The Surrounding Factors of Startups: Part 2
Startups, by nature, operate in an uncertain and dynamic environment. Markets are always changing, with technological waves opening the door to new opportunities as new entrants to the space alter the competitive landscape. All products undergo multiple iterations, as every feature addition looks to take a step towards solving the fundamental need of the market. The team is constantly evolving as well, with each hiring or firing aimed towards assembling a group of people best suited to tackling the goal at hand. Given this environment, agility is one of the most important qualities for any startup.
In my book, Surrounding Factors 2.0, I talk about agile basketball teams as ones who are able to seamlessly adapt to change and pivot when the time is right. The same principle applies to startups: being agile means having the capacity to react to new information, whether it be altering a product based on customer feedback or completely changing the direction of the company to take advantage of a new opportunity. Companies who are agile embrace a growth mindset, as constantly looking out for and being open to potential incremental improvements can add up to a lot more down the road.
Iteration is the heart of agility on the product side. Each iteration either validates or invalidates a hypothesis about the product or customers, which helps the team make progress towards building something that the market wants. Simply put, product-market fit is a function of constant iteration, making critical and incremental changes to the product until it truly satisfies the market need. A common misconception about product-market fit is that once it’s gained, it cannot be lost. Product-market fit is not like a level in a video game, where it’s never revisited upon its completion. Rather, it’s when the company is in the ideal state where, as Marc Andreessen describes it, “the customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers.” Notice that this is a state which is dependent on customers and market dynamics, which are constantly changing. Companies who hope to maintain their product-market fit have to be in constant adaptation mode, as what customers want today might not equate to what they want tomorrow. Startups who rest on their laurels once they reach product-market fit will inevitably see their advantage erode and risk becoming obsolete.
The Lean Startup method, popularized by serial entrepreneur (and the founder of the social network IMVU) Eric Ries, is one that helps companies incorporate agility into their product development process. The method is comprised of three steps: build, measure, and learn. Building encompasses developing the minimum viable product, which Ries defines as “that product which has just those features (and no more) that allow you to ship a product that resonates with early adopters, some of whom will pay you money or give you feedback.” Receiving feedback is core to the second step of measuring how customers respond to the first iteration of the product. Learning involves listening to the feedback and using that as a guide for future product iterations and decisions.
Directional agility, on the contrary, involves reacting to new information by changing the direction of the company as a whole. One sports team which has exemplified this concept, which I talk about in my book, is the Dallas Mavericks of the late 2000s. When the Mavericks made it to the NBA finals in 2006, they were a talented team with potential but very little experience. Their entire offensive strategy was predicated upon getting shots for star player Dirk Nowitzki, a scheme which was easily countered by strong defenses in the playoffs. Their lack of experience came to bite them in critical high-pressure moments, as the Mavs would suffer early playoff exits in the years following their loss in the 2006 NBA finals. But as the Mavericks front-office became acutely aware of the factors hurting their chances of success, they quickly went to work in transforming a team of potential to a team of poise. By acquiring older players who had both extensive playoff experience and offensive capabilities (to take some of the load off Nowitzki), Dallas was able to put a team in place which ended up winning the 2011 NBA championship. This was only possible because of the pivot the Mavericks made, rapidly reacting to the new information (gleaned by their playoff losses) to change the direction of their team.
Similarly, the ability to pivot when needed is a necessary property of most successful startups. When thinking of companies who have been able to seamlessly orchestrate directional changes to take advantage of new opportunities, two immediately come to mind: Twitter and Box.
While many know Twitter as the social network giant that it is today, few realize that the company’s roots was actually in audio podcasting. The founding insight was born out of the creative mind of Noah Glass, who envisioned a world where people could harness the web to make and share podcasts. The company started by Glass, which was called Odeo, looked to do just this: to be the Web’s central destination for podcasts. But while Glass was capable of coming up with innovative ideas, he certainly wasn’t the best operator; this forced him to cede control of the company to Evan Williams, the founder of Blogger who was Odeo’s first investor. While Williams was a rising star in the tech circles for his work with Blogger, which he had sold to Google, he feared being known as a one-hit wonder and wanted to capitalize on opportunities for a 2nd hit. He soon took the reins of this audio-podcasting startup, looking to raise venture funding to help grow the company.
Even without a proven business model, Odeo was still able to raise $5 million. Investors were not betting on the fundamentals of the company they were looking at, but rather the proven track record of Williams and the excitement of the podcasting space. With software and the Web on the verge of changing every industry, audio podcasting seemed like a wide-open market, and Odeo was ready to take it. But the excitement and optimism soon died down when the tech giant Apple added podcasts to iTunes. With the largest music service in the world, Apple was able to replicate Odeo’s entire company thesis with a simple add-on. Odeo’s chances of beating this competitor seemed little to none, and a pivot was necessary in order to save the company.
So the founding team went to work, brainstorming how they could reinvent Odeo. For Williams, the common thread between his two ventures (Blogger and Odeo) had been the underlying vision to democratize the creation and sharing of information. Blogger did this through blog posts, and Odeo attempted to do it with audio podcasting. Now, when Odeo software engineer Jack Dorsey had an idea of a site where people could share their status, Williams was all ears. The status sharing idea soon matured, incorporating concepts such as connecting people by letting them follow others on the site, adding timestamps to status updates, and ensuring these updates flowed into a stream (similar to Blogger). These key fundamentals become core to the new product, which was soon spun off into a new company — Twitter. The product would inevitably go through numerous iterations, growing into information network with social networking capabilities and utility.
The lesson from Twitter? The art of pivoting is not in destroying an obsolete product and starting from scratch, but rather staying true to the underlying company vision and seeing how integral elements of the past product can be readily applied and transformed into a new product with a big market opportunity. Both the information sharing and social component of Twitter can be traced back to the original Odeo product: information sharing in the sense that anyone could share information in the form of audio podcasts, and social by which people could connect with other creators and listeners through the sharing of their podcasts. What Williams and Dorsey did was apply these same ideas to a new domain and market, one which allowed them to reap the returns they see today.
Another company which illustrates the importance of agility is Box. At the time of Box’s inception in 2005, it was unnecessarily hard to share files online, with people having to resort to alternatives such as emailing files to themselves and using hard drives in order to move data from one place to another. Aaron Levie, then a sophomore at USC, experienced this problem first-hand and looked to solve it by launching Box.net, a consumer-facing application which let people upload their files and access them from anywhere. The timing was perfect for such a startup: the cost of online storage was dropping precipitously, the Internet was becoming significantly faster, and browsers were rising in their power and ability to deliver rich applications. The confluence of these technological factors meant that, with Internet use becoming ubiquitous, people would want an online location to store and share their files. Levie had the foresight to predict this market need, and was able to help Box build a large user base following their launch. The founding team soon secured $350,000 in seed funding from Mark Cuban, and dropped out of college to pursue their idea full time.
But Box soon ran into a fundamental problem which would warrant a pivot: too few consumers were paying for their service, making their freemium business model unfeasible. While their user base was growing, only 2% of consumers were paying for the product and its additional features, making it very hard to generate revenue. This issue was amplified when big tech giants such as Apple, Facebook, and Google entered the market for online file storage. These big companies would be able to offer the service to consumers for free, with the incentive of garnering user data so they can mine and monetize it. With these free product offerings rolling out, it looked increasingly unlikely that Box would be able to survive for long in the consumer market.
But when the company listened to their customers, they found that the amount of business use cases of the product outnumbered that of consumer use cases. They were over serving the consumer market; many of the additional features baked into the product were ones that consumers simply didn’t need, leading to so few paying for them. The enterprise market, on the other hand, was one which could truly benefit and glean value from Box’s product. While their product wasn’t quite enterprise ready yet (it didn’t have enough security features and capabilities around how enterprises wanted to use their data), Box found enough signal in their customer feedback to see their potential as a B2B company. This was the new information which Box had the capacity to react to, as they were able to pivot and go from being a consumer-facing company to one selling exclusively to the enterprise.
What Box brought with it to the enterprise was not just the core substance of their product, but also how it was designed and the way in which users experienced it. Levie and his team realized that while they were in the enterprise software industry, they could still apply their consumer principles to disrupt the market. This is the heart of agility: being able to retain past strengths and unique qualities of the company while making needed changes (sometimes even changing the direction of the entire company) in reaction to new information. For Box, their experience in the consumer market served as a prime differentiator and advantage as they entered the enterprise space, being able to focus on user experience and offer products which were simpler, faster, and cheaper. They were able to harness their consumer ethos to change the industry they were in, what Levie calls “the consumerization of the enterprise.” Box’s growth and successful 2015 IPO is due, in large part, to their ability to pivot while staying true to their company DNA.
All in all, the ability to pivot and change direction is integral to any startup. But, as the stories of Twitter and Box illustrate, the key is not only having the capacity to pivot, but in being able to do so while keeping fundamental elements of the company intact. This requires a unique sense of intellectual humility from the founders, being open to new ideas and possible changes to the company. Change is inevitable; the best founders don’t resist this, but rather they embrace it.
