In 1908 Roald Amundsen of Norway planned an expedition to the North Pole. He got scientists to share their time and equipment, won a grant from the Norwegian Parliament, and persuaded other backers to pour huge amounts of money into the project. He borrowed a 400-ton three-masted schooner called Fram and recruited men willing to risk their lives on a journey through the icy Bering Strait. Ordinary Norwegians cheered Amundsen on, imagining he would plant their flag in a land where no one had ever been. But just before setting sail, Amundsen got word that the Americans Robert Peary and Frederick Cook had beaten him to the North Pole. Now what?
Amundsen’s quandary is all too familiar to entrepreneurs. Launching an ambitious endeavor requires enormous support. You need to attract funding and staff. You need media coverage to build credibility. To get all those things, you need a good story. The story usually focuses on a problem and a solution, on a plan and a goal, and highlights the talents of the leadership team. It’s told with passion and conviction. With any luck, enthusiasm builds around the story, and investors pile in, along with employees and other partners and, eventually, customers. But often innovators realize they’ve made a mistake—that the plan was wrong, that they’ve gotten lots of people to give time and money and effort to something that won’t work. They need to pivot.
Changing direction is, in theory, a good thing for a business. The path to enduring success is rarely a straight line. Cornelius Vanderbilt switched from steamships to railroads, William Wrigley from baking powder to gum. Twitter launched as a podcast directory, Yelp began as an automated email service, and YouTube was once a dating site. Research shows that new ventures that reinvent their businesses—even multiple times—cut their chances of failure by conserving resources while continuing to learn more about customers, business partners, and new technologies.
But pivots can incur a penalty if they’re not correctly managed. A reorientation is an implicit admission that the plan to which the founders were once deeply committed was flawed. This deviation can be jarring and can suggest a lack of consistency and competence. Investors, employees, journalists, and customers require a coherent explanation of why things went wrong and what happens next. They need to be persuaded to stick around.
Like scientists, entrepreneurs generate and test hypotheses to find viable solutions to offer; that’s the basis of the lean start-up approach to launching companies. But entrepreneurs must also resemble adept politicians by convincingly justifying shifts from initial positions and managing diverse audiences along the way. This blend of skills is likely to become even more important during the upheaval caused by Covid-19. Many businesses that were experiencing high growth until the pandemic have seen revenue fall and are scrambling to devise new business models and reformulate their strategies. Start-ups may find tremendous opportunity in the early phases of the crisis—for instance, by servicing the “stay at home” economy—only to see it disappear when social distancing eases. The long-term impact on consumer behavior is anyone’s guess. The companies that are likely to endure will be those that nimbly adapt—and can effectively get stakeholders on board with change.
The more specific a narrative is, the more likely it is to turn out to be wrong.
So how can entrepreneurs do this? In recent years we’ve interviewed hundreds of founders, corporate innovation chiefs, market analysts, and financial journalists, and reviewed dozens of press releases, analyst reports, and media stories of both high- and low-performing companies, many in new technology sectors. From this research we’ve identified a sequence of stratagems that are critical to establishing and maintaining stakeholder support during major reboots.
The Pitch: Focus on the Big Picture
To build early credibility—particularly with investors—entrepreneurs must have a unique, concrete plan that meets a specific market need or solves a specific problem. It should include a well-formed product concept and a path to growth and profitability. Yet in their eagerness to gain initial support for their solutions, entrepreneurs often box themselves into a corner: The more specific a start-up’s narrative is, the more likely it is to turn out to be wrong. To avoid this trap, our research shows, savvy entrepreneurs craft broad narratives—umbrella ambitions rather than narrow solutions—that leave room to maneuver along the way.
That requires resisting the urge to be too precise about product features or functionality—particularly early on. Like good political campaigns, the most effective pitches have emotional appeal and underscore a larger aim. They don’t lay out a road map; they promise to reach a destination. That doesn’t mean that entrepreneurs give up credibility or are seen as undisciplined, however. In fact, the use of big, abstract ideas encourages audiences to see what they want to see—in much the same way, political science research has shown, that voters respond positively to candidates who take ambiguous positions on issues, leaving their stance open to different interpretations (which can also help them later avoid charges of “flip-flopping”). Our research indicates that entrepreneurs who follow a similar approach with stakeholders generate more enthusiasm and support and, ultimately, get higher valuations.
Our business-school colleagues often scold companies for having vision statements that are vague or filled with platitudes. But for early-stage start-ups, emphasizing widely accepted principles (particularly populist ones) can be useful when seeking to sell stakeholders on a pivot. Consider the early days of Netflix. Founder Reed Hastings, anticipating a later switch to streaming video, started with the stated purpose of offering the best home video viewing for everyone—not DVDs by mail, which was the company’s actual product. As the business pivoted to digital distribution, the original sweeping ambition still made sense. Even the company name supported its future course. Hastings said he wanted to be ready for video on demand when technology permitted, and that’s why he called the company Netflix.
Yet, to satisfy backers’ demand for unique pitches, entrepreneurs may too explicitly spell out who they are and what they do before those things are entirely clear. When they change course, they can run into image problems by looking inconsistent, confusing, or overly opportunistic. Magic Leap, a pioneer in augmented reality, is a good example. Pitching its nascent product as a high-quality gaming headset for consumers, the company carefully crafted a whimsical image with slogans like “Free Your Mind” and “Enter the Magicverse.” But when the uptake of augmented reality by both game developers and consumers was slower than expected, the firm’s executives began looking to other markets, bidding on a government contract to sell AR headsets to the army. Magic Leap didn’t win the contract, and in a column published by Quartz, it was ridiculed for trying to pivot from “delightful consumer tech” to “lethal military gear.” (The company announced a full-scale pivot to enterprise applications in April 2020 and hired a top executive from Microsoft as its new CEO in July.)
The Pivot: Signal Continuity
The human mind values consistency. Our research shows that audiences are thrown by a confusing plot; they view inconsistent organizations as less legitimate and ultimately less deserving of their support. But they’re less likely to register deviations as significant if they seem to be in line with larger aims. The link between the new strategic direction and the initial pitch isn’t always obvious, however; to maintain credibility and avoid penalty, founders need to make the connection clear.
When Steph Korey and Jen Rubio, the cofounders of the luggage start-up Away, realized that their first suitcases would never be ready for Christmas (as they’d promised investors, customers, journalists, and other stakeholders), they threw themselves into making a coffee-table book about travel instead. Though it came with a gift card redeemable for a bag the next year, the move seemed like a radical departure from their plan and could have easily unnerved supporters and led them to abandon the young venture. Yet the founders maintained credibility and support by spelling out how the move fit with their higher-level goal: building a travel and lifestyle brand. While luggage was a key part of that brand, a book worked, too. Investors were convinced. And so were journalists. A number of media outlets ran holiday gift-buying stories about a suitcase that didn’t yet exist. Within a few weeks 2,000 books had been sold (meaning 2,000 bags had been preordered), and the founders requested a second production run. (Korey stepped down as co-CEO in July.)
Robert Goetzfried
The linking tactic works even better if the overriding aim matches a larger societal objective. In fact, research suggests that people engaged in significant missions are less bothered by course corrections along the way. Two companies we studied in depth illustrate this point. Both started by offering a niche service in which members of an online community could mirror the financial transactions of skilled investors. The idea was to attract investors to the sites, identify the most talented of them, and then make money from their strategies. The companies started within six months of each other and had similar amounts of funding and teams with roughly the same education and experience levels. Eventually both pivoted to become direct-to-consumer investing services with the potential to displace human financial advisers with an automated, software-based service. Yet one became the leader in the automated investment-advisory sector, with more than $1 billion under management, while the other was forced to sell off its assets and shut down. After conducting an in-depth comparative analysis, we concluded that a key reason for their divergent trajectories boiled down to the way the two companies handled their stakeholders. The successful company never wavered from its overriding mission to “democratize finance,” even as it shifted strategies. The CEO positioned the change in business plans as just another way to meet the same goal to which stakeholders were committed.
The unsuccessful company, on the other hand, reframed each new business iteration with a new goal, going from “Bring transparency to investing information” to “Make investing social” to “Trusted investment advisory.” Worse, unlike his counterpart at his competitor, who warned stakeholders of impending changes, the CEO and his management team barely communicated with the affected stakeholders, which further sowed doubt that these transitions were indeed wise. Speaking to us after his company’s demise, the CEO pointed to messaging whiplash as a key reason for the organization’s inability to keep stakeholders on board. “After you pivot, your new positioning can be confusing to customers and partners who paid attention to your original PR,” he explained.
Confusion among key stakeholders is ultimately what also doomed Anki, a toy robotics company that closed its doors in 2019 after a round of follow-on financing suddenly fell through. Founded in 2010 by three graduates of the Robotics Institute at Carnegie Mellon, Anki raised nearly $200 million from high-profile investors like Andreessen Horowitz. Initially, the cofounders sought to “bring artificial intelligence and robotics into [consumers’] daily lives.” The three crafted a compelling narrative about how AI technology was focused on enterprise applications, leaving consumer applications wide open. They laid out a clear road map for investors that started with toys and expanded to other fun consumer products, several of which launched to critical acclaim and became staples at major toy retailers. By 2018, however, it was clear that Anki’s technology didn’t provide enough value to kids. The cofounders needed to pivot away from making consumer products altogether, so they discarded the vision of Anki as a new breed of toy company. It wasn’t long before stakeholders turned on them: Employees began complaining that management lacked vision, and investors became skeptical of the company’s long-term viability. Having failed to link the pivot to the original aims of the company, the management team couldn’t win over investors. A major financing deal fell through, and Anki was forced to shut down.
While pivoting away from an overly specific initial pitch is difficult, it’s not impossible to save face and retain stakeholder confidence. The key is to revisit and broaden—not change—the original pitch. Consider 3D Robotics (3DR). In the early 2010s, it was a rapidly growing consumer drone start-up with more than 350 employees and nearly $100 million in funding from Qualcomm Ventures, Richard Branson, and others. But by 2015, 3DR was getting hammered by competitors that offered better, cheaper drones. Worse, because of unforeseen manufacturing issues, the company was forced to delay the launch of a flagship drone, which was plagued by technical issues when it finally arrived. Holiday sales suffered, money was running out, and employees started leaving. Everyone was rattled—especially investors.
Too often entrepreneurs think empathy is a sign of weakness.
In a last-ditch effort to keep the company alive, CEO Chris Anderson, a former editor in chief of Wired, orchestrated a major pivot to drone software and services for enterprises. Initially, this sudden change in narrative was disconcerting. Some media outlets deemed the company a total failure. Anderson himself acknowledged that he’d grossly underestimated the competition—especially the industry leader, DJI. Nonetheless, Anderson managed to assuage investors’ concerns by skillfully communicating a sense of continuity during a significant strategic shift. How? In essence, he argued that enterprise software was consistent with the vision for 3DR all along. It was just that the vision, as previously understood by stakeholders, wasn’t quite accurate: 3DR was never about drones—it was about extending the internet to the sky. Whether it was for consumers or businesses, using drones or some other method, was beside the point. Some investors bought the revised pitch. In spite of 3DR’s rocky past, the company managed to secure another $80-million in funding to support the new direction.
The Aftermath: Move Quickly but with Humility
New ventures must move fast to capture fleeting opportunities. Resource and time constraints often preclude more-measured approaches, such as a phased withdrawal from a legacy product or market. But swift retreats don’t always sit well with existing customers and other stakeholders who may feel abandoned after a major reboot.
Empathy and remorse are a balm when informing people of changes they may not welcome. Stakeholders (especially employees and early customers, who are most at risk of alienation) are far more willing to remain loyal if they’re given guidance about how they’ll be affected by a change and if leaders seem to genuinely care about their situation. While “Act with common decency” may seem like advice that should go without saying, many company leaders need reminding.
Too often entrepreneurs think empathy is a sign of weakness or that stakeholders will lose faith if they apologize for a pivot. Terrified of losing support—and committed to the uncompromising efficiency of lean start-ups—some simply make the change and never admit they were wrong. Instead of preparing audiences for a change, they spring it on them. Only when stakeholders react—sometimes harshly—do they apologize. By then it’s too late, and they’re on the defensive.
Robert Goetzfried
Another company in the drone industry offers a good example, although this time of what not to do. Founded in 2011, Airware raised more than $100 million from investors such as Kleiner Perkins, Andreessen Horowitz, and GV to build an autopilot platform for aerial data collection. But when the start-up’s leaders discovered that the bottleneck to enterprise adoption was processing and delivering the data at scale, they shifted their focus to developing cloud software. Jolted by the sudden and unexpected strategy shift, the firm’s enterprise partners, customers, and employees criticized the leadership team for its indifference and called for more transparency and open communication. Airware’s CEO stepped down the following year, and the start-up reached the end of its financial runway in 2018 and was forced to close.
Compare that with the handling of Glitch’s transformation into Slack. In 2012, Glitch was a struggling online video game that centered on collaboration. But its founders soon realized that the messaging technology developed so that gamers could communicate with one another would make a terrific tool for companies, so they transitioned to the more promising business. Unlike the Airware leadership team, Glitch’s creators showed humility and remorse for how others would be affected. In plain (though somewhat sappy) language, the company issued a public apology, saying that the game had failed to attract enough players. Executives empathized with those who had signed up and thanked them for their support. They gave them useful information about the shutdown, such as refund details. They mentioned the new messaging product the company would be developing but said the real concern rested squarely with employees who would lose their jobs. The message to stakeholders was honest, helpful, and sensitive to their needs. In short, it was kind. The company announced the decision and moved on. In the end, Glitch’s transformation didn’t provoke a serious backlash—a big risk especially when tech users feel spurned—and the new business launched with roughly $17 million in funding from Accel Partners and Andreessen Horowitz, both original Glitch investors.
CONCLUSION
While our research has focused on start-ups, the same principles should apply when big companies pivot to new business models. Think of how much easier it has been for Marc Benioff at Salesforce to move into new business lines given his firm’s broad aim of “democratizing digital transformation.” Or the plaudits given Microsoft after its leaders justified its shift to cloud-based services in 2013 by linking the change in strategy to the company’s broad vision of “modernizing the workspace.” Netflix, too, has continued to benefit from these tactics. Conciliatory rhetoric was central to maintaining customer loyalty and shareholders’ faith in the company after its transition from DVD by mail to a streaming service.
Throughout history, great leaders have understood that stories and sensemaking are especially important during periods of uncertainty. As the Covid-19 pandemic upends industries and changes consumer habits and behavior, businesses of all sizes will increasingly face the need for strategic reorientation. How they explain and justify their reinventions will play an outsize role in their ability to endure. Explorer Roald Amundsen recognized this. Upon hearing that others had beaten him to the North Pole, he decided to change course—literally. It wasn’t the route or the destination that mattered, he told his fellow Norwegians. From the beginning, his was a mission of scientific discovery. And he had stayed true to that aim. Amundsen went on to become a hero, the first person ever to reach the South Pole.
Comments