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The first company I founded, Pine Labs, started as a services company and over the years, it’s now a leading payments company. GlobalLogic, my second startup, started as a B2B products company and is now a large, established services company. Meesho, an investment I made at a very early stage, started as an offline-to-online fashion company, pivoted to a social commerce company, and is now a leading ecommerce company.

How did this happen? It happened because these companies pivoted to areas they found were better suited. These are often hard decisions to make since pivots entail undertaking a new risk, often cannibalising existing business in the process, and putting demands on shareholders, employees and resources. Change is always hard, but pivotal changes are much harder.

A leadership team can get to know when to pivot as they realise one or more of the following:

The market size is limited for longer-term growth

One97 Communications, the parent of Paytm, was in the VAS business, which was a nice and profitable business in 2008. However, the market was dominated by Telcos and limited in size. Internet users had begun to exponentially grow in India, and there was an opportunity to go directly to consumers. Hence, One97 pivoted in pursuit of a much larger market. This is often a key driver to pivoting. If the ambition of the team is to build a very substantive business, it needs to play in a very large market.

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Key changes in technology

As cloud infrastructure became both available and pervasive, there have been hundreds of legacy software companies which have pivoted from client-server-type models to cloud-based delivery. This often required rewriting the product, changing the economic model, and competing with a new set of competitors. These pivots were necessitated by the availability of a superior technology infrastructure. Similarly, AI technologies today are necessitating a rethink of traditional businesses like support and services.

Lack of capital to pursue the current business model

Some business models are ahead of time and require a large amount of capital for market creation and sustenance. For example, ecommerce has needed billions of dollars to help create the necessary infrastructure and change user behaviour. While some ecommerce companies could raise this capital, several others were not.

This required them to pivot to more capital-efficient models like direct-to-consumer brands or selling through other marketplaces. The dramatic changes in the availability of venture capital (first, plenty of it in 2021/22 and then paucity of it) prompted several pivots.

Macro changes in policy

Changes in government policy or geopolitical changes may open up completely new opportunities or make the current business unviable. For example, India imposed a high GST on real money gaming companies earlier this year and this prompted several companies to pivot their businesses to casual gaming. The omnipresence of UPI and the fact that it is largely free to use has promoted payment companies to pivot to building lending capabilities on top of UPI.

Another important timing issue for startups is the availability of resources. Startups in the early stages are always capital-constrained. A good time to consider pivoting is fresh after a capital raise. This is counterintuitive since the capital raise is likely done based on the current business model. However, it’s also the time the startup has maximum resources to execute a pivot. If the founding team has realised that the current business model is constraining, the right time to pivot is right after a fundraise. If you wait too long, you will run out of capital and may not make enough progress to be able to either raise more money or achieve profitability.

While there are a number of examples of companies pivoting into success, it does not always work. Companies, both big and small, make errors in judgment. Facebook, for example, renamed itself to Meta. It made substantial investments into AR/VR technologies but the bets have not paid off and the whole metaverse movement itself has been shrouded in doubt.

On the other hand, there are many more examples of companies not pivoting and losing relevance. Kodak, in the 90’s, was one such famous example where it did not pivot from film to digital photography.

I have seen more companies suffer from not pivoting versus pivoting too soon. Hence, I am in the camp of agility especially in the early stages of business. As you see the incremental dollar is becoming harder and harder to acquire, that’s always a sure-shot sign.

(Rajul Garg is the Founder and Managing Partner of Leo Capital.)