The Startup Pivot

The myth about pivots is that they are an exception: something undesirable that happens because a startup went seriously awry, and which you should strive to avoid.

In reality, pivots are an integral part of the entrepreneurial process. Whether you’re pivoting in the early days because you haven’t yet found product-market fit, or you’re pivoting by reinventing yourself later on, all companies – if they’re going to become and stay successful – are going to have to pivot.

This essay is adapted from the Greymatter podcast. You can listen to the episode here.

Every successful technology company has repeatedly reinvented itself. Apple went from Apple II to the Macintosh to iOS. Microsoft went from MS-DOS to Windows to Office to many new reinventions, including Azure. Netflix went from mailing DVDs to streaming video. Most don’t think of these shifts as pivots, but that’s precisely what they were.

Here’s how the myth goes: You have a brilliant idea, you execute like crazy, and it either works or it doesn’t. You get one shot, and hopefully you’re in the right place at the right time. Actually, startups, like all businesses, work because of a cycle of invention and reinvention. My friend and colleague Mark Pincus defines invention as adding to the business, while reinvention occurs when you transform a major element of the existing business. Businesses start from scratch with invention, but simply adding on to that foundation with invention alone ultimately results in failure: whether by inability to adapt to changes in the market, competition, or technological foundations, to a potentially unfocused Frankenstein’s monster of mis-matched elements. To refine or change the business requires the discipline of reinvention, which combines addition with subtraction.

So what is a pivot anyway?

In our book, The Start-up of You, Ben Casnocha and I wrote about a concept we called “ABZ Planning”. You have a Plan A, which, in the context of a business, is the investment thesis and strategy. You should have multiple Plan Bs, which represent incremental/partial changes and refinements to your Plan A, and a Plan Z for the worst-case scenario where you need to discard Plan A completely and find a way to survive and build a new Plan A.

Many people think that a pivot is a Plan Z, but it’s actually a Plan B – a change to the existing strategy rather than a complete restart. The nuance is that a repeated set of pivots (Plan B1, B2, B3, and so on) may carry you so far away from your original Plan A that very few will ever remember it.

For example, when the Covid-19 pandemic started, RydeOn was a service helping traditional taxi companies compete with Uber and Lyft by facilitating relationships with hotel concierges. Needless to say, this isn’t a business model that works in the pandemic world. So the company pivoted to running an Instacart-style grocery delivery service using idle taxi cabs. From there, it further shifted to operating its own refrigerated warehouse and fleet of delivery vans to deliver organic foods directly from farmers and specialty suppliers. I’m sure its customers wonder, “Why is an organic grocer named RydeOn?”

In the world of technology companies, a pivot generally involves changing the product in a substantive way that changes how the company engages with its customers. It might cater to new customers, it might solve a different need, or it might involve a different revenue model. Essentially, a pivot means that the business changes in some real way. What all these changes (and more) have in common is that they aren’t simply cosmetic changes; a shift isn’t a pivot if it doesn’t involve substantial risk. Reed Hastings of Netflix has said, “It’s not a strategy if failing in it doesn’t actually cost you something real.” Pivots can be high-cost, but they can also be high-reward.

How do I know when it’s time to pivot?

If you launch your product and you’re not embarrassed by it, you’ve launched too late. Similarly, if you pivot and there aren’t some issues that arise, or implications you haven’t fully thought through, you’ve probably taken too long to pivot.

My general theory of pivoting is that you should generate an investment thesis (Plan A) which lays out your theory of how you’re going to win and takes the form of a short list of key bullets. Then the key question is, “Is your confidence in your investment thesis going up or down?” It’s really critical to have that explicit investment thesis because if you haven’t crisply stated it, you’re not going to be able to tell when you should be losing (or gaining) confidence in it. In many ways, pivoting is simply the natural execution of a significant rewriting of your investment thesis.

People often think that the only reason to pivot is data. In fact, anything that leads to a rational and significant reduction of belief in your investment thesis can justify a pivot. The numbers are not some fact of nature, but rather simply a tool for achieving clarity of thought around your theory of how to win. Part of the reason I encourage entrepreneurs to discuss their ideas with as many smart people as possible is because sometimes that clarity of thought can come from an entirely different field or industry. I believe that my philosophy degree, by improving my clarity of thought, has been more important to my career than the business courses I took as a Stanford undergraduate.

What leads to pivots?

The classic reason to pivot is a lack of product-market fit, which is one of the growth limiters that prevents blitzscaling. One of the reasons that Silicon Valley has been so successful at building blitzscaling companies is its “fail fast” mantra, which encourages entrepreneurs to determine whether or not their startup can achieve product-market fit as early in the company’s lifecycle as possible. Failure isn’t the goal; learning is the goal. You’re trying to learn whether your investment thesis holds up, or if you need to revise it and pivot. (You can read and listen to my more in-depth thoughts on failure here.)

For example, if you think you have a great idea for a business, a standard Silicon Valley startup technique is to create a faux website and run some Facebook or Google ads to see whether or not the concept appeals to the market. Then, you can refine through testing different ads and web landing pages. If you’re learning faster than the competition, you’ll have a massive competitive advantage.

But achieving initial product-market fit isn’t enough; you also need to achieve scale product-market fit. Early product-market fit can sometimes be illusory or limited in scope to a small pool of early adopters.

Sometimes, your go-to-market stalls, and you need to pivot to re-ignite growth. Sometimes your technology platform changes, and you need to pivot from on-premise to the cloud. Frequently, however, you need to pivot your business model and find new ways to make money. Once upon a time, the core basis of competition in telephony was the cost of long-distance calling; when was the last time you even thought about a per-minute charge? Business model evolution is the rule, not the exception.

Companies die when their pivots fail and they don’t have the resources to carry out any more reinvention. That’s why one of the factors that separates successful from unsuccessful entrepreneurs is their pivot “tool chest.” The seriously successful entrepreneurs I’ve worked with have a deep set of tools for thinking about business models and how to execute on them. They’re expert reinventors who have gone through the invention/reinvention cycle multiple times, and built up a formidable tool chest along the way.

What changes does pivoting entail?

Pivoting is more than just a matter of declaring, “Hey, we’re pivoting.” It’s a major change of direction that requires major changes. For example, let’s say you’re an enterprise software company that delivers an on-premise product, but now wants to pivot to delivering a SaaS product in the cloud. This pivot fundamentally changes your required organizational competencies, from Sales and Marketing to Engineering, Operations, and Support. If you pursue a new strategy without refactoring your underlying capabilities, you will likely fail.

Not all pivots are created equal. Some pivots are just easier to pull off. For example, if you’re an early-stage SaaS provider that is shifting from a horizontal solution to a vertical focus, your mission, culture, and competencies can stay the same and the pivot transition will probably go smoothly. Operational processes like dashboards and OKRs may require different entries, but remain structurally identical.

Other pivots represent a bigger challenge. For example, shifting from hardware to software, or vice versa, tends to require wholesale changes to the organization, making the transition trickier and riskier.

One of the most subtle challenges is knowing which learnings to keep and what to abandon. This difficulty arises because success imprints more strongly than failure. When people fail, the need for change is obvious. But when people succeed, they tend to think, “We have to hold on to this lesson we learned from this triumph we won with our blood, sweat, and tears.”

Having the willpower to discard lessons that were true and valuable before, but now have to change, is one of the keys to successful reinvention. It’s very tempting to ask, “What’s the least we could change?” Changing things like people and culture is difficult (and may be emotionally traumatic), but sometimes you’ll fail unless you say, “These are the things we’re throwing out. This is a new day, and we have to be intentional about the things we’re not taking with us.”

Once you make the hard call, however, your people will thank you, because they know what they can stop doing. Knowing exactly what you’re *not* doing is one of the prerequisites for knowing what you *are* doing.

How do I get the team to buy into the pivot?

Getting the team to buy in is always hard. It’s easier (but still hard) when you’re running a small, early-stage organization. That’s part of the reason why pivots are a central part of the entrepreneurial toolkit. As long as you can keep the team and general mission the same, you’ll probably get buy-in. Part of entrepreneurship is learning new skills along the way, so you can even sell the pivot by saying, “We’re all going to learn together.”

In Blitzscaling, Chris Yeh and I wrote about the transition from generalists to specialists. Early in your startup’s life, you likely have a team full of generalists who are generally willing and able to adapt to almost anything. In contrast, a more mature company might have a team composed of specialists who won’t be happy if you’re pivoting away from their area of specialty.

You might not be able to get all your team members to buy into a pivot. For example, an employee who joins a videogame startup because they really want to build a kick-ass game might not want to stay if the company pivots to enterprise software. If that’s the case, both parties are better off parting ways. Your pivot won’t satisfy their core aspirations, and if they stayed, they would pull the organization in the wrong direction. Startups need coherence; all the elements need to fit together. If you execute a big pivot at any kind of scale, you will need to change out some of the organization.

How do I get the Board of Directors to buy in?

Part of the playbook for building giant, world-changing companies is to get one or more competent, powerful venture capitalists on your board. I’m not saying this because I’m trying to pump up the venture capital industry; it’s based on my experiences as an entrepreneur, where I had great VC partners (and some not so great ones). You can also see this through the pattern matching of the great technology companies, all of whom have had some serious venture capital investors and board members.

The decision to pivot carries high risks and high stakes; if you let it be a committee decision, you’re going to have a lot of thrashing. The pro tip is to go to the key one or two VCs and get them on board as your partner in the decision. Then, that board member(s) can persuade the rest of the board that this is the right thing to happen.

If you go straight to a general board debate, various board members will ask things like, “Well, what does this mean?” Or, “Are we taking new risks?” The discussion will be too slow, with too much reflexive risk-avoidance and not enough intelligent risk-taking. The way to cut that Gordian Knot is to enlist a board partner to advocate for the pivot. If you’ve chosen the right person, the other board members will say, “Great. We know that you’re representing the board’s independent governance, and that if you’ve come to this point of view, that helps us get comfortable with making a quicker decision.”

This isn’t an academic concern; nearly every company I’ve ever invested in has faced this kind of board discussion. The entrepreneurs who followed this advice got better results.

Pivoting an established company

While this essay has focused on startup pivots, reinvention is also important for established companies. The world’s most valuable technology companies have always reinvented themselves. We’ve already discussed Apple and Microsoft, but the same pattern applies to Amazon’s evolution from an online bookstore to the everything store and cloud computing giant, or Google’s evolution from enterprise search appliance to the default way humanity accesses the world’s information via search, Chrome, and Android.

The converse is also true; companies that fell from grace did so because they failed to pivot. Amazingly, AOL still has dial-up customers, but it’s inability to reinvent itself transformed it from the world’s most valuable media company to an obscure division within Verizon Communications (where, ironically enough, it was combined with the remnants of Yahoo — another company that succeeded in its early pivots but failed in its later pivots). Achieving sustained success in the technology industry is more challenging than in any other industry because the power of Moore’s Law, which predicts that computing power doubles every 18 months, drives a relentless cadence of rapid change.

PayPal’s Five Pivots To Success

Today, PayPal is *the* online payments company. It processes nearly $1 trillion in payments every year and has a market capitalization of $240 billion, $19 billion in annual revenue, $3 billion in annual profits, and 23,000 employees. 87.5% of online shoppers use Paypal. Most people don’t realize that PayPal had to pivot over and over and over again to succeed. Here are the five major pivots that led to PayPal’s success.

The Starting Point: Mobile Encryption

PayPal started with Peter Thiel and Max Levchin, who met at a talk that Peter was giving and Max attended at Stanford. Max, who is super smart, had this idea for how to do encryption with a low amount of compute cycles, which would be a great fit for mobile, where compute and battery power are limited. That was the idea with which Peter and Max raised angel funding and brought me and Scot Banister on the board. The company was named FieldLink at that point; very few people know that name was ever part of PayPal.

Pivot #1: Cash on Mobile

As a board, we began discussing the investment thesis. We quickly realized that to make FieldLink a viable platform, we would need a killer app. The question was, were we going to depend on someone else for the killer app? Or were we going to try to build the killer app ourselves? There’s valid arguments both ways. There are some very smart people who think that you cannot build your own killer app and have the platform succeed, because the developers will always worry that the platform company will simply clone any successful apps. And there are equally smart people who think the opposite. Just to confuse matters further, a platform might evolve from one state to another, like when Amazon introduced Amazon Basics that compete with Amazon’s other merchants.

We decided we needed to build our own killer app, so Peter and Max suggested that cash on mobile would be very valuable. We pivoted, raised money from John Malloy of Nokia Ventures (now BlueRun), and began to execute.

Pivot #2: Cash on the Palm Pilot

At the next board meeting, we asked how long it would take to roll out the “cash on mobile” app. The answer was, “At least three years.” That was a big problem.

I said, “Look, that’s going to take too long. We’re not going to be able to raise the rounds of capital we’ll need in order to do that. That’s too high of a risk. We need to deliver something sooner.”

That’s when the company came back and said, “We can do the Palm Pilot in about six months.” The Palm Pilot was a personal information manager. If you were around in the late 1990s, you might remember it. It was faster and easier to develop on than the mobile phones at the time. Palm had an interest in supporting new kinds of applications beyond its core day planner functionality, and would support us. So we pivoted again.

Pivot #3: Cash on the Palm Pilot with Email Sync

A lot of PayPal’s pivots came out of our board meetings–every meeting or two, we would discover the need to pivot. In this case, I came back to the next board meeting and challenged the team with a thought experiment. I said, “I thought about your canonical use case, which is splitting the meal tab at a restaurant.” (Obviously, now in our COVID times, this is kind of a quaint example.)

“Even here in Silicon Valley, which is ground zero for Palm Pilot adoption, my guess is if we went around to all of the restaurants in downtown Palo Alto (which is where PayPal was headquartered and where the board meeting was happening) we would find, at maximum, one table per restaurant of where everybody had a Palm Pilot. Based on that simple reasoning, our use case won’t work.”

We needed a solution. Lots of people since then have claimed credit for the idea of adding email payments, but it was actually Max Levchin. I was there. Max said, “Hey, that’s easy. We could just do email sync, and then we’d have payments by email as well.”

Scott and I looked at each other and said, “That’s a good idea.” So we pivoted the organization to cash on Palm Pilots with an email payment sync process.

At this point, we were still very committed to the Palm Pilot. We had engineering specialists and felt we had this unique technology. We had raised our Series A by saying, “This is the hard tech to reproduce, so we have this unique asset.” We had a good relationship with the Palm organization, which promised to help us with go-to-market and a bunch of other things. Even though all of us were thinking, “This email payments thing actually may be more useful than the Palm,” we also thought, “It’s lightweight and anyone can do it, so maybe it doesn’t lead anywhere.”

Pivot #4: Email Payments for eBay Sellers

When we rolled out the PayPal product, we found that our actual customer adoption was primarily from eBay sellers and the buyers that they were bringing in. The reason that this happened was actually quite interested and, frankly, unanticipated.

One of our go-to-market ideas was to circumvent the expensive advertising approach that was the standard Dot Com strategy. Instead of paying advertisers, we’d simply give cash to our users. If you referred a new PayPal user, we’d give you $10 and we’d give the $10 to the person you were bringing in the system, and that would serve the dual purpose of incentivizing virality and proving the utility of our payments system. Everyone said, “Oh, that’s crazy. You’re giving out money.” Actually, it was quite rational. The average customer acquisition cost of advertising on Yahoo or Netscape was well over $40. If we could acquire new customers for $20, that was a bargain. And in fact, in practice it was more like $12 for a number of reasons, one example being because many people heard about the incentive and signed up directly.

In the first couple of weeks after launch, we started getting all of these eBay sellers joining the service. The sellers cleverly merchandised our referral incentive by telling their buyers, “Hey, I’m selling something to you for about $10. If you sign up with my referral link and pay me via PayPal, you’ll get $10, so you’re basically getting the product for free!” Our bounty system became a key part of their revenue model. At first, the organization thought, “Okay, who are these eBay people? This isn’t the customers or system as intended.” Then we realized, “Wait, this is the only place we’re growing. These eBay people *are* our customers.” So once again, we pivoted.

This was our “burn the boats” moment. Peter made the really excellent hard call to drop the Palm product. This wasn’t an easy decision. The Palm Pilot features were our unique differentiator; we had even announced our Series B and garnered press coverage by having our investors transfer $500,000 from their Palm to our Palm. I was one of the people who questioned Peter’s decision. I told Peter, “Our Palm technology is an asset. Shouldn’t we try to sell it or something?”

Peter stood firm. “You play on where your growth market lies. We’re not going to get enough money for the technology to outweigh the distraction. Just close it down.” Peter was 100% right.

In one sense, getting rid of Palm should have been easy because there was no traction. But the hard thing about it was that we’d put all of this energy into the Palm. We’d built this hard-to-build, well-designed piece of technology. This experience led to one of the key maxims that came out of PayPal:

“Hard does not equal valuable.”

Value is what someone else will pay, If something is unique, clever, elegant, and no one is willing to pay more than $1 for it, it’s not valuable. There was more value for PayPal in dropping Palm support and focusing on email than in trying to take that asset and sell it.

Peter’s decisiveness is part of a long tradition of “burning the boats”. Back in the 1990s, Bill Gates was building an online service codenamed Blackbird to compete with America Online. He saw the internet and he went, “this is the future; we have to pivot towards this,” so he literally had all of the engineers’ hard drives erased so that they would start working on the new code base. This action seems extreme but Gates knew engineers and knew that they would think: “I want to finish solving these interesting problems.” A high percentage of them would have been tempted to continue to tinker with the code in order to finish it, so he eliminated that possibility by removing it.

This is hard. You’ve put so much work into building those boats, you’ve polished that mahogany, and you really enjoyed the process of assembling them. It’s painful to accept that you’re just going to set them on fire, but it can be the right thing to do.

We pivoted to email payments only, and that focus led to rapid growth. And while PayPal was successful, in retrospect, we should have pivoted more completely by reconfiguring our bounty system to directly match our new target market. This would have allowed our eBay business to grow even faster.

Pivot #5: The Master Merchant Model

At this point, PayPal was growing at an incredible rate of 2-5% per day. The only problem was, we didn’t have a working business model. We had publicly committed to being “always free” with the thought that maybe we could become a bank and make money that way. That’s part of why we merged with X.com and brought on Elon Musk as a co-founder, because Elon had been thinking a lot about banking infrastructure and banking business models.

After diving into banking, we realized we didn’t have time to build out that banking business before we ran out of money. We needed to have our business model work just based on our rapidly-growing payment system.

Peter, Max, Luke Nosek, and I held an off-site at my grandparents’ house in Gualala, California, to figure this out. We decided that we could keep payments for individuals free, but make money off of businesses. Paying via balance transfer would remain free, but we would only allow users to accept a limited amount of credit card payments before they would have to sign up as a merchant and start paying for those transactions. Once they hit that limit, we wouldn’t allow them to accept more payments without converting their account. Theoretically, our users could have decided to reject our proposal and send their payments back to their customers, but it turns out that vast majority of merchants prefer the transaction to complete versus trying to figure out a free alternative payment solution.

We came back from the offsite, explained the plan to the team, and began to execute. Six weeks after launching the new system, 88% of our payments were now going through the new system, and our exponential growth curve hadn’t decreased at all.

That pivot put PayPal on the trajectory to where it is today. All of these pivots were absolutely essential. All of them could have killed the company. But the didn’t. Amazingly, the first four pivots took place over a period of 10 months. The last pivot took place about six months later, but played out over six weeks. That’s how five successful pivots built the foundation of a $200 billion company.

Other pivots I’ve known

LinkedIn has had a lot of inventions, like LinkedIn News, LinkedIn Influencers, and LinkedIn Learning, but the primary reinvention was the shift to being a mobile-first company. That really does have some echoes of the 7th Counterintuitive Rule of Blitzscaling, “Ignore Your Customers”. When we talk about ignoring your customers, we’re not telling you to completely ignore your customers. Rather, you need to focus on your future customers. In the case of LinkedIn, even though the existing users were primarily using the desktop web application, the new users were going to come predominantly from mobile. We had to focus on the customers we didn’t have yet.

I’ve also been a witness to various successful pivots as an investor at Greylock Partners. For example, Discord began as the Fates Forever videogame. Jason Citron pivoted the company into a modern communications tool that young people use, not just for videogames, but to share all kinds of experiences like doing homework or watching television together.

Most people don’t realize that Nextdoor started as Fanbase, a sports-oriented social network, which ended up pivoting to focus on the concept of a local network based on neighborhoods rather than sports franchises. And of course, Airbnb is now both a noun and verb, but began as a way of renting air mattresses, and now lets you rent entire castles.

Conclusion

Pivoting is the rule, not the exception. You have to expect the pivot, and generally more than one. Any company that’s going to be a long-term success is going to need to reinvent itself and pivot multiple times.

The most important thing when it comes to a pivot is decisiveness. You’ve got to commit to that pivot and that means making a wholesale change to what you’re doing to orient everything around that pivot, and also making a very clear break with the past, deciding what you’re not going to do, “burning the boats” to make sure that everyone on the team understands where they need to go.

Pivoting and blitzscaling often go together. Blitzscaling involves prioritizing speed ahead of efficiency, despite an environment of uncertainty. When you set out to pivot, you execute at warp speed even though you don’t know for certain if the pivot is going to work. When PayPal pivoted to the master merchant approach, we couldn’t know whether it would transform our business model in six weeks, or drive away all of our customers. (Fortunately, of course, it was the former, rather than the latter.)

And yet, if you have the boldness to identify the need to pivot, to understand that it’s going to be necessary to get your people onboard and oriented, and to “burn your boats” and commit 100% to the pivot, you can build a great company.

Successful Co-Founder Dynamics Alice Bentinck and Matt Clifford
Entrepreneur First co-founders
Creating Ambient AwarenessAlexander Embiricos
Remotion CEO and co-founder
ABZ PlanningReid Hoffman
Greylock
Value-Based SalesLee Haney
VP of CXO