When to pivot, when to fail

Fred Wilson has a good post about a frequently encountered scenario today: Pivot or Fail? The gist is that, while the pivot seems universally celebrated in our industry (think Twitter, Slack), there are great reasons for failing gracefully.

To summarize (though you should read his original post), a hard pivot means potentially taking the wrong team, the wrong investor base, and too much dilution into your "next" thing, when what might be best is to just start again from scratch. 

I can empathize with that position. I've been involved in companies post-pivot which where just less interesting than what the founders and we had originally set out to do. But thankfully my "interest" isn't the only thing that matters. As Fred rightly says: "...the harder path is often the best path. And the easy path is often the harder one."

A hard pivot can be incredibly messy. You may have to replace much of your team. You may have to rebalance the cap table. You may have to re-sell your shareholders on what you want to do next. How tempting, especially for very talented founders, to accept failure, shut the business down, and hand back the cash. 

And yet, I do think there are circumstances under which the hard pivot is justified and can work.

Anecdotally, one of the best teams in my portfolio, by little fault of their own, had navigated themselves into just that kind of position. Their original business had worked pretty well. The company had scaled to millions of mobile users and a few million in revenue. We were profitable and pretty unhappy. 

The market had turned out to be much less attractive than we had assumed. New competition - substitutes and direct competitors - was emerging all the time. Paid marketing was no longer viable. 

We had strategic concerns about the long-term value of what we were building. But most importantly there was one thing we were certain of: we couldn't scale this thing to anything approaching a "significant" outcome. 

In economic parlance the "opportunity cost" for everyone around the table was high, but most of all for the founders. 

Having come to the conclusion above, we discussed the "graceful failure" scenario: if we put the company up for sale now, the acquirer would want to hire the team for at least 12-24 months. Including mandating an advisor, running the process, the founders taking some leave after the earn-out, and coming up with a new idea, it would be three to four years before they'd be back with another company. 

But they were raring to go. And most importantly, we had backed primarily them, the team, first at Seed and then at Series A. What they were doing was always a secondary consideration to us.

So around two years ago, we pivoted - hard. They pitched each VC partnership their new idea and we jointly gave them the go-ahead. All investor-shareholders took a significant haircut (15-20% I believe) to re-up the founders and reset the option pool. The founders restructured the team, keeping only those employees who were motivated by the new venture and could contribute. 

We then made the existing profitable business a subsidiary with its own Managing Director in order to run it for cash while exploring a sale. We ended up selling it around a year after that, netting several million which went straight into the founders' new business.

Sound messy? It certainly had the potential to be. But because we all made sacrifices to align ourselves it worked. It's a testament to the strong bond the founders had built with each investor, the investors' belief that this was a very talented team worth backing through thick and thin, and the collegiate, cooperative nature of the syndicate itself.

Today we are happy we pivoted. The new business is thriving, having added hundreds of customers and generating more revenue than the old business ever could have. The future looks 10x bright and the sky is the limit - as it should be. And yes, we had a few more soft pivots along the way.

If I look at the timeline, the founders would be nearing the end of their earn-out at some corporate around now. For two years they would have worked on a business they had long stopped believing in, in a setting they never really chose for themselves. 

While they could have walked away from it all, I'm glad they didn't. At the key juncture, we demonstrated loyalty to them and their journey. And they in turn have been very loyal to us. There's nothing misguided in that.

The venture business has high failure rates baked into its business model. But it's also flexible enough to allow for things that aren't in the playbook. Things that support long-term relationships that look beyond what is profitable for each party or makes economic sense in the near-term.

So is this type of hard pivot the exception to the rule of failing fast and gracefully? I'm not so sure. There's a lot to be said for clean endings. But when all parties are excited about continuing to work together and they have a shot at greatness? Then failure isn't really an option.