CHAPTER FIVE
REVISING THE STORY
Rough drafts are written to be discarded. Every writing manual is in agreement on this point, and the same is true for startup rough drafts. The moment you move from the planning phase to the shark-infested waters of the marketplace, you'll appreciate the truth of Steve Blank's maxim: “No business plan survives first contact with customers.” Startups live or die by how they respond to this harsh reality. Deny the facts, and you'll fail. Sense and respond—even when responding means a radical pivot—and you'll survive and thrive.
WORKSHOPPING
The writer's workshop is perhaps the most mortifying and humbling experience in higher education. You've put your heart and soul into a story, and now you have to read it out loud to a critical audience. Your hope is that they will be dumbstruck by your brilliance; the reality is that they'll immediately start poking holes in your work.
Testing your business plan in front of a live audience—of customers, partners, team members, industry experts—is no different. You can start the process of writing a business plan by filling out the “Lean Canvas” template yourself. There's no shame in throwing out a rough draft to get the conversation started, but then you need to present it your key stakeholders—customers, team members, investors, industry contacts—and ask for their input. Doing so is frequently humbling, but it's always absolutely necessary.
Try It On for Size
I've always been a big fan of taking a decision or a change in direction I'm contemplating and trying it on for size. You never know how a pair of pants is really going to fit until you slip it on in a dressing room, and you often don't know how a decision will feel until you try it out.
Sometimes, I'm simply trying to see how words sound when they come out of my mouth. As Homer Simpson periodically muses, “Did I think that, or did I say that out loud?” There's no substitute for articulating a new phrase, or theory, out in the open and seeing if it sounds the way you expect.
Other times, I'm trying to see how different messages or stories play with different audiences. Finally, there are times when my objective in trying something on for size is to understand the specific downstream effects of a decision. Throwing something out into the open and taking copious notes as people give you their “blink” concerns and reactions are invaluable.
The one thing I'm careful about when I'm trying something on for size with employees is to let them know that's what I'm doing, either before or after I do it. The times I haven't done this, people have taken my Homer Simpson moments as directives, and that can't be a good thing.
KNOWING WHEN IT'S TIME TO MAKE A CHANGE
The interviews you conduct—and the input you get directly from the marketplace—are only as valuable as your willingness to act on them. Are customers responding well to part of your solution while ignoring another? Are the people you interview clear about what they would buy if only you would offer it? Are you willing to respond to this feedback? Or are you confident that it's just a matter of time before customers see the light and buy your product?
Startups have no choice but to quickly change gears in response to company performance and market conditions. As much work as it takes to build a strategic plan, you have to be willing to rewrite it completely if circumstances demand it. Don't cry “uncle” prematurely, but don't deny reality forever.
Knowing when to insist on your vision and when to cede to the marketplace is as much an art as it is a science. The best you can do is to watch out for some important signs and use your judgment to determine whether the situation is temporary—or potentially terminal.
- Data disprove your original thesis. Every startup is a leap into the unknown: you have a business thesis and you want to test it in the marketplace. In the best-case scenario, you'll eventually hit on the right idea. Usually, your original thesis is wrong, in whole or in part, and you have to make adjustments along the way. We experienced this at Return Path a few years ago: when we expanded to a number of email-related business lines, our assumption was that the same buyer would want to buy two or three of the five services we offered. In the end, it was usually one and very occasionally two. Even in the cases where companies did buy multiple services from us, we were dealing with different buyers and budgets within those companies. That meant different sales forces and a lack of efficiencies. It was time to focus.
- Poor results. There is no better indicator of whether your business is working than bottom-line results. Creating new marketplaces takes patience, and your investors won't (or, rather, shouldn't) expect immediate returns. But if you're constantly in the “startup” phase and never making your way into “scaling” or “growth”—if you're never closing major deals, if you're perpetually spending more than you make, if you're endlessly diluting equity in round after round of fundraising—it's probably time for a change.
- Internal noise. Even if your thesis is working and your company is performing well, the foundation your success is built on might be too flimsy. It's too hard to get things done; your management team is constantly putting out fires; everything is at the edge of chaos at all times. Lots of entrepreneurs will tell you that this is simply the reality of founding a business. I disagree. It's easy to get addicted to startup chaos. Your goal should be to minimize it.
There's an infinite variety of ways that you might pivot in response to one or many of these signs, but it ultimately comes down to a choice between two options: changing the company or changing the business.
CORPORATE PIVOTS: TELLING THE STORY DIFFERENTLY
“In matters of grave importance, style, not substance, is the crucial thing.” This is one of Oscar Wilde's most famous statements—or, rather, overstatements. As exaggerated as it is, it's worth considering. Most startup CEOs focus on what they do rather than how they operate—the “substance” of their businesses rather than the “style” of their companies. As a result, they're liable to think that all pivots are related to what their companies do rather than how their companies operate. “Corporate” pivots (changes in “style”) are as important and potentially transformative as “business” pivots (changes in “substance”).
Usually, startups pivot because their product-market fit is off or because their strategy isn't working. Occasionally, though, opportunities present themselves and you have to act. They may be the result of broad macroeconomic shifts like the one we experienced in 2008 and 2009, or they could be specific to your industry. Whatever the occasion, you'll have to act quickly. Pivots should be the result of long-term strategic planning—but sometimes, they can't be.
Consolidating
The most common opportunity you'll encounter is an opportunity to consolidate. Startups often create new marketplaces or industries, or enter ones that are immature. Ideally, you'll want your startup to be a market leader in the industry that you're creating. (By the way: that's the Blue Ocean Strategy in a nutshell.) If you're the first to market, you'll be a market leader by default—if only temporarily. Eventually, competitors will come along.
Competition can't be eliminated—usually. There are two occasions when it can: during a macroeconomic downturn or during a moment of crisis at a competing startup. If you're doing a great job as CEO and your business is fundamentally sound, a recession or two shouldn't put you out of business. The same might not be true of your competitors, and they may welcome an exit. Read the tea leaves and choose the right moment to make an offer.
At Return Path, we acquired direct competitors at two different points in our history. One was following the Internet bubble, when we and a Colorado-based company called Veripost were both relatively new startups (less than two years old) struggling to gain adoption in a new product category at a time when all of the most likely potential buyers were going out of business. That acquisition greatly accelerated revenue generation by eliminating the competitive element to the sales process. It literally kept us alive at a time when I'm not sure we otherwise would have survived.
The second competitor we acquired was a much smaller direct competitor called Habeas, back in 2008. The company was running out of cash and didn't have financing in sight, and we were just about to hit the great recession of 2008 (financial markets had already started getting jittery in 2007). The result of this acquisition was primarily financial gain. As a completely direct competitor with substantial business operations, we were extremely disciplined about eliminating redundant costs and platforms. We ended up keeping something like 75 percent of the company's revenue and only 10 percent of its cost structure.
Given how difficult it is to successfully run a startup, your competitors may not need a broad economic shift to bring them to the brink. If they have something you need—either technology or people—make an offer. If they don't, prepare your sales team to poach their clients.
Note: You and your competitors aren't competing only for customers or market mind share. You're also competing for talent. Chances are that you are interviewing a lot of the same people—or interviewing outgoing employees as other startups tighten their belts. All other things aside, those interviews are great sources of competitive intelligence. Use them to determine how your competitors are doing, and whether they would be amenable to an offer.
Diversifying
Every entrepreneur starts their business on the assumption that they've got a billion dollar idea. Most come to the sad realization that the idea won't cover their costs. In between, there are companies that have a good idea—but one that just isn't broad enough. To build a large business, they need to do more. They need to diversify.
Diversifying doesn't mean entering a radically different marketplace or ramping up on an entirely new technical challenge. It means finding new ways to innovate and solve problems within your marketplace.
One way to diversify is with an opportunistic acquisition. Unlike the ones I discussed above, these aren't about consolidating a single marketplace but expanding your revenue streams by incorporating a company that offers similar but not identical products to your customers offering the opportunity for new revenue streams.
The other way to diversify is by adding a new line of business to your company—one that leverages existing talent, even if it requires an infusion of new hires. Whether you do one or the other depends on whether it's cheaper to “buy” or “build” the new business unit. We reviewed this question in detail in the previous chapter; the same principles hold here.
We diversified Return Path's business over the years as well, acquiring a couple of new companies and technologies at different points along the way. Some of those acquisitions went incredibly well: our email intelligence grew out of our acquisition of Assurance Systems in 2003; our professional services practice grew out of the acquisition we made of GasPedal Consulting that same year; and the acquisition of Bonded Sender from IronPort got us into the certification business. For very small companies, diversifying can be particularly tricky, but if you have a partial solution and adding some new technology or products give you a whole solution, it may make a lot of sense.
Focusing
As much success as we've had with some of our acquisitions, our experience at Return Path has proven that the road to hell is paved with failed diversification strategies. The AOL/Time Warner merger is probably the most famous example: “convergence” never materialized and both companies came close to failing. Even with that counterexample staring us in the face, we tried the convergence route at Return Path—and it almost brought down our company.
When Return Path first made the transition from startup to scaling, the story we told was all about diversification and convergence. “Email is a crucial and complex part of every business. Companies that buy one email solution—deliverability, customer research, marketing lists—will jump at the opportunity to buy others.” That was the theory, at least, but very little of the operating and sales leverage we'd expected across the different products materialized, leaving us a collection of small businesses being run by a single management team off of one small balance sheet. We'd built a company that was too complex. Our board member Scott Weiss started calling us “the world's smallest conglomerate,” and he wasn't smiling when he said it. He was right.
We'd quickly grown from $2 million to $30 million in revenue, but our business was a nightmare to run. We had to eliminate some of the complexity in the business, which came from adding lines of business that ended up having a lot less in common with each other than we thought. One of the most significant days in the history of the company was the day in 2007 that we decided to focus on one line of business and divest the others, setting the stage for much more rapid and sustainable growth. By the time we'd finished divesting all the businesses we deemed “noncore,” we'd shrunk the company from $30 million in revenue down to about $11 million. But, in the ensuing five years, our growth has been even stronger. As of this writing, we're at $70 million.
Realizing that your original idea isn't going to be the next Google or Facebook is always a sobering experience, but sometimes it's accompanied by a bit of good news: a business line that you once considered ancillary to your business may in fact be the next big thing. (According to Steve Blank in The Four Steps to the Epiphany, this is just about the only way startups actually manage to break through.) Accept what the marketplace is telling you, and focus on the winner.
Depending on how mature your once-primary business unit is, this might be a good time to secure an infusion of cash with a well-executed divestiture. If the idea never got off the ground, you'll simply need to pivot your team in a new direction. The case we're discussing here is simply a reallocation of resources toward an existing business line.
Bionic CEO David Kidder on Pivoting Your Business Direction
As a three-time entrepreneur and the author of The Startup Playbook, Bionic CEO David Kidder knows as much about pivoting a business as anyone.
Startups are like heat-seeking missiles: the target of the missile is defined by the company's vision and purpose; the rocket is steered and propelled by mission and work; and the guidance systems are instructed by values and beliefs. In most cases, “pivoting” isn't about changing the missile's target—the company's vision and purpose—but changing how the rocket is steered toward the target. That process will always be treacherous—sometimes fatal, but it doesn't have to be.
The first and most important step is recognizing that success lies not in products but in people. Your teams must understand with incredible clarity your company's vision, mission, and values. Second, while they must have a complete commitment to the core vision, they should also understand that the work often has to change in order to navigate the a changing landscape on the way to the target. If correctly established in your company's culture, changing the mission—or pivoting—does not and should not destabilize a team committed to a startup's vision. The job of a startup CEO is to set this vision, to gain the trust and commitment of the team, and to create an environment that allows the team to shape the mission and achieve the vision—in other words, hit the target.
Another aspect of defining and surviving pivots is creating an emotionally resilient team. This is best developed by setting expectations of change up front, from the very first day. Very often we steer blindly, even with the best road maps and the best-laid plans. The changes in direction required to navigate over and around obstacles must be recognized and accepted by everyone. One of my favorite explanations of the rationale behind pivoting comes from Amazon founder Jeff Bezos (as related to 37signals founder Jason Fried):
People who were right a lot of the time are people who often changed their minds. I don't think consistency is a particularly positive trait. It's perfectly healthy—encouraged, even—to have an idea tomorrow that contradicted your idea today.
The smartest people are constantly revising their understanding, reconsidering a problem they thought they'd already solved. They're open to new points of view, new information, new ideas, contradictions, and challenges to their own way of thinking.
What trait signified someone who was wrong a lot of the time? Someone obsessed with details that only support one point of view.
To be frank, pivoting can often feel like failing, especially if you have not prepared your team for this possibility. But it's simply irresponsible not to pivot around and away from the many fatal obstructions that lie between your team and your collective target—your vision. It's your duty as a startup CEO.
David Kidder, CEO, Bionic
BUSINESS PIVOTS: TELLING A DIFFERENT STORY
Business pivots are what most entrepreneurs have in mind when they think about changing their company's direction. They are much riskier and more complex than changing your position in the marketplace or tweaking your internal model, but they're unavoidable (especially if you're listening to the marketplace rather than trying to force yourself on it). A pivot isn't a leap; it's a change of direction about a fixed point—your core capabilities.
In late 2009, I spoke at the New York City Lean Startup Meetup. My topic was “The Pivot,” but the best summary of my position actually came from a member of the audience, who boiled it down to three words: “Pivot, don't Jump!”
When you discover that your prior conception of “product-market fit” is off, the temptation is to leap in a completely different direction. Resist! Every pivot a startup makes should be at the request or urging of your clients (a request they might voice by not answering your sales calls) and in a direction in line with your core capabilities.
We've pivoted many times at Return Path. But we've never “jumped.” While we have a talented team that could probably execute lots of different businesses very well, it's hard to see us being successful in areas that are far afield from our core competency: email.
Over the years, for example, people have often suggested that we should get into SMS deliverability. “Isn't that going to be a hot topic?” We don't know. We don't spend our lives immersed in text messaging or with mobile carriers. “What about getting in the measurement of social media messaging? Isn't that related?” Maybe, but it's not in our wheelhouse. Expanding from email deliverability software and analytics into services, into data, into whitelisting, into audience measurement—those were pivots, not jumps.