“If at first you don’t succeed, try, try again…” as the old saying goes, so too do some startup companies whose first attempt fails. “Pivot” is the term for a startup company’s change in direction in response to an obstacle, such as lack of market interest, misunderstanding market need, marketing missteps or running out of cash and needing to find new investors. When they need to pivot, some companies find themselves struggling to interest new investors, as the cap table may have too many existing investors with not enough resources to continue moving forward. Entrepreneurs then are faced with a dilemma- do they dilute the value of the early investors in order to entice new investment, or do they try to find willing investors at a valuation that allows them to maintain the investor positions?
One entrepreneur I worked with refused to take out his early investors even though all the money he raised from them was gone and the MVP (minimum viable product) needed to be completely rebuilt. The business actually had nothing to show for its early efforts. Any new investor would need to completely fund the new MVP; knowing that a future fundraising round would be necessary to then turn the MVP into a full-scale operation. The heart and fundamental integrity of the entrepreneur was admirable- he was protecting those early investors who believed in him, and wanted to see them receive a return from their investment at some point. However, after receiving the same feedback from several potential investors, he had to face the truth: he had to significantly reduce their ownership or even take them out completely in order to save the company. What a heartbreaking situation in which to find yourself!
While nothing can sugar-coat a situation that stark; communication, as always, is key. Keep your investors up to speed on your direction, early results and market feedback – all along the way. Make sure they understand the path to profitability and that they have the right investing timeline for your project. If your company is going to require several rounds to reach its goals, communicate those realistic expectations up front. You’ll need your investors’ support and buy in to weather unexpected turns along the path; and their continued confidence in your transparency and approach can lead to needed additional investment down the road. If something isn’t working, aim to “fail fast” and figure it out as soon as possible, preserving capital and allowing your investors to see you managing your resources well.
As the COVID-19 crisis has unfolded, many savvy entrepreneurs have held open forum web-based meetings to provide updates and drive investor engagement, in addition to providing detailed update emails and newsletters with information about their response to the crisis. This transparency and engagement can actually enable opportunity in crisis. In fact, as I met with one entrepreneur to understand her company’s approach to respond to the impact of the pandemic, I was so impressed with her opportunity to pivot that I made an additional investment to support the direction.
The Girl Scouts among you will recognize the refrain, “Make new friends, but keep the old… one is silver and the other gold.” This applies to your investors too, in building a network to support your business through turbulent times and to have the capital needed to pivot your business when required.