THE PIVOT OR PERSEVERE MEETING

 

The decision to pivot requires a clear-eyed and objective mind-set. We’ve discussed the telltale signs of the need to pivot: the decreasing effectiveness of product experiments and the general feeling that product development should be more productive. Whenever you see those symptoms, consider a pivot.

The decision to pivot is emotionally charged for any startup and has to be addressed in a structured way. One way to mitigate this challenge is to schedule the meeting in advance. I recommend that every startup have a regular “pivot or persevere” meeting. In my experience, less than a few weeks between meetings is too often and more than a few months is too infrequent. However, each startup needs to find its own pace.

Each pivot or persevere meeting requires the participation of both the product development and business leadership teams. At IMVU, we also added the perspectives of outside advisers who could help us see past our preconceptions and interpret data in new ways. The product development team must bring a complete report of the results of its product optimization efforts over time (not just the past period) as well as a comparison of how those results stack up against expectations (again, over time). The business leadership should bring detailed accounts of their conversations with current and potential customers.

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Let’s take a look at this process in action in a dramatic pivot done by a company called Wealthfront. That company was founded in 2007 by Dan Carroll and added Andy Rachleff as CEO shortly thereafter. Andy is a well-known figure in Silicon Valley: he is a cofounder and former general partner of the venture capital firm Benchmark Capital and is on the faculty of the Stanford Graduate School of Business, where he teaches a variety of courses on technology entrepreneurship. I first met Andy when he commissioned a case study on IMVU to teach his students about the process we had used to build the company.

Wealthfront’s mission is to disrupt the mutual fund industry by bringing greater transparency, access, and value to retail investors. What makes Wealthfront’s story unusual, however, is not where it is today but how it began: as an online game.

In Wealthfront’s original incarnation it was called kaChing and was conceived as a kind of fantasy league for amateur investors. It allowed anyone to open a virtual trading account and build a portfolio that was based on real market data without having to invest real money. The idea was to identify diamonds in the rough: amateur traders who lacked the resources to become fund managers but who possessed market insight. Wealthfront’s founders did not want to be in the online gaming business per se; kaChing was part of a sophisticated strategy in the service of their larger vision. Any student of disruptive innovation would have looked on approvingly: they were following that system perfectly by initially serving customers who were unable to participate in the mainstream market. Over time, they believed, the product would become more and more sophisticated, eventually allowing users to serve (and disrupt) existing professional fund managers.

To identify the best amateur trading savants, Wealthfront built sophisticated technology to rate the skill of each fund manager, using techniques employed by the most sophisticated evaluators of money managers, the premier U.S. university endowments. Those methods allowed them to evaluate not just the returns the managers generated but also the amount of risk they had taken along with how consistent they performed relative to their declared investment strategy. Thus, fund managers who achieved great returns through reckless gambles (i.e., investments outside their area of expertise) would be ranked lower than those who had figured out how to beat the market through skill.

With its kaChing game, Wealthfront hoped to test two leap-of-faith assumptions:

1. A significant percentage of the game players would demonstrate enough talent as virtual fund managers to prove themselves suitable to become managers of real assets (the value hypothesis).

2. The game would grow using the viral engine of growth and generate value using a freemium business model. The game was free to play, but the team hoped that a percentage of the players would realize that they were lousy traders and therefore want to convert to paying customers once Wealthfront started offering real asset management services (the growth hypothesis).

 

kaChing was a huge early success, attracting more than 450,000 gamers in its initial launch. By now, you should be suspicious of this kind of vanity metric. Many less disciplined companies would have celebrated that success and felt their future was secure, but Wealthfront had identified its assumptions clearly and was able to think more rigorously. By the time Wealthfront was ready to launch its paid financial product, only seven amateur managers had qualified as worthy of managing other people’s money, far less than the ideal model had anticipated. After the paid product launched, they were able to measure the conversion rate of gamers into paying customers. Here too the numbers were discouraging: the conversion rate was close to zero. Their model had predicted that hundreds of customers would sign up, but only fourteen did.

The team worked valiantly to find ways to improve the product, but none showed any particular promise. It was time for a pivot or persevere meeting.

If the data we have discussed so far was all that was available at that critical meeting, Wealthfront would have been in trouble. They would have known that their current strategy wasn’t working but not what to do to fix it. That is why it was critical that they followed the recommendation earlier in this chapter to investigate alternative possibilities. In this case, Wealthfront had pursued two important lines of inquiry.

The first was a series of conversations with professional money managers, beginning with John Powers, the head of Stanford University’s endowment, who reacted surprisingly positively. Wealthfront’s strategy was premised on the assumption that professional money managers would be reluctant to join the system because the increased transparency would threaten their sense of authority. Powers had no such concerns. CEO Andy Rachleff then began a series of conversations with other professional investment managers and brought the results back to the company. His insights were as follows:

1. Successful professional money managers felt they had nothing to fear from transparency, since they believed it would validate their skills.

2. Money managers faced significant challenges in managing and scaling their own businesses. They were hampered by the difficulty of servicing their own accounts and therefore had to require high minimum investments as a way to screen new clients.

 

The second problem was so severe that Wealthfront was fielding cold calls from professional managers asking out of the blue to join the platform. These were classic early adopters who had the vision to see past the current product to something they could use to achieve a competitive advantage.

The second critical qualitative information came out of conversations with consumers. It turned out that they found the blending of virtual and real portfolio management on the kaChing website confusing. Far from being a clever way of acquiring customers, the freemium strategy was getting in the way by promoting confusion about the company’s positioning.

This data informed the pivot or persevere meeting. With everyone present, the team debated what to do with its future. The current strategy wasn’t working, but many employees were nervous about abandoning the online game. After all, it was an important part of what they had signed on to build. They had invested significant time and energy building and supporting those customers. It was painful—as it always is—to realize that that energy had been wasted.

Wealthfront decided it could not persevere as it existed. The company chose instead to celebrate what it had learned. If it had not launched its current product, the team never would have learned what it needed to know to pivot. In fact, the experience taught them something essential about their vision. As Andy says, “What we really wanted to change was not who manages the money but who has access to the best possible talent. We’d originally thought we’d need to build a significant business with amateur managers to get professionals to come on board, but fortunately it turns out that wasn’t necessary.”

The company pivoted, abandoning the gaming customers altogether and focusing on providing a service that allowed customers to invest with professional managers. On the surface, the pivot seems quite dramatic in that the company changed its positioning, its name, and its partner strategy. It even jettisoned a large proportion of the features it had built. But at its core, a surprising amount stayed the same. The most valuable work the company had done was building technology to evaluate managers’ effectiveness, and this became the kernel around which the new business was built. This is also common with pivots; it is not necessary to throw out everything that came before and start over. Instead, it’s about repurposing what has been built and what has been learned to find a more positive direction.

Today, Wealthfront is prospering as a result of its pivot, with over $180 million invested on the platform and more than forty professional managers.3 It recently was named one of Fast Company’s ten most innovative companies in finance.4 The company continues to operate with agility, scaling in line with the growth principles outlined in Chapter 12. Wealthfront is also a leading advocate of the development technique known as continuous deployment, which we’ll discuss in Chapter 9.