Business

4 lessons every VC should know before investing in pivoted startups

Image Credit: Pivot image via Michael D Brown/Shutterstock Illustration by Tom Cheredar

Oliver Holle is CEO of early stage angel fund Speedinvest.

We all know about the perfect pivot. The number of books and articles for entrepreneurs about when, how, and why they should drop their original idea to do something completely different could fill a small national library.

Unfortunately as a steed-stage VC like myself, there is little-to-no advice on how to handle “the pivot” from an investor perspective. And yet, very few entrepreneurs can execute this tricky maneuver without the support of their investors. It’s a very important perspective.

As a seed investor, you invest in teams. You are well aware that product-market fit might be elusive and there may be a few iterations before your team eventually finds its feet. So, you have invested in the team and it turns out there is no traction. The company only has money left to operate for a few more months. They need a new product, they need a new strategy and, most importantly, they need more money from you to have a shot.  It’s Pivot time!

But if a team fails, isn’t this a strong signal that they are not as strong as you originally thought? How do you disentangle external, market forces from in-house? Maybe there are team issues you missed?

These questions are difficult to crack, and there is no easy answer. However, I’ve found that four lessons stick out, (in reverse order of importance) as a good way to place your bet on a pivot investment:

1. Product-team match

You have seen the founders work on their initial product idea and it failed.

Will the new project be a better fit with the skills of the team? For this, you need to understand the skillset of a team first. Are they product people or sales driven? Do they feel comfortable in a B2B environment or B2C?

One key lesson here is that you have to go with what you have. It is very hard, in the short time you have to pivot, to transform a B2C team into a B2B proposition, unless they have done something similar previously.

My advice: if you have the shortlist of pivot ideas in front of you, make this a key criteria for selection. You only have one shot, so you better select a target that the team is truly well equipped to hit.

2. Cut your losses, forget the past

Don’t mistake a pivot for some incremental change in your product.  At least with past companies I have invested in, there comes a point when you sort of know if you are on to something (or not). After a long period of fog, the sky clears and you either see land or you don’t. If you don’t, jump ship. Don’t try to save assets, reuse assets, software components, partnerships, etc. Free yourself of all these burdens and focus on the team and its skills and enthusiasm. If you can jointly find something that makes sense and passes this test, go for it, and don’t look back.

One observation: the successful pivots we have seen were, more often than not, going after an idea that was already sort of on the market. I have rarely seen successful pivots that came up with radical innovations. More often, excellent teams that worked on an original invention — which then turned out to have no market (yet) – can leverage their skills on a product where the risk of product-market fit is smaller.

3. Timing is key or ‘muddling through’

From an investor’s point of view, managing this process tightly is of utmost importance.

Your challenge, simply put, is this: how can you buy time for yourself and the team without piling up further losses? You need to reduce risk in every way you can.

  • Choose a product that has a real chance to prove itself within the financial runway of the startup
  • Scramble for external funding:, salary cuts, renting out staff, office space, etc. Find every dollar you can save to extend runway.
  • Carefully evaluate progress and initial market traction (if any) of the new product. Tie your money flow to milestones.
  • Be 100 percent transparent on the milestones. Have a close, joint understanding with the founding team on the exact scenarios that you can support and those that you can’t.

4. Crisis as team due diligence

So, finally, here is my main point. I have one clear indicator that separates a successful team from the rest: enthusiasm. The single strongest indication is how the founding team deals with such a situation and with a serious, new challenge.

How does the pivot process feel to you? Is it a burden put on the team? Are they weary, still in love with their old product? Do you have to force decisions on them? Do they discuss the pivot as a hypothetical option or do they take fast steps? Do they follow your advice, or wait for your guidance?

Or are they running with it, moving the ball, having strong opinions about a new path? Are they ready to double down their commitments, financially, socially?

Don’t get me wrong: such a process should involve doubt, self-questioning and careful deliberations. But only for so long. At some point, the team has to embrace the change and run. If you don’t see this specific dynamic building up, I would recommend walking away. If you see it, stay with it, fight for it — it will pay off.

Oliver Holle is CEO of early stage super angel fund Speedinvest. He’s also a serial entrepreneur with deep experience in the mobile and Internet industry. While still a student in 1992, Oliver founded his first company, SYSIS, one of the first European Internet startups. A few years and many learnings later, SYSIS became part of 3united AG, a local 3-way merger that created a top European player in the mobile content industry. Early in 2006, 3united was acquired by VeriSign Inc. at a valuation of $67 million.


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