Why Pivoting is Crucial for Startups

Public or not, the best businesses know when it's time to change direction.

I relish the chance to watch startups succeed. But it’s even more satisfying to witness a startup thrive because it executed a successful pivot.

My enthusiasm for a good pivot is twofold: They make for great stories later on, and they teach us a thing or two about founders in the process.

Why am I hammering home this point so early in our startup investing journey together, you ask? Because it’s a foundational piece of how I think about successful business strategy.

Business pivots — that is, when companies strategically shift their product, focus, or target market in response to changing conditions — are also more common than you might think.

But before we get there, let’s rewind a bit. I believe one of the greatest weaknesses any founder can demonstrate is an inability to pivot away from a fledgling business idea.

Heck, that’s why the “A” in my B.L.A.S.T. investing framework stands for “Adaptable management.”

As a reminder, here’s what I wrote on the topic a few weeks ago when I introduced the B.L.A.S.T. acronym:

Adaptable Management: I’m looking for businesses with capable, adaptable leadership. The leadership team needs to have relevant experience, skills and the flexibility to adjust to changing industry dynamics. These leaders must not be too in “love” with their original idea and be willing to pivot the business when necessary (you’ll read several stories about the greatest pivots in startup history in later Bottom Line Investing articles). This ensures the company will be able to adapt and drive sustained, profitable growth.

To be fair, sometimes there’s no realistic pivot available, and the business is simply doomed to fail for any number of other valid reasons.

But far too many founders fall so in love with their original idea that they’re unwilling to deviate from it. Or, if we’re feeling a tad more harsh, perhaps they’re just not clever enough or lack the mental flexibility to embrace possible change in the face of an obviously failing concept.

That’s a recipe for disaster in the startup world. According to Harvard Business Review, around 73% of all startups will pivot their businesses at some point. And failures to successfully pivot are a huge reason 90% of all startups eventually fail.

Put simply, if a founder is unwilling or incapable of pivoting some major aspect of their business, you can virtually guarantee that business will eventually descend into obsolescence.

So what about those great stories I mentioned?

As it turns out, virtually every great business in the world today has implemented a successful pivot at one point in their respective histories.

My kids didn’t believe me, for example, when I told them Netflix used to mail DVDs to our house before pivoting to the streaming service almost 250 million people know and love today.

Or did you know before Slack was acquired by Salesforce for $27 billion two years ago, it started out as a messaging platform that was built into a failed video game called Glitch?

Shopify began as an e-commerce site for snowboarding equipment before its founders realized they could scale the site’s backend platform to target any business owner who wanted an online presence.

Meanwhile, long before YouTube was acquired by Google in 2006, it started out as a dating website — complete with the cringeworthy slogan “Tune in, Hook up” — before its founders pivoted the business to cater to rebel customers who were using the site to share whatever videos they pleased.

Speaking of Google’s acquisitions, Android’s genesis was as an operating system for digital cameras before its founders pivoted to smartphones and eventually sold to the search giant in 2005.

What do all these pivots have in common? Each of the businesses involved were modest startups at one point.

And while most retail investors didn’t have a chance to put their hard-earned money to work in the earliest stages of those startups, new regulations have fundamentally changed the investing landscape in recent years, enabling virtually anyone to become an angel investor today.

So as I sift through the thousands upon thousands of promising startups available to investors right now, don’t be surprised if I pay a little extra subjective attention to the adaptability of the executives at the helm.