Sunday, February 14, 2010

Pivots: Getting it right the first time

Veoh's bankruptcy and liquidation announcement last week was no surprise for people who had followed the company for years. Veoh raised $70 million dollars in venture funding from mid-2005 to its demise. Its bankruptcy was triggered when the company could neither raise more money nor find an acquirer.

Veoh was somewhat unusual in the online video space, in that it followed the same basic business plan from launch to death (although, as Dan Rayburn pointed out, the elements of that business plan changed like the wind)--an advertising-supported business that aggregated content for consumers. A far more common path for online video startups is to begin as an advertising-supported content aggregator (either user-generated or professionally-produced content), and when that doesn't work, change direction (pivot) and take some portion of their technology--content management, encoding, video players or advertising delivery--and market it to businesses on a "white label" basis. When that plan fails (as it usually does), the company is either sold to an acquirer or shuts down.

An excellent example is Joost, which launched in late 2007 with a blizzard of hype as an advertising-supported content aggregator. It dropped its consumer-oriented services and shifted to offering white-label video distribution services to business in the summer of 2009. After burning through $45 million in outside investment and untold millions more from its founders, it was sold for a few million dollars to November 2009.

One lesson from all this is that pivoting will not necessarily save your business. The Lean Startup and Customer Development movements emphasize agility and quick changes to your business plan over taking the time at the outset to insure that you're targeting a real market opportunity and not a mirage. This works very well early on. However, once you staff up and raise a significant amount of outside investment, it's easy to find yourself trying to make a broken business model work for far too long. By the time you pivot, it's too late. Your investment, technology and user base become an "anchor" that defines the businesses that you can pivot into. In the case of online video, you end up pivoting from quicksand into a desert.

It's essential to take the time upfront to get your product/market fit right, and to insure that you're pursuing a real market and not a mirage. You may have to change direction a lot in the first few months of operation, as you learn more. It's much better to recognize early that you're going in the wrong direction and make changes, than to try to make mid-course corrections to a speeding locomotive. Once you've raised funds, staffed up and built your infrastructure, inertia and ego kick in, and fundamental changes to your direction will become almost impossible.

Thus this warning: Pivot early and often (if you have to), because you probably won't be able to successfully pivot later on.

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