Panic at the Pivot – Aligning Incentives By Burning the Boats

It’s a paradox, but early sales success in a startup can kill its chances of becoming a large successful company. The cause is often sales and marketing execs who’ve become too comfortable with an initial sales model and panic at the first sign of a Pivot. As a result they block new iterations of the business model that might take the company to the next level.

Fairchild
As I was reading a history of the startup years of Fairchild Semiconductor, I realized that a problem I thought was new – sales as an obstacle to Pivots – had occurred 50 years ago at the dawn of what would become Silicon Valley.

Fairchild, the first successful semiconductor company in the valley, was founded on two technical innovations: manufacturing transistors out of Silicon instead of the then conventional Germanium, and using a diffusion manufacturing process which enabled the production of silicon mesa transistors in batches on assembly line. (While this might sound like Greek to you, it was a revolution.)

Early on, the young company made a dramatic technical pivot when it discovered a way to build silicon planar transistors that dramatically improved reliability. (This was an even bigger revolution.) This increased reliability qualified Fairchild’s transistors for military weapons systems (airborne electronics, missile guidance systems, etc.) With orders from military subcontractors arming the cold war, Fairchild’s sales skyrocketed from $500K in 1958  to $7M in 1959 to $21M in 1960.

By the end of 1960, Fairchild was at the top of its game. In less than three years from the day it started, the company had pivoted its technology process, sales had done a masterful job of Customer Discovery and had found a sweet spot in the market and its fabrication plants were busy turning out as many transistors and diodes as they could make.

What could go wrong?

It was when engineering Pivoted again. And this time sales revolted.

The Revolution Will Not Be Televised
When Fairchild engineers realized that its planar process of manufacturing individual transistors could now be connected together on a single piece of silicon, the Integrated Circuit was born. Engineering thought this could dramatically change the way electronic systems were built, but the head of sales tried to kill the Integrated Circuit program, loudly and vociferously. Engineering was confused, why didn’t the Fairchild salesforce want a revolutionary new product line?

Over My Dead Body
From the point of view of the sales organization this new family of integrated circuits were a major distraction. The Fairchild sales team was on a roll executing a known business model – selling planar diodes and transistors into an existing market. In the transistor market, the problem was known, the customer was known and the basis of competition was known (technical features, price and delivery schedule.)

Integrated circuits were different. Unlike transistors, no one in 1960 was clamoring for the new technology. Integrated circuits were a new market. It wasn’t clear exactly what problem the product would solve, or who the customer was. In fact, the most likely customers, computer designers were openly hostile as they saw integrated circuits doing what they were supposed to be doing – designing circuits.  So selling integrated circuits meant a search for a business model.

This meant that a high testosterone sales team that was busy “executing” as order takers and deal makers had to put on a different hat and become educators and consultative engineers.  No way.

You Get What You Incent
What the engineers also didn’t know is that the head of Sales of Fairchild had cut a great deal on his compensation package. He was paid 1% of gross sales. While this made sense in the first few years when Fairchild was a startup, now it had unintended consequences. His salesmen were also compensated on a commission basis. Why would they want a product they had to force customers to take when they had existing products that were making them rich?

The VP of sales’ incentives led him to stifle any innovation that got in the way of selling as much of the current technology as he could – even if it meant killing the future of the company. Luckily for Fairchild and the future of the semiconductor and computer business, he quit when his compensation plan was changed.

The Land of the Living Dead
I see this same pattern in early stage startups. Early sales look fine, but often plateau. Engineering comes into a staff meeting with several innovative ideas and the head of sales and/or marketing shoot them down with the cry of “It will kill our current sales.”

The irony is that “killing our current sales” is often what you need to do. Most startups don’t fail outright, they end up in “the land of living dead” where sales are consistently just OK but never breakout into a profitable and scalable company. This is usually due to a failure of the CEO and board in forcing the entire organization to Pivot. The goal of a scalable startup isn’t optimizing the comp plan for the sales team but optimizing the long-term outcome of the company. At times they will conflict. And startup CEO’s need a way to move everyone out of their comfort zone to the bigger prize.

Burn The Boats
In 1519 Hernando Cortes landed in the Yucatan peninsula to conquer the Aztec Empire and bring their treasure back to Spain. His small army arrived in 11 boats. As they landed Cortes solved the problem of getting his team focused on what was ahead of them – he ordered them to burn the boats they came in. Now the only way home was to succeed in their new venture or die.

Pivots that involve radical changes to the business model may at times require burning the boats at the shore.

——

Every chip company in Silicon Valley is descended from Fairchild.

Lessons Learned

  • Sales organizations may get too comfortable to early.
  • Sales execs execute to their compensation plans.
  • Pivots are not subject to a vote in the exec staff meeting.
  • CEO’s and their boards make the Pivot decisions.
  • To force a Pivot burn the boats at the shore.

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13 Responses

  1. Great story, Steve.

    The interesting part from a psychology point of view is how the actors are doing exactly as their incentives dictate (selling for commission, abandoning burning boats).

    I’m curious though: what motivates the engineers who come up with a cool new technology in the midst of executing on a money-making business model? Did this come out of some fundamental R&D lab (of which fewer and fewer organizations now support)?

    Does this suggest that the startup CEO needs to take a step back once a repeatable model is found, and think about the Next Big Thing? Divert some resources to customer- and product development?

    Talk about a tough call — shouldn’t the Board of Directors start screaming to Keep Your Eye On The Ball?

  2. As someone who left a big corporation in frustration because they didn’t see what was coming and therefore didn’t see the value of pursuing a Plan B, you’d think I’d be all for your Burn the Boats strategy.

    But I’m not.

    Because “Burn the Boats” becomes the rationale for “Throwing the Baby out with the Bathwater”.

    Which is exactly what the company I had left ended up doing to cut costs to survive.

    How about a perpetual plan b in the works in which young folks (with new ideas) and experienced folks (who know where the hidden assets are and understand what a sustainable business is) learn from each other:

  3. [...] sales can kill your tech business. Yes, some sales are better than no sales. But, as Steve Blank writes on his blog today, early sales success can often make sales teams content and cause infighting when engineers [...]

  4. Nice history lesson. It has been my experience that many, if not most innovations come from the engineers. (As an engineer, I am biased, of course.)
    Why is that?
    I have come up with some pretty good ideas at a couple of companies. Maybe not 90 degree pivots, but a new market. I have been shut down every time.
    I have done service calls, and sales calls as the technical guy. The differences between what I hear from the customer vs. what the sales guy hears are amazing.
    What tactics would help us poor engineers be heard by the CEO?

  5. [...] sales can kill your tech business. Yes, some sales are better than no sales. But, as Steve Blank writes on his blog today, early sales success can often make sales teams content and cause infighting when engineers [...]

  6. Great post. Thank you.

    Can similar lessons be applied in energy space?

    Thought leaders often invoke lessons in the progress of IT and apply it to renewables. However, Fairchild could pivot early because there were few barriers to do so. Today, regulatory barriers and heavy capex costs equate to a whole lot of boats to burn.

  7. Good post but it only tells one side of the story. The countryside is also littered with the remnants of companies that developed great products just for the sake of development. Building what was innovative and “cool” without any idea of how to sell it or who to sell it to. I worked for such a company out of Cambridge, MA (leaving the names out to protect the guilty). This particular company burned through almost $100m in grants and venture capital money building a solution that was innovative, bleeding edge and fun to develop but had no customers. Eventually, when the money was almost gone, they had to bring in a new senior management team to try and figure out how to sell the thing they created because exactly no one in the 250+ person company could tell you. Eventually the company got eaten by its investors for pennies a share. The moral of the story is there needs to be a balance between the things that generate revenue and the future of the business.

    If you want to motivate a sales force in today’s business landscape look no further than the compensation plan. All sales people are coin operated and will naturally gravitate to the things that make them the most money with the least effort. Knowing this you can correct the boats course, motivating your sales team to sell whatever you want, without burning the same boat that brought you there.

    One good example is SagePoint Software. Their pivot point was to understand with absolute clarity what their customers what to buy before writing the first line of code. While that may sound much more mundane then just burning through money developing what is “cool” and innovative, it ensures that they can be sustainable in the long run and they won’t have to burn any boats to get there.

  8. From everything that I have read about your model and pivots, this story is not about them. It is about making a strategic business decision at a company that already has a developed business model and team in place. The company had set goals and incentives in place to optimize revenue from this model. Like you indicated at the end, this story is a statement about leadership. I think you confusion the point when using the term pivoting. Companies, young and old face this type of situation all the time. How do you grow, how do you make more money?

    Pivoting to find a business model that you can scale and make money on as a startup is a different problem then trying to take advantage of a new business opportunity at a company that has been built to maximize the value of an established model.

    I’ve been part of young tech companies that have faced this problem. The opportunity to radically shift the businesses model to one where growth could be faster and higher. In the case where the CEO burnt the boats, he sank the company and $100 millions of stockholder value. In the case where the CEO didn’t burn the boats, that company was able to grow the new business opportunity and use it to grow and reposition the company.

    The difference between the two situations was leadership and execution. The first company had not gone through the customer development process first to find a new scalable business model that they could exploit. Hence, when the CEO started scaling and spending wildly, his spending was not applied to a known scalable business model. He was spending on a treasure hunt and he had no map to lead him to the bounty. At the end of the day, no one wanted to get behind that vision.

    The second company did setup a process where they did develop the customer model before they started to try to grow it exponentially. Additionally, they had a small team of 3 to 4 people that included the CEO that worked through the opportunity. Furthermore, they used the other business to fund this new opportunity. At this second company, the CEO directed the company so that the sales team and everyone else were inline with the opportunity. He also was the champion for the new opportunity and educated the rest of the company on what this meant.

  9. [...] Blank had a great post this week about Fairchild Semi­con­duc­tors, the com­pany that can be seen as the right­ful par­ent of most of Sil­i­con Val­ley, and its [...]

  10. Good story about Fairchild, but Cortés did not burn the boats, up to you to fix the false myth.

    Alexander the great and other conquers did although.

  11. Interesting story. I worked as a technician in Silicon Valley in the late sixties, seventies and eighties.
    You are telling the story in a different way than I remember, having been there.
    I was hired as a tech at Four Phase Systems in 1972. I was the tech who characterized silicon in the R&D lab. We didn’t know how these devices work (their operating parameters). We had to discover the window. Lee Boysel, Jack Faith and others started Four Phase after Fairchild decided that Integrated Circuits were not a viable product. Lee Boysel thought Fairchild was foolish in their decision — and he was right, of course.
    After two years there, I moved to intel. Intel was started by Bob Noyce, Andy Grove, Gordon Moore and others who were pushed out of Fairchild at the same time.
    The common story was that Fairchild didn’t think ICs would work.
    When Intel first started up, they were in a building in Mountain View, CA right down the street from their old employer.
    I was an R&D tech in the Microprocessor Lab. Wow! What an experience.

  12. “…early sales success in a start-up can kill its chances of becoming a large successful company.”
    I think this is one of the primary reasons 99.7% of all companies remain “small businesses.”

    They achieve sales with ‘early adopters’ and continue to believe that they just need to “sell harder” to get to the rmainstream. Or they become complacent and believe that a $10M run-rate is a better result than they had ever hoped for.

    I believe that the challenge here is getting companies that believe they’ve “matured” (by virtue of having been around for 5-10 years and eking out a living) that in reality most are STILL IN THE CUSTOMER DISCOVERY PHASE of the company. I’m facing this exact issue with two very different clients. Both have achieved some modicum of “success” (on-going sales, paying the rent, breaking even or a bit better) but neither has “pivoted” in years. They continue to do the same thing that has brought them this “success” yet it never grows.

    Do you have any thoughts on getting “successful” companies to revisit their business model, iterate and pivot (if even on a small scale without burning all of the boats), and re-think the concept of “success?”

    • It sounds like they don’t have any goals for the company beyond where they are at and they are milking it. I would think that you need them to set some type of growth goal before you can get them to look at new revenue producing models. This is a leadership issue.

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