Having the awareness that even the best VC and fund managers are not right in every investment they make is helpful for keeping your sanity in the highly competitive VC and startup scene.
Since up to 90% of startups won’t survive a full five year run, the question of when to give up on your startup idea, or to change and pivot to another market with the same company is a matter of not losing too much time, money, energy, and talent. If you make that decision with correct timing, you might be able to apply all of that energy into your next profitable enterprise.
For startup founders, this is usually the most difficult conclusion to reach and decision to make, as their self-esteem is often very connected with the success or failure of their original business idea, and it’s not easy to give up on “your baby” and move on.
However, for both venture capitalists and startup founders, there are times when it is strategically, financially, and emotionally the best course of action to take.
By eventually closing the door on your beloved startup, you are opening up new opportunities to develop other ideas that might end up being viable as a business. Don’t look at it as a failure; look at it as smart and strategic decisions that will have results sooner than later.
Here are some signs that your startup needs a pivot or close doors:
1. It’s been going nowhere for a couple of years
Having a long-term plan for your startup and an exit strategy is mandatory to be able to measure and benchmark your operation. Whether you plan to get investments up to unicorn market value or you plan to make a sale once the company gets €10 million in annual revenue, you should have options to change course if your plan does not go as expected. If you cannot foresee a profit in your startup within a few years, you should not even open it.
2. Your startup is not catching up with industry sales cycles
One very important benchmark you must use for assessing your startup’s ability to generate revenue is your industry’s key sales cycles. Every founder must know what the sales cycle for your target clientele is, whether it be one, two, four, six or twelve months, with one or many Proof of Concept periods or freemium use of your service.
If you realise that you are not getting a conclusive answer from your prospects about using your services, compare it to the sales cycle period of your industry. If yours is taking longer than average, it’s a strong red flag and your team should figure out as soon as possible ways to shorten that period and to increase the number of prospects saying “yes” in the end.
3. Decreasing market value
The viability of your business depends heavily on the market perception of how innovative your product is, and how it improves the lives of others. If the market can see a benefit that differentiate’s your product or service from the competition while better solving a big problem your potential customers have, then you are on the right track.
The market value of your startup will decrease if you are not identifying the important points to your target public. Be very careful and spend quality time with your team figuring it out in case you do not want to make a decision later of leaving the market you are about to enter.
4. Lack of predictable cashflow
The longer term and the more complete your business model and planning can be, the better. Although it might seem obvious, many business models and startup are created just to follow some trend or to copy other successful companies from other countries.
Your team needs to think about delivering consistent revenue-streams to the startup and to investors, instead of an unstable cashflow. In case your team cannot think about new revenue streams in case your startup is having difficulties in getting the cash to pay its bills, there is a need for immediate action to try to change the product appeal or the market approach – or even the target audience.
5. A close competitor is beating your performance
If your sales team is frequently complaining that your company is losing deals to an identified close competitor, it may be a red flag to readjust your features set, your price, your market approach or your advertising tactics. This may also be a red flag that your product is not able to strongly differentiate from your competitor. To verify that, take a good look at the metrics and key performance indicators, or KPI.
Why is your competitor going viral and you are not? If you can’t find the answer, consider changing product features or price, but also be ready to pivot to another market if needed.
6. Your go-to-market timing is too long
It is absolutely okay to want your product to be 100% right before you launch it. Nevertheless, if you miss the timing and it takes too long to get your product to the target public, your business is at high risk.
In case a competitor makes the market début before you do, your idea still suffer considerable setbacks. Research says that startups that closed early were often too late to launch their product in the market. As Frank Sinatra used to say “Timing is everything”, and it has never been so true in the startup world.
Most of the Star companies – those startups that generate 10x returns and compensate VCs for all the other bets that have not generated anything – have their timing or pivoting very well executed.
7. No real interest in the market you are in
To be a successful founder you will need to spend about 60 to 100 hours a week with very little or no pay to make your startup take off for a few months or years. It is not possible to work that hard and be effectively unless you believe in what you are doing and trying to build.
Shift your startup in the direction of solving a problem you care about honestly and profoundly. Many times, it is an underserved problem or a problem nobody has solved yet that makes people want to start their own companies offering a solution for that problem. Having interest in what you are offering and the market you are in or creating is a fundamental must.
8. No market demand for your service
Way too many times have we seen a startup founder team believing their invention is so appealing and phenomenal that the market will beg them for it.
Way too many times, obviously, founders are wrong. If you do not fully understand what your service can achieve in the market and don’t know the psychological aspects of your service potential adopters, it’s very likely your startup will need to pivot to another segment you have better understanding of.
9. Lack of funds to carry on business operations
Most startups go through this point in particular somewhere along their way to financial success.
In the initial months, founders control every cent that goes out and come in. Later on, they often give this control to someone else because they are too busy to “micromanage” – and this is when the headache begins to form the perfect storm.
Take responsibility of your financial operations from day one, and never leave it to the side. A company without cash reserves cannot breathe, and will likely get worse deals from investors and banks than if it would if it were in a more comfortable financial situation. Your founder team does not want the market to see your startup as a “dog” – in VC jargon, a dog is a startup that runs out of money before scaling up, and leaves investors with no return on their invested capital.
10. Zombie startup state taking over
The vast majority of startups in the news today are zombies, even when taking huge investment rounds. While a dog crashes before scaling up and a star generates 10x returns to its investors and value for its customers, a zombie startup often breaks even and can generate enough revenue to cover its costs for a long time.
Those zombies start to live a life of recurrently making investment rounds and give more importance to their investors than their customers or the execution of its business operation, because their service does not differ from existing ones in essence and form.
Whether you pivot or not, make a decision. Trust the data you have collected up to today and market trends, but make a decision. Listen to market feedback, hear what your clients have to say and their perception of your product, as well as their experience with your company. Be ready to try it one more time before closing doors or pivoting to a different market.
Thank you for all of your tips. It is much appreciated. I am just starting out and while I’m nervous about jumping into a new world of entrepreneurship, I also know that like what was written above – if you know ahead of time some of the obstacles and prepare for them, you are a step ahead of the game. It won’t be easy, but I am excited at the opportunities in front of me.