Business plan not working? Time to pivot

(Editor’s note: Serial entrepreneur Steve Blank is the author of Four Steps to the Epiphany. This column originally appeared on his blog.)

At a board meeting last week I watched as the young startup CEO delivered bad news. “Our current plan isn’t working. We can’t scale the company. Each sale requires us to handhold the customer and takes way too long to close.  But I think I know how to fix it.”

He took a deep breath, looked around the boardroom table and then proceeded to outline a radical reconfiguration of the product line (repackaging the products rather than reengineering them) and a change in sales strategy, focusing on a different customer segment. Some of the junior investors blew a gasket. “We invested in the plan you sold us on.” A few investors suggested he add new product features, others suggested firing the VP of Sales. I noticed that through all of this, the lead VC just sat back and listened.

Finally, when everyone else had their turn, the grey-haired VC turned to the founder and said, “If you do what we tell you to do and fail, we’ll fire you. And if you do what you think is right and you fail, we may also fire you. But at least you’d be executing your plan not ours. Go with your gut and do what you think the market is telling you.  That’s why we invested in you.”  He turned to the other VC’s and added, “That’s why we write the checks and entrepreneurs run the company.”

The Search for the Business Model
A startup is an organization formed to search for a repeatable and scalable business model.

Investors bet on a startup CEO to find the repeatable and scalable business model.

Unlike the stories in the popular press, entrepreneurs who build successful companies don’t get it right the first time. (That only happens after the fact when they tell the story.) The real world is much, much messier.  And a lot more interesting. Here’s what really happens.

Whether they’re using a formal process to search for a business model like Customer Development or just trial and error, startup founders are intuitively goal-seeking to optimize their business model. They may draw their business model formally or they may keep the pieces in their head. In either case founders who succeed observe that something isn’t working in their current business model, orient themselves to the new facts, decide what part of their business model needs to change and then act decisively.

(A U.S. Air Force strategist, Colonel John Boyd, first described this iterative Observe, Orient, Decide and Act (OODA) loop. The Customer Development model that I write and teach about is the entrepreneur’s version of Boyds’ OODA loop.)

What happens when the startup’s leader recognizes that the original business model is not working as planned? In traditional startups this is when the VP of Sales or Marketing gets fired and the finger-pointing starts. In contrast, in a startup following the Customer Development process, this is when the founders realize that something is wrong with the business model (because revenue is not scaling.) They decide what to change and then take action to reconfigure some part(s) of their model.

The Customer Development process assumed that many of the initial assumptions about your business model would probably be wrong, so it built in a iteration loop to fix them. Eric Ries coined this business model iteration loop – the Pivot.

(One of the Pivot’s positive consequences for the startup team is realizing that a lack of scalable revenue is not the fault of Sales or Marketing or Engineering departments – and the solution is not to fire executives – it’s recognizing that there’s a problem with the assumptions in the initial business model.)

“Pivoting” is when you change a fundamental part of the business model. It can be as simple as recognizing that your product was priced incorrectly. It can be more complex if you find the your target customer or users need to change or the feature set is wrong or you need to “repackage” a monolithic product into a family of products or you chose the wrong sales channel or your customer acquisition programs were ineffective.

If you draw your business model, figuring out how to Pivot is simpler as you can diagram the options of what to change. There are lots of books to help you figure out how to get to “Plan B,” but great entrepreneurs (and their boards) recognize that this process needs to occur rapidly and continuously.

Unlike a large profitable company, startups are constrained by their available cash. If a startup does not find a profitable and scalable business model, it will go out of business (or worse end up in the “land of the living dead” eking out breakeven revenue.)

This means CEO’s of startups are continually looking to see if they need to make a Pivot to find a better model. If they believe one is necessary, they do not hesitate to make the change. The search for a profitable and scalable business model might require a startup to make multiple pivots – some small adjustments and others major changes.

As a founder, you need to prepare yourself to think creatively and independently because more often than not, conditions on the ground will change so rapidly that your original well thought out business model will quickly become irrelevant.

Startups are inherently chaotic. The rapid shifts in the business model are what differentiates a startup from an established company. Pivots are the essence of entrepreneurship and the key to startup success.

If you can’t pivot or pivot quickly, chances are you will fail.

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  1. [...] interesting thing about each of those companies is that they are constantly “pivoting.”  Each year, Facebook pivots with a new idea.  First it was adding applications and games. [...]

  2. [...] of practices for how to make it more likely that your bet will pay off – Lean startup, the pivot, customer discovery, sales learning curve to name a few – that taken together have the smell [...]

  3. [...] tech / software / apps space. One of the reasons – it demonstrates how important the “pivot” is, well before that strategy even had a name. I’ll get to that in a [...]

  4. [...] world tout the necessity of the pivot. A pivot is not a business plan or a product plan, but rather a radical reaction that startups make to real-time information about their business. At this point, the pivot is an expected part of the [...]

  5. [...] In the start-up world, they call it pivoting, and the faster you do it, the better. (See this great post by Steve Blank: Business plan not working? Time to pivot.) [...]

  6. [...] tout a prerequisite of a pivot. A focus is not a business devise or a product plan, though rather a radical greeting that startups make to real-time information about their business. At this point, a focus is an approaching partial of [...]

  7. [...] In the subsequent months we learned a lot of fundamental things that forced us to “pivot” the idea.  It was hard, and we lost some of those early customers but they stayed friendly [...]

  8. [...] Business plan not working? Time to Pivot (Entrepreneur Corner) [...]

  9. [...] wanting to give up on The Yakstand I decided to do what any good entrepreneur would do and pivot. It seemed like a better idea than just scrapping all of the work I had already done. Before [...]

  10. [...] any other startup, is most likely searching for a repeatable and scalable business model.Steve Blanksays: “Investors bet on a startup CEO to find the repeatable and scalable business model. Unlike the [...]

  11. [...] 但鮮少人會去留意其爆紅的背後,包括了多少次的嘗試 — 他們創業至今,一共取得 1,700 萬美金的融資,曾經發行了 35 款不同的手機遊戲,全部都無法引起風潮。但耐得住性子的是其背後的投資人,相信團隊可以做出對的東西來,而允許他們不斷大膽地嘗試,中間也包括轉換方向(pivot),嘗試了社交遊戲,事實上一開始 OMGPOP 並不是這個名字,也不是做遊戲,而是一種競標式的交友。 [...]

  12. [...] of the first articles to mention "the pivot" was from venture beat in 2010.  http://venturebeat.com/2010/04/1…  I know that companies have been changing their direction since the beginning of time but I am [...]

  13. [...] The Lean Startup and there were scores of articles highlighting the importance of the pivot, from VentureBeat, Forbes, and Fast [...]

  14. [...] short, it has innovated, experimented, pivoted and finally alighted on a development and publishing strategy that works for it. It is developing [...]

  15. […] does a good job of teeing up this issue in discussing churn in the Fortune 500 list.  With the technology and VC crowd, the more recent term for business model innovation is “pivot“.  I think you’ve […]