How do you know when to stop pivoting?

As an entrepreneur following the lean startup philosophy, how do you know when to stop pivoting and pull the plug on your venture? Is this decision easier or harder in a lean startup?

By Said Francis 

To best answer the question about how an entrepreneur knows when to stop pivoting and pull the plug on a venture, I will reflect on two startups that required pivoting:  1) Cake Financials and 2) Marginize.

Steve Carpenter did not follow the lean startup practices when he set up Cake Financials in 2007. While he had a clear hypothesis around the customer pain point, he spent considerable time and significant financial resources on building the platform based on his initial assumptions. He designed and perfected a product without really taking into account the customer feedback, hence risking product-market fit. He soon realized that, despite the extensive PR coverage, his hypothesis was incorrect and his product was incongruent with its target market. However, given the $9m+ he had spent so far in development of back-end, it was too expensive and unaffordable for him to pivot, and he could not go back to his investors to raise more money. That led him to stick to his original plan for 3 years before discontinuing operations and returning < 1x capital to his investors.

Ziad Sultan founded Marginize while at Longworth VC. Since our tenure at MIT, he always believed that the way people interact with the web is primitive.  He initially launched Marginize in 2010 to “allow a real-time conversation on top of an existing webpage, by overlaying a marginal column that tracks conversations about that page on Twitter and other existing social-media networks”. He raised the necessary funds from sound investors in the Boston area after participating in Tech Stars and was covered by major tech PR venues. He ran very lean operations, with outsourced developers in Egypt and one CTO in Montreal. He held many sessions with users and observed their behavior with the tool he developed and refined it to best meet their needs.  Despite key partnerships with Xconomy and Boston Globe, Marginize did not take off as people’s comments in the margin did not add valuable information to the webpage, and consequently was not monetizable. Within a year he recognized Marginize’s shortcomings and went back to his investors with the same thesis of improving the browsing experience of the web. Given that he had followed lean principles and did not invest a large amount of investor money before pulling the plug on the first “experiment” has he calls it, his investors, including Dharmesh Shah, bet on him again and funded “Nextly” an innovative way to view content streams within the browser.

The difference between Ziad and Steven is that Ziad followed lean principles and was willing to kill fast a product that did not achieve product market fit while Steven kept doubling down on the same untested platform before reaching the point of no return with $9m already sunk in his own vision of Cake financials. He had identified a great market opportunity the way Ziad did with the improved browsing experience, however he did not have the luxury of pivoting given how expensive his failure was.  I believe that if an entrepreneur identifies an attractive market opportunity he/she should not stop pivoting until he/she cannot access financing anymore. Someone will ultimately figure it out and an entrepreneur who is flexible enough to pivot is best positioned to provide the optimal solution for the identified market. Lean startup principles give the entrepreneur the luxury of pivoting cheaply and more frequently than those following the traditional model.