Why pivoting is a radically good move and fundamentally important
After more than 600 seed investments, High-Tech Gründerfonds (HTGF) has conducted a study to see how founders can perform a successful pivot. HTGF Managing Director Alex von Frankenberg presented initial results of the study at the High-Tech Partnering Days in February. Together with his colleague, Investment Manager Gregor Haidl, he presents the study’s findings here in more detail. In addition, the two experts explain why pivoting is also important for experienced companies – and why they believe “we all make mistakes”.
Alex, a few days ago you opened the High-Tech Partnering Days with the words: “We all make mistakes.” Shouldn’t we be looking to not make any mistakes?
Alex: In my opinion, it’s really important to admit that we almost always make mistakes in life. Sometimes because things didn’t turn out as well as we imagined. But sometimes because they turned out better than we first thought. This mindset is absolutely crucial, because it helps us to always be prepared for changes. We can therefore adapt and react accordingly.
Gregor: I’d even go so far as to say that always being right could be fatal. I’m always sceptical when companies from our portfolio haven’t made any mistakes. It leads you to ask whether the start-up has taken sufficient risks. Many companies are hesitant and therefore avoid failure – but they also miss out on potential opportunities.
Alex, why are pivots so important?
Alex: A pivot is a radical move – an about-turn in a company’s models and ideas. It can therefore be described as a fundamental realignment. There are many famous examples of how a significant shift in focus can lead to success. YouTube initially started out as an online dating platform.
Shopify, today one of the most successful shopping platforms worldwide, was once a small snowboard shop in Canada. Slack, a tool that has become essential in working environments, began as a gaming platform. Having the mindset that you can always make mistakes and being able to pivot are crucial factors in the success of young start-ups.
Gregor: It’s important that this change of course comes from the founders themselves. Especially at the start, accepting you’re wrong about target customers, the market or a product takes a great deal of willingness and a lot of discipline. Such awareness is more prevalent in the software sector, but it is also important for start-ups active in the fields of high-tech, industrial tech and hardware. A lot of start-ups must first identify their product/market fit, which means that they will always need to pivot.
You really know a thing or two about the subject of product/market fit, Gregor. You’ve even held several workshops on this topic. What have been your most important findings?
The life of a start-up can be roughly divided into two phases: before and after product/market fit. Many start-ups want to scale up quickly, employ as many people as possible, raise funds and set up a large team. But this simply doesn’t make sense before identifying a product/market fit. Our study showed that if a team is too large, this hampers flexibility and slows things down – even when pivoting.
Can the findings of the study also be applied outside the start-up world?
Alex: Absolutely! Being successful in the long term is a continuous process; the markets are always changing. Companies should always reconsider their product/market fit and continue to pivot. This is essential for SMEs, family-run enterprises and corporations – particularly in the era of digitalisation. We therefore work closely with our fund investors to share our knowledge and experience. We see this as a cornerstone of what we do in the partnership we share with our fund investors. Ultimately, there are not many venture capital companies like HTGF that – with over 600 seed investments under its belt – can draw on such a wealth of experience.
We’ve learnt that when pivoting, a team shouldn’t be too big. What are the other findings of the study?
Alex: The younger the team is, the more chance of the pivot succeeding. Young people tend to be more fearless; their lives are shaped by change. This carries over into their professional lives. But experience also plays a role. The more experienced a team is, the more successful a radical change of course will be.
That sounds a bit like the cliché: “We’re looking for a 20-year-old with 30 years of job experience…”
Alex: (laughing) No, this obviously isn’t what we mean. However: It helps to get started while you’re young. To fail with small projects when you’re young doesn’t hurt as much as when you’re older and might be hampered by private pressures.
Gregor: A diverse team can help to achieve a combination of young founders and those with a lot of experience. If I can select my team with people from various backgrounds, then I can tap into a great deal of experience. Diverse teams are more successful when pivoting.
Alex: And this doesn’t just apply to age. Teams with a mixture of male and female founders enjoy more long-term success, studies have shown. Diversity in a successful team also includes people with experience of living and working abroad. There are many examples of this in Silicon Valley – but here in Germany, too.
The study also found that too much success can stop companies from pivoting at the right time.
Alex: I’ve witnessed this phenomenon for years. A start-up has an innovative idea, they implement this idea and generate an acceptable level of sales as a result. But the start-up never really takes off. It therefore continues to do the same thing and is no longer innovative. In the long run, these companies are unable to really establish themselves or are sold below their actual value.
Gregor: It’s interesting to see how even start-ups – with their young company history – continue to fall into the corporate mindset. Some start-ups don’t pivot because they think they’ll be moving away from their core business and that they’re actually quite successful as it is. But even founders should continually ask themselves what their core business is and take a critical look at their own product/market fit.
Alex: A lack of innovation and fear of change is a very human trait – something that affects us all. To move on from something tried-and-tested is a huge step. But our experience shows that taking this step is so important. And this has now been backed up by our study.