Pivots and PirouettesPosted on .
At the Sigalow house we have a ritual of ordering Chinese take-out on Sunday, and two nights ago I got the following fortune, “If we do not change our direction, we are likely to end up where we are headed.” I think the forces of the universe, or perhaps just the forces at China Fun, are telling me to write a blog post about companies that change direction (fashionably called a “Pivot” in VC lingo).
At Greycroft we typically invest after the angel stage, which means that almost every company has a product and some customers prior to our investment. Nevertheless, seven of my thirteen companies changed business models some point after I invested. I didn’t do the count for the entire portfolio, but my guess is that it falls along a similar line. Generally speaking I think this change is a good thing.
The changes that I mention above run the gamut – everything from business model changes, like selling managed services instead of software licenses, to complete 180 degree product and model changes, such as switching from a consumer-facing blog network to an open-source B2B software company. This shouldn’t be surprising because I do early stage investing, but it is a nice reminder of the differences between venture capital, where change is expected, and the private equity business, where change triggers debt covenants. We even have one company in the portfolio that changed three times and ended up back where it started. We collectively deemed that to be a “pirouette”.
Good entrepreneurs are always tweaking their business to improve performance, and one obvious differentiator between good CEOs and great CEOs is the ability to get out in front of change early. There are a lot of theories to this – some experts say you want a sales-oriented leader who spends a lot of time with customers so he can see trends emerge (like Benioff at Salesforce) while others say you want a product-oriented leader with great ideas (like Zuckerberg at Facebook). Ultimately I think it doesn’t matter. In my experience the best leaders have a common trait – they execute quickly and without prevarication. In a start up, the two most valuable resources are time and money, and there is nothing worse than watching these slip away because of poor execution. I tell entrepreneurs this all the time, how you execute honestly matters more than the quality of the idea.
As a last point, when I was an entrepreneur I noticed that some people have the “creative gene” for problem solving and some do not. If you are considering taking early stage money from a venture fund I recommend you find someone who you think would add value in a brainstorming session. I am not going to make this a shamless plug for Greycroft, but it is something to think about if you realize that there is over a 50% chance that your business will have a completely new business model between now and the time you exit.
Ian is a co-founder and partner at Greycroft Partners in New York City. He has been a venture capitalist since 2001.
Posted on 11:03 am March 9, 2011.
Ian this is your blog, you can make a shameless plug..
Great points on being out early with change.
I have just been in the position to change our well “forecasted” business modell with nice SaaS revenue and full service high margin ecommerce service provider revenue, to a single stream transaction revenue for what is now a “platform” with lower margins.
This was an especially difficult decision as our new platform approach enables our clients to build their own apps and simply plug into our platform via our api, so unplugging is equally simple. Our rationing for lower margins, an open platform and flexibility for our clients came from the desire to provide clients the fastest way to monetize their audience with offers, while removing all growth barriers of a scaling model on our end, which included building one off applications for clients. Today our clients build their own apps and use Adility as a tool.
Our “old” model had a long sales cycle and long integration development process, so we were signing up on average 5 new clients per month.
Since we made the change we had 75 sign up’s in January and over 100 in February and are now growing by 30%+.
The change was particular difficult as it literally jeopardized our existing business that paid the bills. Going through a change like this requires conversations with existing clients, the willingness to migrate them to a more favorable financial model for them and letting loose of a (short term) controlling leverage.
I understand that it is difficult for many startups to make this kind of dramatic move once they have clients and revenue, as you have no clue what is around the corner and how your ideas and vision for the product will actually be interpreted once implemented.
For us ultimately the understanding that we will only win with the best product and if we focus on long term clients made the decision easy and having a deep understanding of our market and the competition helped us to see the risk as a temporary arbitrage for long term growth.
The larger a company grows the more difficult are these rapid changes. I would argue a start up, well funded with no revenue is propably in the best position to make these changes. Though in many cases they have no clue yet what clients really want and so are throwing a bunch of darts.
Ultimately the founders vision will drive their willingness to change along the way. In our case we see Adility as company that handles billion dollars of transactions for our clients and the decision was easy.
Posted on 5:50 pm March 11, 2011.
Posted on 9:01 pm March 11, 2011.
Posted on 10:29 am March 14, 2011.
@MarissaCampise marissa what do you think of LiveFyre?
Posted on 10:35 am March 14, 2011.
@thomascornelius Thanks for the comment Thomas – I think @davidjrodriguez spoke with you last week and I am waiting to get his feedback when he comes back from SXSW. I believe the hard part for some software companies is providing all the service around the offering. In the daily deal segment, most publishers don’t have the experience or team to scale a new business line like this, so GroupCommerce and others are providing a lot of hand holding.
Posted on 10:50 am March 14, 2011.
@IanSigalow marissa i’m not getting these @replies on my social networks
Posted on 11:22 am March 14, 2011.
@IanSigalow @thomascornelius@davidjrodriguez agreed. That’s why we are today integrated with most white lable tech providers like nimblecommerce, chompon, etc.
Though for us daily deals are just the tip of the iceberg, we are looking at lbs and mobile and see a huge push coming there aside from the current “flavor of the year” of group buying deal sites.