When Should A Start-Up Pivot?

When Nimbuzz, an early Over The Top provider, was acquired last month by UK-based New Call it didn’t generate much of a media buzz. But the eight-year old Dutch company, which the deal valued at $250 million, is just the latest example of a company that survived near death by changing its focus.

Nimbuzz is not alone. Some of the best-known tech companies started life doing something completely different. Pinterest was a shopping app, Flickr was a game, and of course Nokia started life as a wood pulp mill.

Hassle’s co-founders were down to their last £10

Altering course is so key to a company’s success that “change” is this year’s theme for NOAH, an annual Internet conference in London. Pivots are not the only issue. Scaling comes with challenges and for founders one of the most difficult issues is when it is time to step down as CEO.

“The Internet has changed change,” says Marco Rodzynek, founder of NOAH Advisors. “Everything is faster. Management and shareholders need to be 100% aligned to adapt and willing to take risk.”

Founded in the Netherlands in 2006, Nimbuzz gave the java-phones of the day a single “app” where a user could connect to all his or her social networks.

Seeds Of Success

“That got pretty popular,” says Michael Jackson of Mangrove Capital Partners, which invested in the company, giving Jackson a board seat. “Then two things happened. There was only one social network because Facebook nuked everybody else.

“The second was the smartphone. You can run an app for every single social network on your phone at the same time. You didn’t really need an aggregator. The whole thing was a bit redundant.”

Nimbuzz also realized that while the app was drifting in Europe and the U.S., “We found a lot of people in the Middle East, North Africa, and India were using it,” says Jackson. Indians in the Gulf States were using the app’s instant messaging service to keep in touch with home.

“We took the Indian country manager and made him the boss of the show and said, ‘get on with it in your geography.’ And so he did.”

As start-ups that have successfully turned failure into success have often discovered, the seed of success is sometimes to be found locked inside the husk of the old company. This was the case for London-based Hassle, which connects domestic cleaners to clients.

£100 Left In The Bank

Alex Depledge was an Accenture consultant before quitting her job to found the company together with Jules Coleman and Tom Nimmo. The first plan was a local services marketplace.

The company was picked by the Springboard accelerator (now TechStars) in 2012. But soon after leaving the program it became apparent that all was not well. “Tom and Jules were coming to work every day and writing lines of code and felt that they were making progress.

“Meanwhile I am traipsing around London trying to get bookings and realizing that even though the idea was a really good one it was too unwieldy.”

With stagnant growth and cash running out Depledge says they had to take drastic measures. “With about £100 left in the bank we looked at all the research data, looked at what was happening on our site. One in four people who came to the site was looking for a domestic cleaner.”

Ten Famous Pivots

Well-known tech brands of today that all started life doing something else.

Started life as: Odeo, a podcasting service that was part of Obvious Corp.
Now: Obvious went on to found Twitter, which went public in 2013 and now has a market cap of $30.09 billion. Odeo still exists today.

Started life as: a mobile shopping app called Tote in 2009.
Now: Pinterest now has over 70 million users; approximately 80% are women.

Started life as: a consumer activism site called The Point in 2007.
Now: Having spawned a thousand clones, the discounted daily deal site IPO’d in 2011. It has a market cap of $4 billion.

Started life as: Confinity, in 1999, a way of transferring money between PDAs.
Now: Acquired by eBay for $1.5 billion. Earlier this year eBay announced it would spin off PayPal into a separate publicly-traded company.

Started life as: A massively multiplayer online game called Game Neverending with a tool for sharing images.
Now: Acquired by Yahoo in 2005 for an undisclosed sum. For a while it was one of the web’s biggest photo-sharing sites.

Started life as: Burbn, a kind of Foursquare check-in service.
Now: Burbn wasn’t a great hit, but founder Kevin Systrom noticed that the photo-sharing aspect was very popular. That became Instagram. The company was acquired by Facebook for $1 billion in 2012.

Started life as: Many things, but one of them was Facemash, a Harvard-based “Hot-or-Not” service.
Now: It’s Facebook.

Started life as: An unsuccessful dating site called “Tune In Hook Up.”
Now: Part of Google, it was acquired for what was in 2006 an eye-watering $1.65 billion.

Started life as: Yelp. But back in 2004 it was a rather convoluted automated system for emailing recommendation requests to friends.
Now: A crowd-sourced review site. Yelp went public in 2012 and now has a market cap of $4.18 billion.

Started life as: a wood pulp mill, founded in 1865.
Now: After a time it became the world’s largest phone maker. Today it is a telecoms equipment provider with a mapping service and is a shadow of its former self.

The three tore down the site and rebuilt it. Instead of being a site where people could come on to look for tradespeople, it became a site where domestic cleaners could pick clients.

“We released on January 3rd [2013]. We didn’t have any money. We gave ourselves six weeks to see if this thing could really do something.” They needn’t have worried. By April the site was closing £250,000 a month. The company now employs 35 people in three countries across seven cities and landed a £6 million funding deal from Accel Partners.

The problem, says Depledge is that “we all fall in love with an idea. We fail to validate them in the market.”

A Cool Solution To A Problem That Did Not Exist

That is a lesson that another London start-up, payment service GoCardless, learned the hard way.

According to co-founder Matt Robinson, “Lots of ideas start on a whiteboard in a room between lots of people that are talking about something they really know nothing about. We came up with a cool solution to a problem that did not exist.”

That solution was a site designed to be a tool to allow everyone from a five-a-side football manager right up to someone running a subscription business to collect payments.

The site failed to take off. “After a couple of weeks you would get these football team managers saying, ‘It’s fine, but I needed to collect the medical consent form.’ We said of course we can build that. But then you would find that the landlords didn’t need that.”

“The real warning sign is you have flat growth despite the fact you are doing everything you possibly can to delight your customers.”

The team dived into their data. “It turned out that 80%, no more like 99%, of the people we were trying to help just did not have a burning pain.”

At the time the four co-founders were half way through the Y Combinator accelerator program.

For A Month We Were Literally Cold Calling All Day, Every Day

“One of their mottos is ‘build product, talk to users.’ Paul Graham said something which we really took on board. ‘You build the product, you keep adding more features to it. You can improve it, but it’s not going to make a order of magnitude difference.’

“He told us, ‘all of you down tools and from now on you spend all day calling actual and prospective customers.’

“We were in San Francisco at the time,” recalls Robinson “We were getting up at ridiculous times. For a month we were literally cold calling all day, every day, to speak to people in the UK and to find out what did they want.

“We were living together in San Francisco in a four-bed place. Every night one of the co-founders would come into my room. And I would be saying, ‘Stop messing around, we’ve got an early start tomorrow. Go to bed.’ And he would reply, ‘No. I’m not going to bed because I know that as soon as I get up I have to do the cold calling again. Anything I can do to make that not the next thing is better.’”

What they found out was that users really wanted not a new site or tools, but a way of integrating payments into their existing accounting tools and services.

While still on the Y Combinator program, the four completely rebuilt the company, pivoting to an API-based payment service in time for the demo day at the end of August 2011.

“We serve over 5,000 companies and grew 800% last year,” says Robinson.

Pivots present a challenge to investors. “What you have to do is treat it as a new company walking in the door,” says Accel’s Sonali de Rycker.

“If somebody says that they can sell ice cream and then they say they are going to sell furniture you really need to say, ‘Is this the right team to sell furniture? Is there a better team? Do we really need more furniture makers?’”

But proving that for every rule there is an exception, while Hassle and GoCardless found their path to success lay in ruthlessly focusing on just one part of their project, Israel’s ironSource found success by taking the opposite approach.

The company started out writing plugins for the Firefox browser, says co-founder Omer Kaplan.

We Transformed Into A B2B Company

“We worked a lot of time on the application and then nothing happened. We didn’t get users and we were not able to monetize and we weren’t able to distribute. The naïve dream is that once you have a good application, it means you have a business. We very quickly understood that this was not the case.”

The company realized that the existing tools to help developers distribute their services and monetize were completely inadequate. They built their own.

“We started to generate significant revenue through our applications. We transformed into a B2B company offering technologies to application developers.”

But rather than focus on just one aspect, ironSource built a whole suite. “We have technologies that enable large-scale distribution and monetization of applications — historically on desktop but today of course we are strong in mobile.”

Kaplan says the counter-intuitive decision to go broad, not deep, is a consequence of the market they are in. “That is the direction the market is going. I see a lot of consolidation between companies and we were fortunate enough to identify that in the beginning.”

As ironSource, Nimbuzz and many others have learned understanding the needs of your users is key and the willingness to embrace change is crucial to success.