Not Everyone Can Afford a Pivot

by Alvaro Febrel

The idea of pivoting is fairly intuitive and it is at the core of lean startup management practices. A pivot is just the correction of the startup’s trajectory in light of some evidence provided by experimentation. However, I don’t believe that pivoting is well suited for any kind of company and hence I don’t think lean startup management practices are universally applicable.

The reason is that some startups are more sensitive to errors, and thus can afford fewer errors than others. Their “cost of failure” is higher because of the nature of the product or service they are trying to develop. Considering the cases of several technology companies studied at Business School, I believe there are 4 factors that amplify this “Cost of Failure”:

1.   Reputational risk: In this respect, the probability of ruining a company’s reputation varies with:

a.   The size of the market – The lower, the higher. For example, a company that is playing in a niche market is more likely to be cautious in managing its relationships with customers.

b.   The level of interconnection and transparency between the market players – The higher, the worse (because the bigger the spillover effects will be). For example, a product delivered over a social networking platform may be more sensitive to customers’ word of mouth.

c.   The level of “criticality” of the product or service – The higher, the worse. For example, IMVU, who was doing 3D avatar instant-messaging, had a much lower reputational risk of not delivering a satisfactory product than an elevator company or a mobile payment platform would have if their products failed.

2.   Scale/Vision: Sometimes a minimum viable product requires a lot of investment up front to be able to test it. This is the case of many platform products, where customer acquisition costs can be very high. Brightcove, for instance, had to deal with this issue. The company had an ambitious plan to develop a 4-sided platform that would transform the way internet video content was consumed and distributed. With a top-notch team, the company poured millions of dollars trying to be the meeting point of the industry. At the end, they had to discard the original idea and become an online video editing company.

3.   Learning Cycles: Some products have longer learning cycles due to the complexity of R&D developments or because their customers’ feedback is sluggish. In the energy efficiency sector for instance, it is hard to get customers’ attention given that energy is not a core part of their business.

4.   “Asset Specificity”: Very specific and specialized human capital would be more costly to replace if they become disillusion with changes in the company’s direction. This was the case for Cake Financial, where the founder had to replace the entire engineering team.

All in all, although lean startup management practices are useful, I am of the opinion that they can only be applied to a subset of companies. Most particularly, those that have lower costs of failure, which also tend to be those with more modest returns in the long run.