July 7, 2013 in Business

Rethinking startup can be pivotal experience

Wailin Wong Chicago Tribune

From left, David Feldman, Chris Zamierowski and Chris Youkhana of BetterFly work at Lightbank, a venture capital firm with offices in Chicago.
(Full-size photo)

It requires emotional detachment yet total passion. It might involve killing a business in order to save it. It’s by turns agonizing, rewarding, humbling and empowering. And everyone who’s done it seems to have a slightly different idea of what it is.

It’s the pivot.

An essential concept in the startup world, pivoting means doing something differently, often under time constraints as cash and investor patience dwindle. A pivot could involve changing a product to reach the same target market, going after a different market with the same product or preserving a small piece of existing technology to form an entirely different business. Entrepreneurs and venture capitalists don’t always agree about when a tweak becomes a full pivot, or when a pivot becomes a do-over. But they do say startups have to be open to change.

“There’s a mistaken belief by a lot of entrepreneurs that ‘Hey, I spent three years building this thing; I’ve put in a lot of time and effort, so inherently it’s worth something,’” said Paul Lee, a partner at Chicago-based venture firm Lightbank. “But the market is telling you what it’s worth, and it’s not the work you put into it. If you look at it clinically and take off the effort lens, it becomes a very easy decision.”

Startups certainly didn’t invent the idea of adapting to market forces. But it is a testament to Silicon Valley’s optimism and flair for salesmanship that it coined a euphemism for, as veteran tech writer Kara Swisher put it in a recent Vanity Fair profile of mobile photo-sharing service Instagram, “saying you’ve screwed up and are starting over.”

The most famous Chicago pivot in recent history belongs to Groupon, which started out as The Point, a company focused on organizing collective social action. A campaign would be activated only if a minimum number of people pledged support. This tipping point model was later applied to negotiating discounted products and services with local merchants.

Lightbank’s founders, Eric Lefkofsky and Brad Keywell, were also Groupon’s earliest investors. The venture capital firm has guided many of its portfolio companies through pivots. The process must be data-driven and move quickly, said Lee, who believes entrepreneurs can typically gauge whether an idea is working within 90 days.

This was roughly the timeline that Brad Weisberg and CJ Przybyl encountered. Weisberg had realized a 10-year dream in 2011 by launching BodyShopBids, a company whose website and mobile application allowed car owners to upload photos of their damaged vehicles. Local body shops could submit quotes for repairs and customers could book their appointments through the app.

Just months after completing a $1 million fundraising round from investors, including Lightbank, the team realized the car owners were unlikely to become repeat customers because car repair is an infrequent need. This dynamic made their marketing costs high, and selling other services such as oil changes through the website didn’t fix the problem.

“That’s what we thought a pivot was just deviations within the same model,” said Przybyl, whom Weisberg had brought on as co-founder after launching BodyShopBids. “We didn’t get traction until we pulled a real pivot. That was ripping up the company.”

With their funds running low, Weisberg and Przybyl started attending body shop and auto insurance conventions around the country in search of a new business model. In July, they launched a new startup, Snapsheet. The company builds branded mobile apps for auto insurance carriers. Drivers still take photos of their damaged vehicles using the app, and they can also use it to see their insurance company’s estimate.

“I had had this idea for BodyShopBids for 10 years, so it was not easy to let go of my vision,” said Weisberg, who initially funded the company with money saved from his bar mitzvah.

Swift decision-making is important in a pivot because most startups are strapped for cash and can’t afford to dither. Venture-backed companies in particular face “more pressure to get to higher revenues faster,” said Phil Nevels, co-founder and chief operating officer at Power2Switch, an online platform that allows consumers to compare electricity providers and sign up with a different utility. The startup, which is backed by several local investors, is mulling a pivot where it would package its software tools and license that technology to other utility brokers.

“You might have a wonderful business that’s got traction – you’ve got revenues and customers – but you’re still thinking, ‘I’m trying to get X revenue by here and the current trajectory just isn’t getting me there,’ ” Nevels said.

For Sharon Schneider, the pressure to find a winning business model was heightened last summer when she entered startup boot camp summer program Excelerate Labs, now called TechStars Chicago. Her subscription rental service for baby apparel, Good Karma Clothing for Kids, had won a business pitch competition and gotten good press. But it lacked paying customers.

Schneider decided in Excelerate’s third week to change. Knowing she would have to present her startup to a crowd of potential investors in less than three months, she kicked off a three-week process of converting the company into an online resale shop for upscale children’s clothing. The startup needed new e-commerce technology, new product inventory and even a new name.

Moxie Jean, the result of Schneider’s pivot, launched to friends and family in mid-July. By the end of August, the company had five times more customers than Good Karma had signed up in its lifetime.

“The data will tell you what’s not working, but it doesn’t tell you what to do instead,” Schneider said. “You still have to go out and figure out what’s the right answer, and that’s hard. The weeks or the months before you pivot is the darkest, most miserable, most horrible time of your life because your business is failing and you don’t know why.”

Some startups go through multiple transformations. Entrepreneur Zach Smith compared the process with a game of telephone, with the final company bearing little resemblance to the original concept. As an undergraduate at Harvard, Smith founded Gtrot, a website that allowed friends to tap their Facebook network for travel recommendations. Like the BodyShopBids team, Gtrot found that big trips happened too infrequently for the site to amass a large base of users. The company turned its focus to local discovery, or helping consumers collect personalized tips about enjoying their home cities.

For Smith, the shift to local recommendations was too small to constitute a pivot. But then he made a big change. One of Gtrot’s local features allowed Facebook friends to give each other gifts furnished by a local merchant, such as a free appetizer or hang gliding excursion. Smith decided to focus wholly on this concept of “social gifting” and launched a new company, Boomerang.

The changes kept coming. Less than a year after launching, Boomerang shifted from local gifts to virtual gift cards for national brands such as Shutterfly and Ghirardelli. It introduced a technology platform for online publishers such as survey companies to reward users with these gift cards. In essence, Smith and his team started with a consumer travel website and found themselves with an online advertising platform in less than five years.

“We knew we had to move faster with Boomerang than we had at Gtrot,” Smith said. “We had this experience of failure and we knew what failure looked like. If you can pivot and iterate early on, before you get too much emotional devotion or credibility on the line, it makes it a lot easier.”

Lightbank’s Lee said his firm will continue backing a portfolio company through multiple pivots if the startup is pursuing a viable market in a cash-efficient way.

“That said, if we come to the conclusion that the management team is not right or the execution is not there, we’re not going to put good money after bad,” Lee said.

Sometimes the proper course of action is to shut down a startup instead of attempting another pivot. At Chicago venture firm and startup incubator Sandbox Industries, “we kill a lot of projects,” said Nick Rosa, co-founder and managing director.

Sandbox had launched a company called Morgan Street Document Systems to help wealthy individuals and financial advisers with online storage and management of important documents. The startup ran into trouble in 2008 when two of its customers, Lehman Brothers and AIG, buckled during the financial meltdown. Sandbox turned Morgan Street into Orggit, a lower-cost online document management system for everyday consumers, but couldn’t make the business work and pulled the plug.

“We almost always fall prey – I think it’s just human nature – to ‘Can we try one more thing with this business?’ ” Rosa said. “If you’ve invested in a business, it’s hard to kill it. That’s the hardest part of what we do. You’d rather pivot and take advantage of some of your sunk costs, but every once in a while, you realize this is a business that’s not good for us.”

The term “pivot” is overused in startup circles to the point of parody – Moxie Jean’s Schneider has heard entrepreneurs say “I pivoted my plans” if they go to lunch early. But for those who have been through the process of revamping their startup, they have emerged just as transformed as their business.

“There’s definitely some survivor bias, but I get a lot of credit as an entrepreneur for having made a successful pivot,” Schneider said. “People take that not as, ‘Wow, she really screwed it up before,’ but, ‘She really figured it out. The team figured it out.’ ”

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