Kabam's story is pretty well known. In a Cinderella story twist, the social network-turned-sports-turned-gaming company weathered three major pivots in 10 years to ultimately sell for $800 million. This is pretty much unheard of. But there's a big chunk of this unlikely tale that hasn't been told — how they managed to pull it off. In this exclusive interview, Co-founder and CEO Kevin Chou shares the most important hypotheses and actions that made their survival possible.
Imagine four pillars holding up a house. That's your startup. And the columns supporting you are:
Your market of target customers or users.
Your go-to market strategy (how your audience gets to know your product).
Your business model (how you make money).
It's a true pivot when you have to completely change one of those four things. And your decision to pivot should only be triggered when you see one of these columns crumbling, says Chou.
For example, when Kabam was building Facebook apps for sports fans, its business model depended on revenue from advertisers. When the recession descended in 2008, ad budgets plummeted. The company had $2 million in the bank when their annual revenue went from $3 million to $300,000 over the course of four quarters. Their core business model no longer worked. But Facebook was still working well for them as a platform — traction wasn't the issue. So they decided to build Kingdoms of Camelot, a hardcore strategy game that would generate revenue from in-game purchases without any ads at all.
That shift in business model also demanded a complete product overhaul (pillar 1). As Chou has seen time and again, while you’re forced to pivot if a single pillar crumbles, you can rarely rebuild just a single pillar at a time. For Kabam, changing the business model from advertising revenue to in-app purchases required also changing the product from fan community message boards to strategy games.
This is how you determine exactly what to pivot around. What's your strongest standing pillar? This should remain a constant. For Kabam, that pillar was its go-to-market strategy. “We took a step back and said, 'Okay, we're actually really good at creating social applications on Facebook,'” says Chou. “We realized we wouldn't have to change who we were going after or our go-to-market strategy, because Facebook was still growing and Facebook virality to drive installs was something we were already great at doing. What was not working in the business was our business model of selling ads.”
Instead of laying off 50% of their staff to lower burn and stay the course, they decided to pivot around the strong pillars and start building games on the Facebook platform. By the time they made this decision, they'd expended all their options with advertising revenue — they tried programmatic ad sales, outsourced ad sales, in-house sales. Their ability to make money didn't improve, and they were staring down the real possibility of going out of business.
“We've asked ourselves a lot, 'Why did it take us so long to recognize the problem and act?' And the answer is because our traffic on Facebook was still growing so fast and was so robust,” says Chou. “Initially that made it difficult to pivot. But then we realized that was in fact a strong reason to pivot, as opposed to a reason to continue flailing.”
While you don't want to pull the trigger too early on an about-face like this, it does pay off not to be the last in your market to adapt to major changes. A couple years later, when Facebook levied its new 30% tax on developers, Kabam once again had to pivot to stay afloat. In this case, the business model of in-game purchases stood strong. So, having learned their lesson, Chou and his team were proactive about it, and became one of the first gaming studios to switch its go-to-market from Facebook to building mobile games — beating Zynga to the punch, and reaping the rewards.
Ideally, you're not waiting for a life-threatening situation to make a big change. Pivots are most successful when they're not reactive. But it takes work to be prescient. This is why Chou recommends tying quantitative key performance indicators (KPIs) to each of the four pillars described above. “If a company is designing KPIs strategically, then every leader on your team has KPIs tied to product, market, growth or revenue.”
Every quarter, and certainly every year, you should see your leadership team hitting or coming close to their KPIs in those areas. If you start seeing significant misses (or as Chou calls them, “whiffs”) in one of them, that's a red flag for the whole company.
“As a CEO, that's the moment you need to start diagnosing the problem,” he says. “Of course, it could be that the executive in question is unqualified or in the wrong role — it could be a performance issue. But you want to rule that out first, because if it's not, then a pivot might be coming down the line.”
When Kabam was still focused on sports apps, one of his executive team's shared KPIs was revenue per thousand page views. That's where the dramatic shifts in the market showed up first when they missed their mark by a mile. They'd seen this figure grow from 10 cents to 80 cents at the peak of the sports app business. Then in the 2008-2009 recession, they watched miserably as quarter after quarter it fell, bottoming out at 2 cents.
“We should have started questioning ourselves after whiffing two quarterly KPIs,” says Chou. “By the time our revenue was in free fall, we had our backs against a wall and had to try the first pivot that made sense.”
Instead, he wishes they'd done more business planning off of quarterly results, and asked themselves one key question: “If things continue like this, will anyone want to fund our next round?”
“I think if we would have done that, we would have seen much more quickly that there wasn't a path to success for our then current model,” he says. “I think we would have seen the macro trends in the economy faster. If you're burning cash and can't see a clear path that would make you an easily fundable company in the next 2 to 3 quarters, that's a sign you need to change something big about your startup.”
This is how Kabam caught its Facebook to mobile migration fairly early. “As soon as we heard about the 30% tax, we put together a 12-month financial plan that let us run scenarios around organic growth, marketing CPIs, ARPUs, churn, etc. We came away from that saying, 'There's no scenario — even if all other parts of our business was working great — in which our business with a 30% tax wasn't totally awful.'”
In this case, they made the decision to pivot before any meaningful decline in KPIs, but they did use them as a tool to verify that they were on the right trajectory after the fact.
“Pivots begin with the growing misalignment of KPIs around product, market, growth and revenue, and they end when you see these figures coming back into alignment,” says Chou. “Depending on the size of the startup, pivots can take anywhere from 3 to 12 months. You’ll know when the pivot is over when you go to any person in your company and they can explain what the company is doing in each of those four areas. That's when your old company is officially your new company.”How to Execute a Pivot (without Losing Your Mind or Too Many People)
1. Tell your team it's game over and there's no going back.
“I'm a big believer in getting the entire company together and straight up telling them the truth — if nothing changes, we're going to go out of business. It's really important for the entire company to understand that,” says Chou. “Not everyone will agree with you, but knowing that you, as the CEO, believe 100% that the current direction is unsustainable will pull the right type of people across the line. This talk is a terrifying thing to do for me, but necessary to pull a big pivot off.”
This will only work if you convey absolute conviction in what you're saying. Waffling on a major pivot creates confusion up and down the company that can kill even the best plans.
“When we were trying to change from sports to gaming, there were a lot of people inside the company saying, 'We still have the traffic. Advertisers still want to work with us. They just want to wait 6 months or 12 months. The economy could pick up.' For a while this smart and reasonable argument made me waver. It made me wonder if we should just tighten our belt and wait it out,” he says.
“On top of that, as a CEO you feel like you're disappointing the people who joined when the company was one thing. You feel like you lied to them now that you're saying it should be something else. But there's no room for this. You can't worry about people thinking you don't have your act together. Waffling on key strategic decisions will make more employees concerned. If you're at 60% to 90% certainty that you need to make a drastic change, push yourself to 100% — go out there with complete confidence and say to everyone, 'Look, what we're doing isn't working. We can change that. It's going to be difficult, but when we're successful, the company will look like this.' And then tell them how and why the future will work.”
2. Kill the old company, don't wait for it to die.
More often than not, if the business you want to pivot away from is still limping along, people will say, “Let's just put it in a corner somewhere with only a few people working on it, but keep it going for now.” Resist this temptation, Chou says. “I think that's a really dangerous thing to do, because no matter where you put it or how much you shrink it, you're still going to be dedicating some resources to it. As a CEO, it will take up some part of your brain. It will make it harder to 100% embrace the new business.”
He acknowledges that in some cases, old business can generate helpful revenue as you're getting your new direction spun up. If you absolutely need this, then you should still divorce it from the rest of your company as much as possible. Top leadership should spend none of their time on it. Try to move it to a separate location than your main office if you can. Out of sight, out of mind, Chou says.
Keeping old business units around will make it harder to shut down objections to the pivot. When Kabam transitioned away from Facebook, the same concerns would regularly pop up in executive meetings: “Let's allocate more dollars to our Facebook games’ marketing to see if it works differently now. Let's finish and launch this new game on there and see what happens.”
“It was hard, but I always shut those conversations down and kept 100% focus on swinging through the pivot. I would say, 'Hey, we decided four months ago that we would be all-in on this.'” The more of the old business that still exists somewhere in your organization, the harder these conversations get.
3. Don't get paralyzed by voluntary turnover.
“Don't be surprised if up to 30% of your business turns over voluntarily when you pivot,” says Chou. It starts with the decision to pivot and create a workforce plan for the new business that may include purposeful involuntary turnover. Teams might become redundant or unnecessary. When Kabam moved away from sports, they had to lay off their entire ad sales team, including their awesome, veteran VP of sales. It was an extremely hard decision that rippled through the entire company. And the hardest part? The shakeup prompted a wave of voluntary departures of talented employees.
In that kind of situation, it can be easy to see red. You worry about mass exodus right when you need to chase after a new market or business model or product. This can lead to some bad behavior. You might scramble to retain people who wouldn't be in it for the long haul with you anyway. You might rush to hire fresh people without the same hiring rigor. You might panic in front of your remaining staff, your investors, your customers — and that's extremely unproductive.
Remain calm and remember this, Chou says: “The best-run, successful businesses see around 6 to 10% voluntary turnover no matter what's going on, and that's healthy. You shouldn't see yellow flags until you get into the teens. During a pivot, the number for us went as high as 25% voluntary turnover. You have to set a new standard and mindset for yourself. You're in a different mode.”
4. Promote from within to move forward with strength.
Some of this turnover is going to leave holes in your staff — often at the leadership level. Before you launch searches to replace them, look at who you have in junior ranks. Promoting from within at a time like this has several advantages:
You can fill slots faster. When you’re in the midst of a crisis prompting a pivot, leaving key roles empty for months can be a pivot momentum killer.
You reward people who are passionate enough and have the conviction to stick with you through turbulent times. And they're people others in the company know already, making them easier to rally around. When dealing with employee turnover, battlefield promotions from within can help stem important junior talent from leaving.
Hiring key talent from outside the company is twice as difficult in a pivot. Not only are you changing the entire business, but you’re also dealing with employee turnover. Are you really going to get “the best” talent from outside the company to join at that moment?
“At the time we started pursuing Facebook games, we had this front-end engineer who was a huge gamer and was very familiar with what was hot in that area and how to go after it — I asked him to lead the initiative instead of hiring an experienced gaming executive right away. He went from being a talented engineer to one of the most senior leaders at the company in the pivot, and he did a brilliant job,” Chou says.
Give new opportunities in tough times to the people who you see regularly in learning mode. They'll help your whole company adapt to change.
Pivots aren't pretty. Whether you're a several hundred-person company staring bankruptcy in the face, or a tiny startup zig-zagging toward product market fit, it's going to be alternately hard, deflating, hopeful, manic, and exhausting. Kabam's business catapulted to greater success every time they made a change, and Chou and his team still felt all these emotions and more in technicolor.
If you can manage to keep your eyes open, see the signals early, pull the right levers and turn down the volume on objections and noise, you’ll probably make it. But there’s one other vital component: celebrating the small things on the journey itself.
“Looking back, it was amazing to see how each pivot gave us the chance to work with talented people in different capacities — especially those that we gave the chance to learn a whole new business or functional role — and really see them grow in their careers too,” says Chou. “Remember to pause when you see that happening around you, and to be incredibly proud of that. It helped us get through the tough times.”
Photography by Michael George.