Are investors pivoting?
In an episode of the comedic TV series “Community,” two students show up for their PE class, expecting to resume their physical education. Only it’s not a PE class. The writing on the chalkboard quickly reveals that it’s a P.E.E. class.
A former jock realizes that this acronym stands for Physical Education Education. He won’t get to play any sports. Instead, he’ll be taught to be a gym teacher. Disappointed, he says that he assumed the repetition in the course catalog was nothing more than a typo.
“It started as a typo!” replies the swaggering gym coach. “But it’s grown into one of Greendale’s most successful programs…”
The school may have taken a cue from Silicon Valley. The industry has an estimated failure rate of 90% and, rather than buckle under these odds, it continually tries to affirm the value of failure, at least outwardly. We’ve all heard the mantras — “fail fast, fail often” among them.
That isn’t always sincere; Harvard professor Shikhar Ghosh has noted that “VCs bury their dead very quietly.” Nevertheless, success can be born of humility. The strategic pivot is one aspect of this.
Instead of feeling defeated and crumbling when an expectation is not met, some companies radically modify their product or service in order to meet more evident demand and leverage what they have learnt or built. Sometimes, they do so under pressure from investors to grow, grow, grow. In the aforementioned TV episode, even a printing typo was grounds for a pivot.
An online store for snowboarding equipment pivoted and became Shopify, the DIY e-commerce platform. YouTube was once intended to be a video dating app, with inspiration drawn from the superficial rating site Hot or Not and the cringe-worthy slogan “Tune in, hook up.” Slack, the platform for digital workspace conversations, began as an internal tool that serviced a conflict-free, multiplayer online game.
Some pivots are more gradual. Suzuki is known to many as the manufacturer of flashy motorcycles but in the early 1900s they were making looms for the Japanese silk industry.
Now, even some investors could be seen as “pivoting.”
Peter Thiel’s venture capital firm Founders Fund is reportedly aiming to raise $2.7 billion by the first quarter of next year. Of that, $1.5 billion is earmarked for investments in older, larger companies, which is considered to be a departure from its usual strategy and a broader VC tendency to write checks to unicorns when they’re still… well… just baby unicorns.
However, with all of the abandoned and failed IPOs in 2019, there’s reason to believe that companies will continue to stay private longer. This gives pause to some traditionally early-stage investors who are now especially concerned about the dilution of their stakes.
So-called growth-stage financing didn’t seem to work out well for SoftBank and WeWork. But The Wall Street Journal reports that Thiel’s Founders Fund remains undaunted. According to reporting by Rob Copeland and Katie Roof, “It has told potential investors that older companies that stay private longer can prove to be more stable, if less lucrative, investments than moonshot startup bets.”
People are beginning to look at things differently.
Jason Calacanis, an angel investor and the host of a popular podcast about startups, says there’s value in being a so-called “pegasus.” By skipping rounds of financing that have become routine for others, founders are able to retain more ownership, avoid dilution, maintain closer teamwork, and stay focused on product development.
Calacanis notes that there are exceptions to this advice. “If you come up against rabid competitors, sure, take the big money and go to war — just try and do it after you hit $5-10m in yearly revenue,” he writes in his blog.
There’s some irony here. A pegasus is basically a business that is profitable enough to invest in its own growth. The fact that this warrants a new term says something about the perversion of credit and speculative mania that has overtaken the tech industry. In the old days, this was simply referred to as a business. But perhaps the invocation of potential magic — valid or invalid, from innovation to investment — is part of what makes tech so exciting and worthwhile.
3 April 2020