Advocating Change

• My goal in advocating a scientific approach to the creation of startups is to channel human creativity into its most productive form, and there is no bigger destroyer of creative potential than the misguided decision to persevere.
• There is good news about our reliance on judgment, though. We are able to learn, we are innately creative, and we have a remarkable ability to see the signal in the noise. In fact, we are so good at this that sometimes we see signals that aren’t there. The heart of the scientific method is the realization that although human judgment may be faulty, we can improve our judgment by subjecting our theories to repeated testing.
• It is about aligning our efforts with a business and product The Crown Publishing Group. Kindle Edition. that are working to create value and drive growth. In other words, successful pivots put us on a path toward growing a sustainable business.

Innovation Accounting Leads to Faster Pivots

• To see this process in action, meet David Binetti, the CEO of Votizen. In the early 1990s, he helped build USA.gov , the first portal for the federal government. His first product concept was a social network of verified voters, a place where people passionate about civic causes could get together, share ideas, and recruit their friends.
• David’s initial concept involved four big leaps of faith:
  • 1. Customers would be interested enough in the social network to sign up. (Registration)
  • 2. Votizen would be able to verify them as registered voters. (Activation)
  • 3. Customers who were verified voters would engage with the site’s activism tools over time. (Retention)
  • 4. Engaged customers would tell their friends about the service and recruit them into civic causes. (Referral)
• Three months and $ 1,200 later, David’s first MVP was in customers’ hands. The numbers were so low that there wasn’t enough data to tell what sort of engagement or referral would occur. It was time to start iterating.
• David spent the next two months and another $5,000 split testing new product features, messaging, and improving the product’s design to make it easier to use. Those tests showed dramatic improvements, going from a 5 percent registration rate to 17 percent, and from a 17 percent activation rate to over 90 percent. Such is the power of split testing.
• However, as shown in the chart below, those numbers proved to be even more discouraging: David achieved a referral rate of only 4 percent and a retention rate of 5 percent. Silicon Valley, we call this experience getting stuck in the land of the living dead. It happens when a company has achieved a modicum of success, just enough to stay alive but is not living up to the expectations of its founders and investors.
• David had two advantages that helped him avoid this fate:
  1. Despite being committed to a significant vision, he had done his best to launch early and iterate. Thus, he was facing a pivot or persevere moment just eight months into the life of his company. The more money, time, and creative energy that has been sunk into an idea, the harder it is to pivot. David had done well to avoid that trap.
  2. David had identified his leap-of-faith questions explicitly at the outset and, more important, had made quantitative predictions about each of them. It is only because David focused on actionable metrics for each of his leap-of-faith questions that he was able to accept that his company was failing.
• He had heard three recurring bits of feedback in his testing:
  1. “I always wanted to get more involved; this makes it so much easier.”
  2. “The fact that you prove I’m a voter matters.”
  3. “There’s no one here. What’s the point of coming back?
• David decided to undertake what I call a zoom-in pivot, refocusing the product on what previously had been considered just one feature of a larger whole. David decided to change Votizen into a product called @2gov, a “social lobbying platform.” Rather than get customers integrated in a civic social network, @2gov allows them to contact their elected representatives quickly and easily via existing social networks such as Twitter.
• But the results from his next round of testing were dramatic: registration rate 42 percent, activation 83 percent, retention 21 percent, and referral a whopping 54 percent. However, the number of activists willing to pay was less than 1 percent. The value of each transaction was far too low to sustain a profitable business even after David had done his best to optimize it.
• David pivoted again. This time, rather than rely on activists to pay money to drive contacts, he went to large organizations, professional fund-raisers, and big companies, which all have a professional or business interest in political campaigning. The companies seemed extremely eager to use and pay for David’s service, and David quickly signed letters of intent to build the functionality they needed.
• In this pivot, David did what I call a customer segment pivot, keeping the functionality of the product the same but changing the audience focus. He focused on who pays: from consumers to businesses and nonprofit organizations. In other words, David went from being a business-to-consumer (B2C) company to being a business-to-business (B2B) company.
• But when he went back to companies to collect his checks, he discovered more problems. Company after company procrastinated, delayed, and ultimately passed up the opportunity. Although they had been excited enough to sign a letter of intent, closing a real sale was much more difficult.
• Returning to his leap-of-faith questions, David concluded that the results refuted his business-to-business hypothesis, and so he decided to pivot once again.
• David decided to reduce staff and pivot again, this time attempting what I call a platform pivot. Instead of selling an application to one customer at a time, David envisioned a new growth model inspired by Google’s AdWords platform. He built a self-serve sales platform where anyone could become a customer with just a credit card. As always, the new people were verified registered voters, and so their opinions carried weight with elected officials.
• The new product took only one additional month to build and immediately showed results: 51 percent sign-up rate, 92 percent activation rate, 28 percent retention rate, 64 percent referral rate (see the chart below). Most important, 11 percent of these customers were willing to pay 20 cents per message.