If you spend much time with Web entrepreneurs or investors these days, it quickly becomes clear that "pivot" is the hottest term in Silicon Valley. It signifies a young company's shifting of focus, and everyone has an opinion about whether it's something start-ups should be doing or not.
The answer, it seems, is yes. And as long as it's done at the right pace, it can even be an extremely lucrative and important step. In fact, young Web outfits that pivot once or twice can raise two-and-a-half times as much money, see 3.6 times the user growth, and are half as likely to scale too soon than start-ups that either never pivot or that do so more than twice.
That was one of the major conclusions of the initial report of the Startup Genome project, an initiative put together by a group of Silicon Valley investors that aims to identify the DNA of successful Internet start-ups and the teams and investors that build them.
The project began last December as an attempt to "find a way to accelerate start-ups in a scalable way," said Bjoern Herrmann, one of the leaders of the Startup Genome project. It was initially a survey of about 50 start-ups, but over time, the team's ambitions grew, and as the crew set out to codify what works and what doesn't with Web start-ups, its research grew to include surveys from more than 600 companies.
Today, Herrmann and his partners on the project--Max Marmer and Ron Berman--released the first version of their study (PDF), a 59-page volume that breaks down the experiences of those 600-plus ventures and draws some very clear and potentially actionable conclusions.
The authors of the report acknowledge that there have been previous attempts to isolate the winning strategies of successful Web outfits, including Eric Ries' Lean Startup and Steve Blank's Customer Development project. But, the report's authors write, none of these efforts have given would-be entrepreneurs much more than the initial patterns of how a start-up should be built.
The report says,
"Most founders don't know what they should be focusing on and consequently dilute their focus or run in the wrong direction. They are regularly bombarded with advice that seems contradictory, which is often paralyzing. And while start-ups are now gathering way more qualitative and quantitative feedback than they were just a few years ago, their ability to interpret this data and use it to make better business decisions is sorely lacking."
And that's why, the report continues, the Startup Genome team set out to build the "flexible framework that enables the integration of the principles, methodologies, and wisdom that have been discovered about how to create a successful start-up."
The Major Conclusions
The full 59 pages of the report are probably going to be read only by certain investors and entrepreneurs. But for those short on time, there are a number of main conclusions, starting with the idea that Web start-ups tend to pass the same kinds of development milestones, and that those that skip those steps tend to perform poorly. "They tend to lose the battle early on by getting ahead of themselves," according to the report.
Here are some other major conclusions:
- Learning Is Key To Success - "Founders that learn are more successful: Start-ups that have helpful mentors, listen to customers, and learn from start-up thought leaders raise seven times more money and have three-and-a-half times better user growth."
- Over-Investing Is A Problem - "Many investors invest two to three times more capital than necessary in start-ups that haven't reached problem-solution fit yet. They also overinvest in solo founders and founding teams without technical co-founders, based on our indicators that show that these teams have a much lower probability of success."
- Stuck In Gear Too Long Slows Scaling - "Solo founders tend to stick to their original concept way too long and take much longer to reach scale. Compared with a founding team of two, they are 2.3 times less likely to pivot, and take 3.6 times longer to reach the scale stage."
- Experienced Management Teams Breeds Success in Scaling - "Business-heavy founding teams are 6.2 times more likely to successfully scale up with sales-driven start-ups than with product-centric start-ups. Technical-heavy founding teams are 3.3 times more likely to successfully scale up with product-centric start-ups with no network effects than with product-centric start-ups that have network effects."
- Diversified Management Teams Raise More Capital - "Balanced teams with one technical founder and one business founder raise 30 percent more money, have 2.9 times more user growth, and are 19 percent less likely to scale prematurely than technical- or business-heavy founding teams."
- Over-Optimism Kills - "Start-ups that haven't raised money overestimate their market size by 100 times and often misinterpret their market as new."
In addition, the report divides most Internet start-ups into six discrete development stages, each with several substages.
"This creates a kind of directed tree structure and allows for more granular assessment by being able to pinpoint the main drivers of progress at each stage."
Those six stages are:
- Profit Maximization
Does It Make Sense?
It's all well and good to compile a study like this, but the work done by the Startup Genome team is clearly only as good as its data. The question is, do their results matter in the boardrooms and offices of Silicon Valley and beyond?
To be sure, the report is just out, and it's too early to reality-test its conclusions. But the team did share an early version with a number of independent successful Silicon Valley investors and entrepreneurs, asking each to evaluate the report's advice.
At least two of those who've seen the report cautiously suggest they think the Startup Genome project is on to something.
Ilya Fushman, a principal at Khosla Venture says,
"A lot of these things make sense. Are they actionable, or are they going to get someone to stop what they're doing and re-evaluate? And I think at the end of the day, if you look at the state of start-ups now, you have a very broad gamut of founders with varying levels of expertise, and at the very early stage, this can be helpful to start-up teams, especially with teams out of university."
Some, of course, may look at the major conclusions and think that there are few surprises. But whether that's true doesn't mean entrepreneurs can't learn from them.
Says Khosla Venture's Fushman about the conclusions drawn from the study,
"Sort of obvious once you think about them, but the question is, does everyone think about them? The answer is, maybe they do, maybe they don't."
And that's the key to the report, it would seem: to get people thinking about the process of building a company and to shine a light on the things that work and those that don't, and to give would-be founders some ideas of what they might do, and what they should stay away from, if they want to be successful.
Says Soeren Stamer, a board member at the European think tank the Lisbon council and CEO of a startup called Yokudo,
"I buy the [report's] major conclusion, that start-ups evolve in phases and that awareness of the phase you are in helps to focus the founder's attention and increases the likelihood of success. Some of the results are very helpful [for raising] red flags for a team: pivoting too often, not at all, etc. Again, that is helpful to create awareness and constructive discussion within a founding team."
But Stamer also pointed out that start-ups should be wary of thinking that if they follow the conclusions in the report to the letter they will automatically be successful. After all, the report is merely a framework, as Herrmann put it, and its data points more to averages of what has worked in the past. There is no substitute for real experience and expertise. As he put it, founders should be careful not to conclude, "we have to pivot two more times to be in the green zone."
The initial report is out, but Herrmann said it's just the beginning. Though more than 600 start-ups participated in the survey, there are countless others in Silicon Valley and elsewhere that could contribute their own data, and the Startup Genome project is now going to work on a second, larger survey.
At the same time, Herrmann said he thinks the report is a "pretty significant map" that could give a lot of people "a better understanding of the world of entrepreneurship."
The team is also considering repackaging the data as a free product that would give investors a dashboard through which they could assess the start-ups they're funding.
Ultimately, Herrmann said, the project is about helping to pinpoint some key elements of successful start-ups in a measurable way that could help future innovators as they get started in business.
"We've reached a critical mass of people who have been describing certain patterns of entrepreneurship and we're seeing entrepreneurship evolving as a science. For the first time, [we've started] to develop specific repeatable patterns for entrepreneurs building high-tech start-ups."
COMMENTARY: I think the Startup Genome project is all well and good, but it does not answer the question:
Are successful entrepreneurs born (DNA) that way or can they be molded into successful entrepreneurs?
I believe that the answer lies somewhere in between the two.
The Startup Genome project is helpful in that it comes to six major conclusions about successful entrepreneuring regarding reaching scalability and success in raising venture capital. However, these findings are a bit too obvious and ignores humanistic qualities like thinking, vision, passion, drive, determination and creativity. Humanistic qualities are are much simpler to understand. Carmine Gallo comes closest in describing humanistic qualities of entrepreneurship and innovation in his new book, The Innovation Secrets of Steve Jobs, required reading for entrepreneurs. In the book, Mr. Gallo identifies the Seven Success Principles of Steve Jobs, the master of technology innovation.
- Principle One: Do what you love. Steve Jobs once told a group of employees, “People with passion can change the world for the better.” Jobs has followed his heart his entire life and that passion, he says, has made all the difference. It’s very difficult to come up with new, creative, and novel ideas unless you are passionate about moving society forward.
- Principle Two: Put a dent in the universe. Passion fuels the rocket, but vision directs the rocket to its ultimate destination. In 1976, when Jobs and Steve Wozniak co-founded Apple, Jobs’ vision was to put a computer in the hands of everyday people. In 1979, Jobs saw an early and crude graphical user interface being demonstrated at the Xerox research facility in Palo Alto, California. He knew immediately that the technology would make computers appealing to “everyday people.” That technology eventually became The Macintosh, which changed everything about the way we interact with computers. Xerox scientists didn’t realize its potential because their “vision” was limited to making new copiers. Two people can see the exactly the same thing, but perceive it differently based on their vision.
- Principle Three: Kick start your brain. Steve Jobs once said “Creativity is connecting things.” Connecting things means seeking inspiration from other industries. At various times, Jobs has found inspiration in a phone book, Zen meditation, visiting India, a food processor at Macy’s, or The Four Seasons hotel chain. Jobs doesn’t “steal” ideas as much as he uses ideas from other industries to inspire his own creativity.
- Principle Four: Sell dreams, not products. To Steve Jobs, people who buy Apple products are not “consumers.” They are people with hopes, dreams and ambitions. He builds products to help people achieve their dreams. He once said, “some people think you’ve got to be crazy to buy a Mac, but in that craziness we see genius.” How do you see your customers? Help them unleash their inner genius and you’ll win over their hearts and minds.
- Principle Five: Say no to 1,000 things. Steve Jobs once said, “I’m as proud of what we don’t do as I am of what we do.” He is committed to building products with simple, uncluttered design. And that commitment extends beyond products. From the design of the iPod to the iPad, from the packaging of Apple’s products, to the functionality of the Web site, in Apple’s world, innovation means eliminating the unnecessary so that the necessary may speak.
- Principle Six: Create insanely great experiences. The Apple store has become the world’s best retailer by introducing simple innovations any business can adopt to create deeper, more emotional connections with their customers. For example, there are no cashiers in an Apple store. There are experts, consultants, even geniuses, but no cashiers. Why? Because Apple is not in the business of moving boxes; they are in the business of enriching lives. Big difference.
- Principle Seven: Master the message. Steve Jobs is the world’s greatest corporate storyteller, turning product launches into an art form. You can have the most innovative idea in the world, but if you can’t get people excited about it, it doesn’t matter.
Instead of being able to 'pivot' all the time, entrepreneurs should stop starting "me-too" businesses, and concentrate on developing a Blue Ocean Strategy that creates uncontested market space and makes the competition irrelevant--the simultaneous pursuit of differentiation AND low costs. If you haven't already done so, I highly recommend the book, "Blue Ocean Strategy" by W. Chan Kim and Renee Mauborgne both distinguished Harvard professors and now professors at the INSEAD Blue Ocean Strategy Institute. In my opinion, Blue Ocean Strategy is required reading and THE book for developing business strategy in the new modern age of technology innovation.
Entrepreneurs should also understand the basic foundation or principles of entrepreneurship and technology innovation, something that I strongly believe in. Start out by building a strong foundation. This is something that is mostly ignored by entrepreneurs. You will find more often than not, that if you start out with the right foundation, you will pivot a lot less. There is a difference between thinking you are an entrepreneur and being a really good entrepreneur. If you want to learn more, I highly recommend the book, "Finding Fertile Ground -- Identifying Extraordinary Opportunities for New Ventures" by Dr. Scott A. Shane, Department of Economics, Weatherhead School of Management, Case Western University. Dr. Shane establishes the 10 basic rules for starting a successful technology startup:
- Select the right industry.
- Identify the valuable opportunities.
- Manage technological transitions.
- Identify and satisfy real market needs
- Understand customer adoption.
- Exploit established company weaknesses.
- Manage intellectual property.
- Create barriers to imitation.
- Choose the right organizational form
- Manage risk and uncertainty.
In my opinion, Dr. Shane's work is THE book on entrepreneurship for technology startups. If you don't want or have the time to read the entire book, I have developed an ten-part series that expands on Dr. Scott's work. Please contact me for additional information.
Finally, I would like to recommend "Rework" by Jason Fried and David Heinemeier Hansson. In a nutshell the author's will tell you to "stop talking and and start working" and then show you a better, easier way to succeed in business. Their teachings are a bit radical and drift greatly from the principle's of Blue Ocean Strategy and Finding Fertile Ground, which just comes to show you that there is no exact science for entrepreneurship and technology innovation. Some of it is just plain common sense.