The Mystery of the Pivot
Ever wondered what factors make a founder or entrepreneur perform a complete pivot? New research suggests that the decision rests mostly on three separate but interrelated variables.
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In the case of most startup firms, the first stage of entrepreneurship is often defined by the development of a theory about a market gap. In other words, an entrepreneur starts his or her journey trying to determine a market demand that is not being met. On the basis of this theory, the entrepreneur then introduces the new product to the market, in hopes that the theory is correct. In many cases, however, the initial theory is wrong, and the entrepreneur must return to the idea generation table and refine the theory. In some cases, a decision is made to simply alter the original product, making relatively minor adjustments to things like distribution channel, product positioning, or target base. But in more serious cases, when the theory is deemed to be incorrect and the product has been firmly rejected by the market, the original idea is discarded and a new theory is developed.
The process described above is commonly known as a “complete” pivot, in contrast to the “iterative” pivot in which a product or service is adjusted, rather than fully discarded. An example of an iterative pivot might be Netflix, which began as a DVD rent-by-mail company but eventually morphed into a streaming service and ultimately a content creator. An example of a complete pivot would be Twitter, which began life as an app service that allowed users to search for and subscribe to podcasts. In between these two examples are hundreds of other companies – some small and very some large (think IBM) – that have undergone an extensive pivot, whether that be in terms of products offered or back-end business model.
From a broad perspective, while the concept of “pivoting” has been extensively discussed in both popular and academic management literature, the factors influencing an entrepreneur’s decision to pursue a complete pivot strategy have remained mostly a mystery. To clarify, researchers understand quite well the cognitive and operational factors behind iterative pivots, but the factors that influence an entrepreneur to completely pivot his or her company’s product or service have been mostly overlooked. From a practical perspective, this lack of understanding can be a major obstacle for early-stage founders who are considering whether their product needs only minor adjustments or a massive overhaul.
Fortunately, a new study by researchers at Baylor University in Texas offers an insightful window into the mind of entrepreneurs who pursue a complete pivot strategy. Published in the Journal of Small Business Management, the study uses an analytical tool known as behavioural decision theory to dissect the most important factors behind this phenomenon, concluding that there are three unique but interrelated dynamics that influence the decision to pursue a complete pivot: the gap between projected estimates and actual (for example, projected revenues versus actual revenues, or projected profitability versus actual profits); the reasons given by the entrepreneur to explain this gap (what the authors call “attribution for the miss”); and the “length of the runway” (essentially, how much cash the company has available and the associated cash burn rate). These three factors, conclude the researchers, explain the vast majority of situations in which early-stage startups choose to follow a strategy of complete pivot.
In the case of the first factor, a massive gap between projected and actual revenues could be a significant shock to any founder, and can naturally cause a re-assessment of the original theory about a market gap. In the case of attribution for this gap, the authors conclude that an individual is more likely to pursue a complete pivot when it is believed that the reason for the gap is an incorrect theory of the market, as opposed to a failure of persuasion. In other words, when an entrepreneur determines that a revenue miss (for example) is caused by their own failure to read the needs of their customers, then they will automatically rule out the notion that the miss was a failure to properly bring the product to market. In such a case, the entrepreneur will be more inclined to pursue a complete pivot, since the problem is thought to be with the product itself, rather than the marketing of the product. In the final factor, the cash burn rate (or “length of the runway”, as the authors call it), the impact this has on a founder’s thinking should be obvious: when a company is burning through its cash, there are often very few options available aside from abandoning the project and starting fresh with something new.
Using behavioural decision theory (BDT) to analyze the question of early-stage entrepreneurship provides a fascinating window into how founders make actual decisions. The basic idea of BDT, a concept which was first developed in the 1960s, is that the strategic direction of a company flows directly from the cognitive processes involved when the company’s leaders measure their company’s performance against an alternative. In other words, BDT suggests that a company’s strategy is essentially an outgrowth of the constant psychological push and pull involved in a founder’s mind when he or she measures the success of a venture against other courses of action. A firm’s leader will constantly assess the success of their firm against an aspirational vision they hold of success, and then make adjustments to better align the operations of their firm with this visualized aspiration.
This theory helps to explain the decision to pursue a complete pivot because an aspiration (the founder’s vision) must exist in order to realize a performance goal. Without a vision, there is nothing to aim for, and a firm will exist only in a reactionary state. While this might be acceptable for large and established companies with significant market share, being reactionary in the world of startups is a clear recipe for failure. Therefore, founders develop an aspirational goal, and then attempt to fit their product within the parameters of this goal. If the strategy being pursued is thought to require a completely new market search, then the most obvious course of action for many entrepreneurs is to kill the original product and develop a new theory about the market.
The authors are quick to point out that two personality traits, impulsiveness and grit, can have an important impact on a founder’s decision to pivot. In the case of impulsiveness, an entrepreneur might be more inclined to pursue a complete pivot when only one of the factors are present. For example, if an impulsive entrepreneur determines that the gap between projected and actual revenues is too great, he may decide to pivot completely even if the company’s cash burn rate is still acceptable. Conversely, when an entrepreneur with a high level of grit and tenacity observes the same phenomenon, she might determine to continue pushing the product even if her cash burn rate is dangerously high. For an entrepreneur who is considering a pivot, understanding the extent to which he or she is highly impulsive or highly tenacious can help to avoid making an irrational decision.
The Bottom Line
One of the key takeaways here from the perspective of an entrepreneur is to consider that many of the cognitive processes involved in his or her decision-making are likely a result of what researchers call aspiration-performance misalignment. A less academic way of looking at this is to say that all founders, whether consciously or not, are constantly measuring the performance of their company against an imagined ideal. In order to maintain energy and passion for the project, there must exist a high level of alignment between a founder’s vision and the reality on the ground. At the same time, in order to make the best decisions, a founder must ensure that decisions related to a perceived misalignment between these two variables is based on a rational decision-making framework. For example, a founder who determines that her product theory is incorrect (and thus chooses to pursue a complete pivot) might not be considering that the product may require a longer runway in terms of developing market share, or is being marketed to the wrong consumer demographic.
Another important takeaway for founders and entrepreneurs is the fact that rational decision making is challenging, and self-perceived rationality is not always as rational as one might think it is (we might not always be acting as rationally as we think we are). For a founder considering a strategic move as drastic as a complete pivot, it would be immensely beneficial to employ a formalized decision-making tool that attempts to remove some of this potential irrationality, such as a standard decision tree or decision matrix.
Wood, M.S. et al (2018). Full steam ahead or abandon ship? An empirical investigation of complete pivot decisions. Journal of Small Business Management, 56(2), https://doi.org/10.1111/jsbm.12437.Tags: aspiration-performance misalignment, Baylor University, Pivot