Not only do most startups fail, but this high failure rate is often considered an essential part of the innovation process as it means organizations are really stretching the bounds of what’s possible. Indeed, modern startup lore suggests that learning what works and pivoting based upon one’s learning is a key part of the entrepreneurial process.
Learning how to pivot successfully is nonetheless not always straightforward, as new research from Cambridge’s Judge Business School illustrates. For instance, while using deductive reasoning results in a hypothesis being formulated and then tested, inductive reasoning focuses instead on synthesizing complex information towards a conclusion.
Learning to pivot
The researchers followed 21 early-stage startups for two years to understand how and why they pivot. The analysis shows that deductive reasoning tends to work best during the validation phase of the startup, but when the startup is trying to both create ideas and then scale them, inductive reasoning works better as it better accounts of the inevitable complexity and ambiguity in each stage.
“Our findings bring clarity to the tension between the two approaches of strategy formation, as they qualify the conditions that make each approach valid,” the researchers say.
Importantly, the research also identified clear boundaries to the “build-measure-learn” approach that is often advocated as a key part of startup creation via the hugely popular Lean Startup methodology. Indeed, the researchers suggest that such deductive reasoning can actually harm the development of the startup at various key stages.
“There are times when venture founders need to draw inferences from ambiguous and complex information, and an overly restrictive experiment-based approach at certain stages could lead to erroneous inferences and therefore choices,” the researchers explain. “Early-stage ambiguity or complexity emerging at later stages can render experiments ineffective.”
Alternative reasoning
The findings emerged after tracking the startups via an accelerator based at a European business school during 2016 and 2017. The startups were tracked throughout along with interviews with the founders and other key stakeholders.
During the study period, the startups underwent 129 pivots, which the researchers defined as significant changes that will have impacted the performance of the startup. The pivots were grouped into four buckets: market; execution or operations; organization; or product or service.
For instance, if the pivot was in the market dimension, the entrepreneurs would often change market segmentation, the route to market, or widen the market in some way. Alternatively, if the organization dimension was the focus of the pivot, it might involve changes to the founding team or the partnership structure.
As well as the key finding that pivoting in the right way at the right time is crucial to success, it also emerged that pivoting the right amount was also key, with failing ferms found to either pivot too much or not pivoting at all.
“In our sample, ventures that ceased to exist exhibited one thing in common: they did not pivot at all, or they pivoted very rarely,” the researchers conclude. “However, frequent pivoting also hampered venture progress.”
