Reboot: How to Reinvent a Technology Startup

Three years ago, Odeo was a struggling startup on a path to nowhere. Odeo's core offering--a set of tools for users to create, record and share podcasts--was facing serious competition from Apple and other heavyweights. The management team made a radical decision to "reboot" the company, and Twitter was born.

As I read the Twitter story, narrated eloquently by Dom Sagolla, I can't help but look back over the many startups that I've been associated with over the past twelve years.  In my various roles as a founder, an investor, a board member, and an advisor to startups in Silicon Valley, I'm constantly fascinated by the mechanics of reinvention. Which approaches to reinvention succeed and which ones fail?

Startups flounder for countless reasons. Perhaps the market opportunity is not as big as imagined, or perhaps there is a mismatch between the technology and the market. Maybe the world changed in some significant way, invalidating the key assumptions on which the startup was based. For example, an established company such as Google or Microsoft might enter the market. Or perhaps the deepest recession in recent history dried up demand for the original product or service. In these cases, the founders and management team have to ask themselves the question: should we push ahead, assuming superior execution will win the day against long odds? Or should we change what we're doing? 

Companies that decide to reinvent need to acknowledge the bad news first: most startups fail, even the reincarated ones.  Those are just the odds. The good news is that certain approaches to reinvention work better than others, and companies can increase their chance of success by carefully calculating their reboot strategy.

Every technology startup has four core components: team, technology/product, market, and business model. Rebooting involves changing at least one of these components, while leaving the other factors unchanged. Let us look at each component in turn:

1. Team. Reinvention usually leads to changes in the team. To qualify as a reboot rather than an entirely new company, however, there must be at least part of the team -- and usually at least one of the founding members -- who continues to remain with the company through the transition. In my experience, one model that usually does not work is when VC investors replace the entire founding team with new management. I've never seen a startup with none of its founders remaining succeed.

2. Market. Many startups try the most tempting option: to keep the same technology/product and look for a new market.  After all, the investment in product development has already been made.  Unfortunately, while this approach seems the most logical, it is also the least likely to succeed. Why? The hardest part of a startup is understanding the requirements of the market, not building the product. After the dot-com bust in 2000, many consumer internet startups tried to reinvent themselves as enterprise technology providers (remember Chemdex?). The startup junkyard is littered with the carcasses of dot-coms that took this route and failed.

3. Business Model. A very attractive strategy is to keep the same product and market, but change the business model. In my experience, this is the most likely option to succeed. For example, enterprise software companies can reinvent themselves by open-sourcing their software and providing consulting services, or a premium version. A software vendor can reboot as a software as a service (SaaS) provider on the Web. Consumer websites can move to a subscription model from an advertising model, or vice versa.

4. Product. Another smart reinvention approach is to addressing the same market (or a closely related one), but change the product or the business model. This option works best when the market need is real, but the product does not adequately address the opportunity. I've found that the key to success is to throw away the old product completely and start from scratch, using the hard-won learnings about the market acquired from the first iteration. In some cases, it makes sense to move the old product to "maintenance mode" and reassign the bulk of the team to developing the new product.

I've applied this particular model of reinvention to both companies where I have been a founder -- Junglee in 1997 and Kosmix ten years later, in 2007.

We started Junglee in 1996 to create virtual databases that integrated data from multiple websites. Although we had some initial success, we quickly realized that the architecture of our first product limited our ability to deal with rapidly-changing information, a key success factor in certain markets. We completely rebuilt the product from scratch in 1997, and created the world's first comparison shopping service.  This service was enormously popular and led to Junglee's acquisition by Amazon.com in 1998.

We introduced Kosmix as a vertical search engine, initially in the health sector.  Our idea was to find a better way to help users understand open-ended queries such as "diabetes", which have no single right answer; that is, explore topics rather than find the needle in the haystack. We'd planned to take a vertical-by-vertical strategy, launching sites named RightHealth, RightAutos and RightTrips. Very soon, however, we realized that the vertical approach carries severe limitations, because it's hard for consumers to remember to go to different sites for different topics of interest. We decided to rewrite the product from scratch, and we relaunched Kosmix.com as a horizontal site.  Kosmix lets you explore any topic and gives you a 360 degree view of anything than interests you -- including information from the Deep Web that is inaccessible to the usual search engines. This transition from vertical to horizontal was much harder than it sounds; it required us to rewrite our technology from scratch. But we did it because of our passionate belief that the problem is real and the market opportunity is vast.

While most startup reboots involve rethinking only one or two of the four core components, in some rare cases it makes sense to go the whole hog. Sometimes it pays to be bold: go after an entirely new market opportunity, create a new product, find a new business model, and make large-scale team changes. This approach is fraught with risk; but there have been a couple of spectacular successes. One clear example is Twitter. Another is Twitter's cousin SMS GupShup, a similar service in India. SMS GupShup was born as Webaroo, a company that wanted to create offline copies of large parts of the web so you could browse while offline. A couple of engineers there launched the SMS GupShup service as a lark and it took off; once the management team saw the traction of GupShup, they re-oriented the company around the new idea.

Some startups are born great: the right team starts with the right idea at the right time, and the rest is history. Some have greatness thrust upon them: the right conjunction of market forces propels an unlikely startup to dizzying heights. Other startups, not so lucky as those in the first two categories, need to earn their greatness. And sometimes that requires a reboot.

Comments

[Piyush]

Thanks Anand for this really enlighting post. I think there is a common belief amongst aspiring entrepreneurs that great companies are formed out of some miracles and luck plays the most important role. However, I believe persuasiveness is the most important quality which the entrepreneur must have to make his company a success. A startup reboot requires one to think deeply about what out of the four factors you mentioned is not working and make appropriate changes, instead of giving-up by saying that most startups anyway fail!

[Randy Korba]

and the corollary to #1, sir -- witness what a great founding team (say, the Junglee guys) go forward and do... much like odeo and Twitter are related only by humans.

[Samir]

Great post Anand. In reading through your distillation of the reboot process I saw my own experience at my fist start up more clearly. Your categories helped me to put structure on what was before just series of changes that we made to stay alive and retain the growth curve that we sought when founding. Using your classification, we did a business model change (end user to institutional subs) on our core product, then put it into a maintenance mode while we did a product change to go after a new opportunity in the same market. The question we asked ourselves for the product change was "what do we have that others don't but want"? With the deeper understanding of our market (actually the vendors serving the market we were in) we took what was a small piece of our old offering and made it into a full blown product that served the vendors. We also changed the business model to data licensing. We sold the company (at a "strategic" multiple) on the back of that reinvented vendor-centric product. Thanks again for helping me to understand more fully what we did!

[Abhishek]

"The hardest part of a startup is understanding the requirements of the market, not building the product." -very wisely said. Finding the shortest path to understanding the requirements of the market and defining a problem worth solving seems the key to success to me. I feel experimentation or iteration is critical to figuring this out quickly. I have been reading this book "Experimentation Matters" by Stephan H. Thomke, which describes the importance of experiments and how to design and conduct them. If start-ups execute quickly with experiments designed to test their assumptions, they might stand a better chance to get to their desired product, business model, and market.

[Brad West]

I think I may have overload on this one. I am thinking about teck launches that were great but no longer are of any real use with the new technology. They served their purpose well and are just put to bed. But on the other hand I am thinking some of the simplest things are overlooked, I think it may be wise to review some archives, am going to hunting. Thanks your post really got the ole juices going.

Thanks for the read
Brad West ~ onomoney

[Xanindia]

You point your views straight and clear. The process of start up is really not that easy if we are to consider the ups and downs, pros and cons. It takes a lot of courage to set it up and eventually reach the top in just a short span of time.

[Prakash Gurumoorthy]

Well written article- Based on my experience, I firmly believe that a critical evaluation of the start-up and the founding team needs to be done. Typically that is never done and the whole team feels great after getting the initial stream of continual revenue. This "feeling great" syndrome does not allow the team to do a critical review of where they stand, what they need to do and how they need to do. The starting point is the critical review and also admitting that the situation is not that great! That is the key ingredient for a reboot- Most of the times, start-ups dont do a reboot as this process does not set in at all and even if some of the founding members try to introspect, its often viewed as a skeptical/negative attitude rather than a constructive one.

These are my 2 cents but this is a prevalent condition for sure. Let me take an example- the CEO of the start-up usually takes some responsibilities and who is evaluating his R&R continually and tracking that? If its a non-venture funded start-up, then this tracking is non-existent. If its a venture funded start-up this tracking usually is done by the board and the VC team- Is this done without any prejudice? These are some of the tough questions that are relevant for a reboot as well.

Thanks for this thought provoking article.

Prakash