The Power of Your Pivot Point

Consider a medical-device start-up. In this case, the pivot point is based on the initial clinical trials, where we can see if the device is going to work as intended—or not. How many resources, in terms of money and time, must the company spend to pass that first trial? That’s the money we are betting. And the pivot point? The effectiveness of the device in those trials.

Take Facebook, or eBay: How big could these businesses get without advertising? The pivot point: How fast, without any advertising spending, would it take to load a critical mass of users into their network?

Jet’s initial pivot point was based on marketing spend. How many dollars would it take to get a defined number of people to pay the up-front membership fee? Jet could interact with potential customers in many ways, from banner ads, to targeted promotions and emails, to traditional advertising, and, of course, through prelaunch press buzz. Would the $225 million it raised buy it enough
active customers?

Jet got its answer, but not the one it expected. Just a few months after going live, the company announced sales weren’t growing fast enough and waived the membership fee. Jet had missed its pivot point.

Why more than a Plan B?

From afar, it may seem that all a company needs to avoid collapse is to have a Plan B in case things go wrong, and in hindsight, it may appear that Jet had such a plan. But in the thick of the battle, failing to hit your pivot point means that your team had it wrong, that your plan, for now, has failed. How you react to this event will determine if you get a second chance at success—or not.

Jet decided to waive its fee, which may seem like an obvious Plan B. But dropping the fee invalidated everything the company was built on. Jet’s premise was that people would come in droves to pay $50 up front to save on everyday essentials. Without the fee, none of the projected numbers worked without raising prices. You see, Jet’s plan had been to sell everything at true cost, with profits based solely on the $50 annual fee, so no fee, no profits.

Consider how another business reacted when failing to meet its pivot point. A start-up I’ve worked with designs and manufactures a high-tech product for the bicycle market. Its product won rave reviews from experts, but, when placed in stores, it didn’t sell. The entrepreneur reacted by starting to develop a different product instead.

That may sound reasonable, but it’s not a good move. For one thing, new products often have long development times. This company needed sales now, not another long product development and testing delay.

Rather than build something new, the founder needed to spend time understanding what had gone wrong. Why wasn’t the current product selling well? Was the price too high? Was the brand not powerful enough? Had others caught up with the product’s innovation? To fix what had gone wrong, our entrepreneur needed to first figure out why the product wasn’t selling—whether it was due to the product, marketing, competition, or other forces.

Here’s an example of a company that reacted better after failing to meet its pivot point: a start-up pharmaceutical company I have been involved with began with a well-proven clinical concept. The company’s first test of efficacy failed
badly. As a result, an important initial investor lost faith in the concept and pulled funding.

But the CEO of the company reacted well. She was quite shaken and questioned whether the concept for the product could ever work, telling her board, "We have done something very wrong. I don’t know what it is. We are going to do nothing from this point forward until I discover why we have failed; we will not start another trial until I find out why this one failed."

That reaction is anathema to most venture capitalists and management teams, whose mantra is "go faster." In this case, the CEO chose to stop and understand rather than rush forward. It was exactly the right approach.

The CEO thoroughly analyzed why the tests failed. Her business plan had set forth the scientific reasons the projected dosage regimen would work, with data to back up her approach. But after the trial failed, she methodically checked every issue and decided the right move was to change the dosage. The next pilot trial was a success, and the key investor who had pulled out after the initial failure came back.

A start-up’s reaction to early failures will help determine whether or not it survives. In the case of Jet.com, we may never know if the company could have continued on its own, because it got lucky. Jet found a buyer in Wal-Mart, anxious to dent Amazon’s sales growth, perhaps at almost any cost. Jet will become part of Wal-Mart’s e-commerce platform, and Jet’s results will roll into the larger company’s successes and failures.

This is a happy ending for the investors in Jet, and we all love happy endings. But before pushing forward with your start-up, think about your pivot point. This will help you develop the correct responses if you don’t hit your numbers the first time around.

Perhaps Clint Eastwood as Dirty Harry said it best: "You feeling lucky today, punk?" Answering this question may well affect the return on your next investment.

James E. Schrager is clinical professor of entrepreneurship and strategic management at Chicago Booth.