Tom Leahey, Principal & Lead for Strategic Growth Advisory Practice, Windham Brannon
Leave it to Silicon Valley to introduce yet another business term―so futuristic and symbolic―that its meaning is barely recognizable beyond those in the know. We’ve had these episodes before. Terms such as “accelerator,” “revenue linearity,” and “asymmetric returns” have been thrown at us before by ranks of entrepreneurs and financiers all hungry to coin the next catch phrase.
Phraseology has reached fever pitch as of late with a host of clever new terms finding their way into today’s business vernacular such as “in the wild” (technology used in the open market for the first time), “freemium” (giving the consumer a free app or service hoping to convert to a premium or paid service), “acquihire” (acquiring a company solely for its human talent), “approtunity” (the opportunity to create an app)―and “pivoting.”
Trendy Buzzword or Proven Business Strategy?
Although the term “pivoting” has escaped Webster and his dictionary for the time being, the concept seems to have become a permanent addition to Silicon Valley speak. Pivoting is best explained by Eric Ries in his Fast Company series called “The Pivot.” Ries is the author of “The Lean Start Up” and the man responsible for elevating the acceptance of the term today. In his best-selling book, Reis defines pivot to mean, “A structured course correction designed to test new fundamental hypothesis about product, strategy and engines of growth.”
Pivoting often means a dramatic change to a business model if original objectives have not been met or a better idea comes along. There are several types of pivots incorporated in business today including those related to revenue models, market segments, and technologies. In simpler terms, pivot can mean “best efforts” product development in which “minimal viable products” (collect the most amounts of viable data with the least effort) are created by companies that adopt and employ a build-measure-learn loop to stay relevant and fully capture evolving market forces. So, the term and consequent practice is quite radical in suggesting that a product development team needs not know all of the answers when designing a new product offering. Instead, the strategy suggests that companies stay nimble, lean and probe and poke their ways to success as compared to having the entire thing figured out before a general launch.
As the old saying goes: “The work will show you how.”
Corporate pivots existed well before Silicon Valley coined the phrase or branded the idea. Corporate pivoting can trace its origins to the dawn of American capitalism. In perhaps the first significant corporate pivot, William Wrigley changed his business model when he noticed that the chewing gum he gave away to promote sales proved to be more popular than his mainstay products of baking powder and soap. As we all know, Wrigley went on to manufacture Juicy Fruit, Doublemint and Spearmint gum thus creating the iconic and timeless brand we know today. In more recent times, famous companies have pivoted away from legacy models including Nokia (a 150-year old Finnish paper company that created a wide variety of electronic and telecommunication devices including its once omnipresent brand of mobile phones); Groupon (originally a “social good” fundraising site); PayPal (started in 1999 to “beam” payments from PDAs such as Palm Pilots); and Instagram (began as Burbn, a check-in app which included gaming elements). Now, think of the companies that chose not to pivot, including Kodak.
All of these companies (except of course Kodak) have one thing in common―a rather dramatic pivot away from legacy business models and ideas to pursue newly discovered markets and economic opportunities.
What’s Old Has Become New
Why are we just now hearing so much about pivoting?
One can certainly point to changes in the capitalization of young and promising companies as a nexus to the try-as-you-might approach. Pre-revenue and embryonic companies are now able to attract private equity capital early in the game which is a relatively new phenomenon. Slightly more mature companies can eschew public capital sources which demand operating consistency. Even the smallest start-ups today raise capital from a variety of sources including private equity, family offices and foreign sources. All of this empowers companies with operating latitude heretofore unknown. Companies can test and perfect revenue and technology platforms until they get the combination just right.
Building companies the old-fashioned way―establishing reliable cash flow and redirecting profits to support future growth―seems to be a thing of the past. With a sound capital foundation in place, companies can radically alter a business model without the worry of running out of funds.
Timing is Everything
As you might imagine, some companies are better positioned to pivot than others. Assuming your company has a product or service and is considering a pivot away from legacy operating reality, the following are a few questions you may want to consider:
- Do we have a capital structure to support a radically different strategic direction?
- Heavy debt loads with compliance and covenant inhibitors make pivots difficult.
- Heavily or over-equitized companies make good pivoting prospects.
- Can we realign the capital structure to accommodate such a change?
- Flexibility within a capital structure is essential when considering a pivot.
- Can we augment what we have or do we need an entirely new approach?
- Can we redirect cash flow to new activities or must we fund new initiatives from dollar one?
- Are we betting the company or can we ease our way into a new vertical or offering?
- Do we have an organization that can tap into the build-measure-learn loop?
- Can we test our hypotheses or do we need to throw away the old playbook?
- Referencing the minimal viable product example above, can we dip our toe in the water first?
- Do we have the innovation engine to move and learn quickly? A company could give up a hard-won competitive legacy position for a sexier, yet hyper-competitive market opportunity.
- Do we have the change agents to properly understand what is at stake?
- We all know: Change is hard.
- Do we have the market and technical expertise or did we bump into something exciting?
- Is the company culturally all in? In most cases, you’ll have to be.
5. Can we pivot outside of our current corporate structure?
- Can special technology (IP) or strategic advantages be lifted into new entities?
- Higher value product or service offerings can assume new and potentially more valuable operating profiles.
- Capital can be raised without the consideration of legacy business models.
Accelerated Change is the Only Certainty
As we march into the second decade of the new millennium, I see a world in which we can count on nothing but accelerated change. By using pivots strategically, companies can jumpstart forward momentum needed to remain competitive―even if it’s in a different direction.
I don’t think any of us would have predicted 10 years ago that today the world’s most influential media company creates no content (Facebook), one of the largest retailers carries no inventory (Alibaba), one of the largest accommodation providers owns no real estate (Airbnb), and the world’s largest taxi company has no cars (Uber). These nimble, asset-light companies represent the future of business. And, the next pivot these companies make could be aimed your way.
Will your company be ready?
About the Author
Tom Leahey is principal and lead for the Strategic Growth Advisory Practice at Windham Brannon, an Atlanta-based provider of tax, audit, accounting and advisory services. He has more than 25 years’ experience in finance and executive management in a variety of high-growth environments including software, managed services and professional services companies. His transaction experience includes lead finance executive in multiple public-market financings, including a New York Stock Exchange listing, 35 acquisitions and corporate transactions totaling $3 billion. Leahey serves as a mentor, advisor and director to a number of emerging business ventures.