October 20, 2020

COVID-19: An External Factor Forcing Some Startups to Pivot

Written by Julia John-Scheder

There are multiple perceptions of the concept of ‘pivoting.’ The term “pivoting” itself comes from the well-known lean startup method and involves gradually improving on a minimally viable product by testing it and continually analyzing customer feedback. But most people associate pivots with change and adaptation – whether it is the business strategy that needs to be adapted in times of market uncertainty or a product for which the right market-fit has not been found quite yet. In any case, it is important for any company to remain open to change and continuously strive for improvement to succeed in the long run.

What Is ‘Pivoting’?

As many entrepreneurs may know within the pivoting “universe,” there are several different directions a pivot can take. A pivot can take place within a product, so specific features of a product are modified. A pivot can also involve the target group a startup is trying to reach, meaning a startup redefines its customer type – enterprise or vertical vs. B2C. And of course, a pivot can also mean changing the entire service or product portfolio a company offers. Some of the most famous examples are Slack, Instagram, and Twitter. Slack was initially created as a communication channel within a game, Instagram (or Burbn) had many more features before they were paired down, and Twitter was a platform for podcasts before turning into the microblogging giant we know today. The sentiment of aiming to remain nimble is echoed by Maria and Dominik Sievert, Founders & Managing Partners at inveox, a current participant in the German Accelerator Life Sciences program: “As a startup especially, it should be expected that adjustments may become necessary to remain competitive even when conditions are changing. Change should also be a ‘fixed variable’ in a startup’s company structures.”

3YOURMIND, one of German Accelerator’s now 280 Alumni (Silicon Valley Class 2016-4), underwent several pivots, according to the founder and CEO Aleksander Ciszek. His startup offers an enterprise software that allows customers to quickly add industry 4.0 services to their production processes, streamlining industrial 3D printing. He thinks that “startups go through more pivots than they think, but they are often not called pivots.” Whether it’s about modifications to a product’s features or changes of the target customers or market strategy, all of these actions can be called pivots. So, pivots can be both internally as well as externally motivated.

Pivoting Due to Outside Forces – Covid-19

Then there are more profound pivots involving changes to the business model of a startup. Each change has different underlying reasons, such as stalling revenue, lagging adoption rates, or pricing power. Currently, the COVID-19 pandemic leaves no other options for startups than to pivot if their revenue was suddenly cut down drastically. The crisis presents a whole set of challenges but also new desirable opportunities for young companies, driving them to reorient their target markets and strategy or adapt their business model. Ciszek also likes to call pivots “a reaction to the learnings in the market.”

How German Accelerator Companies Have Pivoted

We also talked to Tim Miller, co-founder of CertifID, a company providing a platform for users to find people with certified skills and match them where most needed. CertfiID participated in our Southeast Asia program when COVID-19 turned into a global problem in early spring “Our whole business model is driven by the education industry and labor mobility. So for us, it was a massive kicker when this pandemic first happened because the first thing that was shut down was education, like all schools and universities. And then, of course, travel was shut down. I had a few key people with me in Singapore who are usually based in our office in India. It was unclear whether they would be able to return back home because they were closing the borders. And it became a sort of defining moment for us when we had to hit the brakes and ask ourselves how we were going to manage this situation.”

As a life sciences company in the MedTech sector, inveox saw not only a problem but also an opportunity to contribute to improving the issues in the supply chain of healthcare institutions during the pandemic. While inveox usually helps histopathology labs fight against cancer, they pivoted during the first few weeks of the COVID-19 outbreak. They became one of the startups which provided valuable resources in the fight against the virus. They took advantage of their broad network in the industry’s supply chains to produce and dispense testing equipment, protective masks, disposable gloves, and protective suits. For inveox, “COVID-19 wasn’t just an influential factor, but rather it was the main trigger for our decision to build an additional line of business for the provision of medical supplies.” As the crisis poses systemic risks and highlights the faults of carefully orchestrated network structures, inveox’ founding team Maria and Dominik Sievert points out that “the healthcare sector thrives on the close interaction between different industries, stakeholders and disciplines.”

As with the current global pandemic, it’s safe to say that almost every startup across all industries had to adjust something about their activities. The manufacturing sector is severely affected by the virus, as well.  “A third of our business is in the automotive industry, strongly hit by the pandemic,” says Ciszek. As a response, 3YOURMIND set up a dedicated platform to organize 3D printing production and distribution of parts needed to react to the COVID-19 crisis.

Pivoting = Failure?

When a company reaches a point where pivoting is the only chance to survive a crisis, there are a few general things to keep in mind. A startup should try to preserve the cash without ruining the company. Organizations need to walk a fine line between keeping their course and pivoting with the learnings they make along the way. Pivots are often perceived as failures in the startup community because one pursuit didn’t work out. Ciszek guesses that “founders might be averse to pivoting because that could send a signal that they have not yet found a good product-market fit. This could, in turn, signal to investors that the startup seems risky to invest in or that their valuation must lower. So, I can understand why founders shy away from using the word pivot.” According to the 3YOURMIND founder, what’s essential to take into account is that “a startup is, by definition, something that is new and operates in a highly uncertain environment. Thus, it is unlikely that any newly founded company will run in the same direction from the day it’s founded.” inveox confirms this sentiment as they’ve expanded their business activities to include an additional segment that meets the current market needs while following their original vision: “Our core business is and will continue to be the automation and digitalization of sample entry in histopathology.”

In the case of CertifID, adaptation to the new COVID-19 environment meant putting a lot of cost-saving mechanisms in place, like reducing advertising spend, adapting their marketing strategy, and putting a hold on hiring. “There was a balance between managing our team and ensuring that we have consistency in operations but, at the same time, making it clear that the money needs to go much further,” says Miller. At the beginning of the crisis, he faced a lot of uncertainty, but now that has shifted: “in terms of pivoting, it was interesting because we got a lot more interest in our business by shifting our market messaging.”

Utilize your network

One aspect Miller mentioned was that your network could also help. At the beginning of the crisis, he participated in the German Accelerator program staying at the Singapore office. “The German Accelerator mentor network has been invaluable.” A lot of honest and open conversations with his lead mentor, as well as scenario planning for the next 18 months really helped him make decisions regarding the adaption to the new market reality.

In any case, our mentors’ advice is to generally remain open to pivoting during all growth stages of a startup but to approach it with careful consideration. Do your research, gather as much data as you can, talk to your customers, and listen to their feedback. Most importantly, be open and transparent about your plans as a founder. Especially during an external crisis such as COVID-19, it seems vital to share your considerations with your team early on. Hamadeh recommends weekly town hall meetings with your staff to keep everyone in the look. Taking notes will allow you to share your learnings and observe progress.

An Investors’ Take on Pivoting

From an investor’s point of view, especially in the early stage of a startup’s growth phase, pivoting to a model that scales is seen as something positive rather than a failure. The former [position] of German Accelerator alumni Mesaic and Managing Director of Inception Collective, Sebastian Kellner, recommends startups to “know your sales cycles  to determine if you’re on the right track or if you should pivot.” This knowledge or data can then also show if the changes worked or not. In inveox’s case, they informed their investors about their plan right away since, for them their investors “are much more than just sources of funding; for us, they are advisors, partners, and confidantes.”

Depending on the different growth stages of a startup, advice to pivot may also come from investors. Christian Busch, Program CEO of German Accelerator New York, gives advice for communicating a pivot with your investors: “you can certainly reposition to VCs if your product is flexible, but you need to be careful that the changes are a legitimate evolution of your business model and not a forced pivot.” CertifID’s Tim Miller had a different approach: “In terms of communication with our investors, we wanted to wait to show them examples of how our pivot would work before informing them of our plans.” And that is how they informed their investors about their pivot plans: “We wanted to come to them with a solution instead of talking about a problem.”