 했던 소비자의 불편에 대한 가정이 잘못 되었다는것을 배운거지. 그리고는 피보팅을 해서 “사람들은 등을 긁는거보다 발을 긁는데에 불편함을 느낀다!”라고 생각을 하고 발 긁게를 출시를 했다. 이러면 이제 피보팅을 했다고 볼 수 잇는거지. 스타트업에서는 수익을 내기위한 빠르고 지속적인 피보팅을 해아한다고 한다.피보팅에 종류가 여러가지 있다던데 그건 아직 못 찾아봤다. 도움받은 사이트 http://steveblank.com/2010/04/12/why-startups-are-agile-and-opportunistic-%E2%80%93-pivoting-the-bus… [...]

  47. […] but a little technical. Here’s how Steve Blank describes […]

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