Innovation

The Art of the Pivot

As these young companies learned, a successful entrepreneur needs to know when to ditch their original business plan to pursue more profitable paths

Written by Deborah Aarts

The idea seemed brilliant.

Jamie Clarke wanted to sell adventure equipment, and he  decided to do it by creating a social network—a sort of Facebook for adrenaline junkies. Once enough people with a knack for high-octane escapades signed up, the network would be the perfect venue to sell climbing harnesses, hydration packs and other specialized gear. Clarke, a professional adventurer who has written books about his conquests (including reaching the summit of Mount Everest four times) and filmed his expeditions, was convinced that “if we could build the community, the ecommerce would come.”

When you get that nauseous, gut-sick feeling, something has to change

Fast-forward two years, and the startup—called LiveOutThere.com—was struggling. Sales were flat, early momentum had stalled and money was running out. A frustrated Clarke had a big decision to make: should he soldier on with his concept or move the business in a different direction? “I’d fallen in love with what we were doing,” he recalls. “And I had to divorce that original idea if we wanted to survive.”

So, he did: Clarke and his team ditched the social community and moved to a flat ecommerce model. It worked—enough to earn LiveOutThere.com the No. 39 spot on the 2013 PROFIT HOT 50 ranking of Canada’s Top New Growth Companies.

There’s an entrepreneurial stereotype that holds that in order to succeed, you must be an iconoclast: tune out the naysayers and hold fast to your vision, like Steve Jobs or Richard Branson did. This is an inspiring narrative. The trouble is, Jobs and Branson are exceptions, as Clarke’s experience in transforming LiveOutThere.com taught him. “Most people accept the propaganda of €˜You can do anything you set your mind to—don’t let anyone talk you out of it,'” he says. “It spells the end for a lot of entrepreneurs.”

Coming Back from the Brink: read about how two HOT 50 companies abandoned their initial model and turned their failing ventures into growth stars

Clarke believes that changing course—or, in startup lingo, pivoting—saved his firm: “Had we continued with our initial €˜great idea,’ I’m certain we’d be bankrupt today.”

And he’s not alone in this conviction. Many of the dynamic young firms on the HOT 50 now are selling different products or services to different customers in different ways than they did at inception. “Most successful entrepreneurs have morphed their business at least once, sometimes significantly, in terms of product or customers,” says Elspeth Murray, director of the Centre for Business Venturing at the Queen’s School of Business. “Less successful entrepreneurs are wedded to their initial thought for too long. That seems to differentiate the winners and losers.”

View the full 2013 PROFIT HOT 50 ranking

Despite all the buzz about the lean-start-up methodology—which advises businesses to put out an early version of a product or service, then develop it iteratively based on client feedback—many entrepreneurs find it hard to abandon (or even alter) their initial idea, says Murray. It’s a very human emotional response, but it stymies promising ventures. “Passion is incredibly important,” she says. “But you need to be passionate about solving a problem, not a particular product you’ve developed.”

But when you’ve invested scads of time, money and emotion into bringing your business plan to life, how do you know it’s time to rethink? How do you decide what to do next? And how do you shift your company to get there? The leaders of fast-growing HOT 50 firms have some answers.

Andriy Azarov knew very early on that his business was failing. He wasn’t making any money. The CEO of Ottawa-based gift and flower etailer CanaFlora (No. 22) was hungry to build a company. In early 2008, only a year after immigrating to Canada from Ukraine, he quit his job at a flower wholesaler and hung out his shingle to design websites for the only buyers he knew in his new country: flower-shop owners.

The move was a total flop. He had a decent website in his portfolio, so he decided to transform it into an online hub that sold flowers on behalf of growers. That worked better. A year or so later, when the reselling model didn’t prove profitable enough for his liking, he shifted course again, making CanaFlora a blossom grower, too.

In Azarov’s case, the need to change was immediately obvious. More often, the signs are subtle. Especially in a startup’s scrappy early days, there’s a fine line between “paying your dues” (read: working incredibly hard for very little) and toiling at something that’s going nowhere. A good sign you need to shift is a change in your physical well-being. If you feel a level of frustration beyond the normal stresses associated with the “tsunami of to-dos,” it’s a sign that your business isn’t working, says Clarke: “When you get that nauseous, gut-sick feeling, something has to change.”

You also should look for signs—any signs—that your initial plan is working. If you don’t see them, it’s time to re-evaluate, says Dave Mason. When he and Andrew Carey started Oakville, Ont.-based Shift IT Solutions Inc. (No. 41), their goal was to serve very small clients—and they were willing to do whatever was asked of them. They made educated guesses about what their clients would want and how they’d want it, and “we soon found out we’d gotten a lot of those assumptions wrong,” says Mason. The clients proved more price-sensitive than anticipated, and also were tougher to sell to. “We were getting fewer meetings with tougher prospects. And when we did sign them, the dollars weren’t enough for us to operate on,” says Mason.

So, he and Carey started targeting larger firms. They also ditched their founding “do anything the client wants” ethos and started offering one core IT-service package. Shift IT now has fewer clients, but its top line has improved considerably—revenue grew by 454% in the past two years.

“It’s easy to end up with confirmation bias,” says Mason. “You keep telling yourself you’re on the right path and, if you just keep working hard at it, it’ll work out. But if you take an honest look at the actual data, and understand that your assumptions may have been incorrect, you can change the model to get a profitable business out of it.”

Unbiased eyes are essential, agrees Michele Romanow of Toronto-based Buytopia.ca (No. 3), whose firm has evolved from a basic daily-deals website into a multi-faceted ecommerce platform. She and her co-founders, Ryan Marien and Anatoliy Melnichuk, have learned not to believe their own hype. “Even if you have very good data, when you’re in love with an idea, you can come up with all sorts of reasons why your data isn’t cooperating,” says Romanow. That’s why you need to call in outsiders.

“When you’re just consulting with internal stakeholders, there’s a real danger of groupthink,” says Jeff Dennis, entrepreneur-in-residence at Fasken Martineau DuMoulin LLP. “Everyone’s in the trenches; there’s a prevailing private logic. You need people who’ve seen other things in order to bring perspective.”

Murray suggests seeking out people who know you, your industry and its nuances, and have spent enough time with you to speak candidly. And, no matter whom you choose as advisors, it’s crucial not to let that old bugbear—ego—sway you. “When someone says, €˜Your idea is not good enough,’ there’s an instinct to respond with €˜Who are you? Of course it’s good enough. I’ve sweated blood for it,'” explains Murray.

But remember: these are people whom you trust to be frank. You can’t keep your feelings from being hurt, but you shouldn’t ignore what the advisors say, either.

So, you know it’s time to make a change.  But into what? Often, a stopgap response to the failure (or torpor) of your initial venture will lead you in the right direction. But it’s more likely that the next phase of your business will stem from research and consultation. Your advisors are likely to have some ideas. You can look at what your competitors are doing, then replicate or improve upon their strategies. Or you can check in with your clients.

Michael De Monte is fond of reviewing comments on social media to take the pulse of what customers want. He believes you must pay attention to the zeitgeist if you want to meet its needs. De Monte’s company, Toronto-based ScribbleLive (No. 11), started with a web-based publishing platform and now is adding syndication services in the hope of targeting a broader clientele. “The question becomes how your business is going to adapt to reach a new community, or to continue to reach a changing community,” he says.

Buytopia.ca has a more direct approach to soliciting client suggestions. “We’ll go to our customer list, pick up the phone and spend a few hours calling people,” explains Romanow. “Sometimes, they’ll give us an extraordinary amount of insight into what they’d really like.” In fact, such feedback led to Buytopia’s latest project: a couponing app called SnapSaves.

Once you’ve determined your new direction, it’s vital to keep the change from disrupting the business you’ve built to date. First off, keep costs low. Thanks to cloud computing, shared office spaces, contract staff and makerspaces, it’s easier than ever to launch with minimal overhead—and to relaunch with minimal pain.

Second, ensure you have enough cash to survive the transition. That can mean phasing out the old model while introducing the new one, or tapping into reserves.

Third, don’t keep key stakeholders—staff, investors and/or clients—in the dark. If the change is going to affect them, they deserve to know promptly. Besides, as several HOT 50 CEOs have found, if something’s up, those involved tend to suspect that.

Finally, don’t let your change define you. The prevailing motivations in business should be to grow sales profitably and build personal net worth, says Dennis: “If you base your decisions on pride and ego, it may not be in the best interest of the business. It’s a dangerous motivation.”

Instead, do as Clarke does and maintain perspective. “In climbing, you’ll have a route in mind,” he says. “But once you get there, you get new information about things you can’t control or predict—maybe about the snowpack or the weather. The climbers who succeed—and survive—are the ones who take that information in and make adjustments to their course, even though it’ll prevent them from reaching their original goal.

“They haven’t failed, compromised their integrity or sold out,” Clarke concludes. “They’ve just responded smartly to the situation in which they found themselves.”

It’s easier to find expert advisors than you think. And doing so can be invaluable. Read: 6 Advisors Any Startup Can Tap

Originally appeared on PROFITguide.com