The words “pivot” and “lean” have been overused recently and there is a backlash against them now. Moving forwards past a milestone to the next stage of growth is not a pivot, nor is the word an excuse for not having a clear strategy that you back enough to commit to. And being cost-efficient is implicitly an aim for all businesses. So where did they come from?
At their core the two principles make sense. The idea is that you don’t know in advance what the market wants, so you’ll have to find out. If you spend a huge amount of money on one product that you think everyone will like, and they don’t, you go bust; that’s a gamble, not a business. Better to find out what the market likes by letting it speak to you, which means making a product, trialling it, analysing uptake data, and then deciding if the market does in fact like it.
If the market likes it, raise some money for growth, and go for it. If the market says no, however, then if you were cheap at going through this learning cycle, you should still have money to try again. Change whatever you think was wrong with the first product, and try again.
That’s it! The change is the pivot, and being frugal enough that you can keep going through this learning cycle on the money you have, until you find the answer, is the lean bit. “Pivot” became a talismanic word because it helped the otherwise stubborn entrepreneurial community see changing and responding to market information as a positive, not a failure. Being lean was about being able to live through enough cycles to get it right.
The Lean Startup
Eric Reis is the most famous proponent of lean business, and his book The Lean Startup is worth a read regardless of your stage or sector. He broke down the cycle into three stages,
Build – Measure – Learn
He made clear that unless you are reading the data from the market, merely failing is not learning. Only when you allow the data from the failure to tell you what was wrong and what to do next, are you benefiting from Validated Learning. Assumptions and questionnaires aren’t validations- only market behaviour is.
What are you looking for in the data? Three things drive growth, and you need data to work out what is (or isn’t) driving yours.
Stickiness is the retention ratio of your product. If half of your users fall away each year, you have a problem, no matter how good your new sign-up rate is. Trials need to focus on why your R is low. Guessing is not lean, as if it takes five guesses, you’ll be out of business. So conduct the trial in a way that will inform you of why customers leave.
Virality is the opposite. It looks at how many people each current user causes to use your product. If your K is less than 1, then your uptake curve will flatten and stop; over 1 and you will enjoy exponential growth. Note that K may change depending on the size of your network; for the first Facebook user it was probably a bit of a hard sell, once a few thousand were on it was viral, and now everybody that everybody knows is on, K has flattened again.
Finally, you can acquire customers. Simply, if the cost of acquiring a customer is lower than the customer lifetime value, then upon acquiring that customer the value of your company has increased by the difference.
A few of the types of pivot that Eric Reis identified are:
- Customer Need
- Customer Segment
- Platform Type
- Zoom In/Out (a feature becomes the whole, or the whole product becomes a feature of the new one)
- Margin-Volume (high-volume low-margin, or low-volume high-margin)
- Value Capture (at which stage you capture value)
- Growth Driver
- Channel (how you reach your customers)
- Technology
By now you might see why investors have gotten a little fed up with excessive use of the term. If you seek investment for a product that you think has a product-market fit, then you are implicitly saying you have done your trials, made your pivots, and only need money to grow. There should be no more pivoting- that just means you aren’t really where you say you are.
On the other hand, if you are presenting an idea that is still embryonic and will need a lot of trialling, then you will have to make sure time and money are costed in to pay for those learning cycles. You need to show how cheaply you are going to do all that, since you are to some extent asking someone to sponsor your education- salaries, offices, and secretaries are all a long way off.
Either way, a pivot is the end product of a lot of data capture and analysis, which will only happen efficiently if you have planned to capture that data properly. Telling an investor that you will, at some point in the future, “pivot” in an abstract and unspecified sense, is meaningless and hugely frustrating for the investor.
Application
Lean business in its current form is a product of the Silicon Valley environment, where large amounts of money are available to support a forward-leaning investment and entrepreneurial culture to test and grow. Such testing is worth the cost because America has a large, reasonably unified market (for tech products) with a high GDP per capita. Y Combinator and other Accelerators drive growth as the key metric, and funds aggressively (sometimes detrimentally) push money into their investments to generate growth.
In the UK it is a different scene. The market is smaller, and expansion into Europe means translation costs at the very least. Often the UK is used a test-case for later globalisation- in a way it is the “Learn” stage of the build-measure-learn cycle for a global ambition. All of this means that money is less available, meaning in practice that is arrives at a later stage (more for growth than for testing), costs more (you have to give up more equity), and is more nervous (it will only support a higher level of confidence in success).
Lean Business Model Canvas
One thing you can do to de-risk yourself as an early stage company seeking money in a slightly hostile environment is use a lean canvas. This is also a great system for ideation, as it’s like a business plan on one page. It asks questions about a number of aspects of a proposed product, and drives for alignment. It becomes very clear when some answers don’t tie in to the plan as a whole, and these aberrations must then be trimmed- as such, it has the same effect as a Lean Startup-style approach.
A lean canvas should represent the views of one customer segment, so you will need one canvas for each segment you have. Drivers and passengers, for Uber; hosts and guests, for AirBnB. In short form a lean canvas can be included in a presentation to investors, if it gets information across clearly.
The rule is to go through the process such that the product can be tested, and the assumptions validated, for as little as possible. Once you get your data back you can change any assumptions on the canvas, and go again.
Case Study
Dimec is a CEP 2016 company founded by two pharmacists, which exited to the Co-op in a multi-million-pound sale in 2018 after two years of existence and only £150,000 of investment. The founders were forced to be lean because they didn’t have funds to waste.
It originally intended to be an integrated online pharmacy system. It went through a number of pivots as it fought to stay alive, including being a physical pharmacy, an online pharmacy, and at one stage even selling pet food online to make ends meet!
In the end, the founders found just the right product-market fit; an integration that included GPs, pharmacies, logistics and patients. Before a penny of revenue had come in from the new business model, they were bought.
They were able to iterate through so many models because they kept lean- no salaries, no office, and they did everything themselves. Each time a product failed they re-worked it and tried again with something new. (In fairness to them, pet food wasn’t a pivot, they just needed money- it’s the kind of determination that makes entrepreneurs successful). Because they cost nearly nothing, and the founders scrutinised the data rigorously, the early failures were not failures; the learning was validated and, ultimately, fruitful.
Dimec’s founders did two things well from a Lean perspective. They listened to the market, which meant they ended up being led to the solution the market wanted. And they survived long enough to reach and build that solution.
They remain part of the Clinical Entrepreneur Program as lecturers and mentors, and their story is worth hearing when they present at the CEP events.