(And what to do about it)
Mark Roberge, full-time professor at Harvard Business School and former SVP of Global Sales at HubSpot, keeps seeing the same problem show up again and again — when later stage startups attempt a pivot they completely fumble it.
In the early days, when the team is 1–5 people, startups are pretty good at being agile — it’s in the DNA of the company, it’s literally innovate or die. But as a later-stage startup around 100 people, they lose that agility.
Startups are kind of synonymous with innovation, aren’t they? It’s supposed to be the big companies, enterprises, MegaCo. Inc. that can’t figure out innovation. Aren’t startups just “naturally” great at innovation?
Fumbling the product pivot
But again and again, Roberge sees the same pattern play out. A small team of 1–3 builds a new, innovative product. They test, iterate, test, iterate. They attract their first users. Gain traction. Get a round or two of funding, and…at last! Start growing!
Sometimes they can fuel that growth through the IPO. But sometimes, things fall apart.
Growth starts to slow.
“Maybe they hit a ceiling on the addressable market,” Roberge says. “Maybe they couldn’t quite get the unit economics to work, maybe a new entrant came in with a lower price and commoditized the space.” Whatever the reason, the startup needs to pivot its product.
So, the go-to-market team shifts their focus to the exciting new product — a new website, sales training, a launch date (most likely around a big industry conference). The new product is unveiled to the world and….no one cares.
It fails miserably.
The company runs out of money. The mission is lost.
What the hell happened?!
3 reasons why startups struggle with innovation
“Thanks to great philosophies like the lean startup, design thinking, and agile development, the startup ecosystem has made a lot of progress in successfully navigating the first stage of a new venture,” Roberge says. “We know how it works. Hire a small R&D team, stay close to the customer, launch an MVP, gather feedback, iterate and test until you get it right.”
“A product pivot should follow a similar process to what a startup went through in the traction stage. But fast-forward to a 100-person company in the middle of its growth stage, and we just don’t do this.”
Roberge points to three common reasons for why this happens:
- Startups at later stages get overly confident on their read of the market and think they can get it right the first time.
- The executive team feels the pressure to keep pace with the 100% annual revenue growth and needs to throw a “hail mary” to get back on track.
- Investors put pressure on the company to keep pace with revenue growth expectations, despite a massive influx in new unpredictability.
We understand that it is rare to nail product/market fit on the first attempt in the first stage of a business. However, we don’t appreciate the same dynamic during the product pivot.
We place our entire bet on the first thesis, and usually it kills the company.
How startups should run the innovation process
Here’s the tl;dr of Roberge’s strategy: Focus R&D (product & engineering) on the new product to accelerate the pace to the new product/market fit. Focus go-to-market (sales & marketing) on the legacy business to “fund” the pivot (and minimize the distraction on R&D).
Here’s your playbook:
“R&D needs to be set up in an agile environment focused on finding product-market fit, exactly like it was when you were a 5-person startup,” Roberge says. He recommends that 90% of R&D resources are focused on the new product. This “new product team” should also include a small group of go-to-market folks:
- 1 sales person
- 1 customer person
- 1 marketer (depending on the size of your team)
This team should be sitting together & collaborating every minute of every day.
“Your R&D team can’t be bogged down by 15 salespeople saying the product isn’t working, marketing messaging in constant flux, and a CEO on their back to get it right in one month or the company is done.”
“Instead, they have maximum number of fingers on keyboards to launch the product, a small go-to-market team to accelerate their feedback from the market, and enough financial runway to test and iterate like a seed funded startup.”
“The go-to-market resources need to be positioned to fund the pivot and minimize the cash trough the company suffers during the process,” Roberge says. He recommends keeping 90% of your go-to-market teams dedicated to the legacy product. This “legacy product team” will also include 10% of your R&D team supporting the old product, and working with customer support to keep your existing customers happy.
“Keeping the sales team on a dead-end business may seem counter-intuitive. However, when you reset goals from doubling revenue every year to producing a predictable, efficient stream of revenue to fund the pivot and minimize the cash trough suffered the pivot, magic often starts to happen.”
What does this magic look like?
- Sales productivity goes up: Sales managers no longer have the pressure to hire and train new sales people every quarter. They can focus 100% of their energy on the existing team.
- Revenue becomes very efficient: Marketing is no longer under pressure to fund a new segment of lead flow to feed a growing sales team. They can lean back into known successful campaigns to feed the existing team. Roberge adds, “An efficient revenue stream alone won’t be enough to scale a startup, but it is a model that can fund the pivot.”
5 tips for managing the growth-stage product pivot
The growth-stage product pivot is by no means impossible. Startup lore is littered with examples of companies that have pulled it off:
- Before Instagram was a photo-sharing app it was Burbn, a clumsy Foursquare imitator.
- Pinterest was a originally Tote, a mobile shopping app.
- Android got its start providing photo storage for a network of smart cameras.
- In the 1970’s, Starbucks was selling espresso makers and coffee beans (Yep, even coffee companies pivot).
In addition to the playbook, Roberge offers five pieces of advice for founders trying to thread this needle:
1.Prioritize product-market fit. “This doesn’t mean revenue,” Roberge clarifies. When he says product-market fit, he means customers are realizing value from the product, and you can’t rush this — avoid putting artificial deadlines in place.
2.Get the right go-to-market people on the new product team. The tendency is to pick the top-performers from sales, marketing, and customer support. But what makes someone successful at execution, doesn’t necessarily make them successful in an environment of uncertainty.
Roberge says this is a lesson he learned the hard way. “I pulled one of my highest selling rep to launch a new product at HubSpot, and he hated it. He was a top seller because he knew the playbook so well. He wanted to close deals, not spend his time philosophizing about how to launch a new product. Those two sales people are very different.”
3. Be transparent with your team. Taking a new product to market as a five person team is fun and exciting. But as a 100-person company it can feel stressful. If you’re moving toward a world where most of your revenue is coming from the new product. Say that. If you anticipate the next 6 months will be intensely stressful, be honest.
And yeah, this might mean losing some people. “Product people are typically excited about building something new,” Roberge says. “So the loss tends to happen on the go-to-market side. Their jobs will likely change dramatically over the coming months, so losing people who are worried about uncertainty shouldn’t be viewed as a bad thing.”
4.Do heavy scenario planning. “If you have an instinct for how long it will take to generate revenue on a new product, just assume it will take 2x as long as what you think.” Roberge says. Have a plan in place for best case and worst case.
5. Act like a startup. “Ask yourself, ‘Would I have done this when we were a 5-person team with no money?” Roberge says. “That question becomes an important filter. You’ve done this before. You just need to remember how.”
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Original article published here