This is part of my new series on what makes an entrepreneur successful.  I originally posted it on VentureHacks, one of my favorite websites for entrepreneurs. If you haven’t spent time over there you should.

I started the series talking about what I consider the most important attribute: Tenacity.  I then covered Street Smarts.

3. Ability to Pivot – I don’t like to invest in people that I’ve never met before who come through my office wanting to have a term sheet within 30 days.  I don’t think most VC’s do.  Yes, there is the mythical company you all heard about that walked into Sequoia and had a term sheet 24 hours later.  I’m sure that happens.  But in most situations a VC will want to be able to judge how you perform over time.  It’s what prompted my post on how to build relationships with VCs.  I also wonder about the entrepreneur who would sign a term sheet that came from somebody they hadn’t gotten to know over time.  It’s sort of like going to Vegas and marrying a good looking person without knowing more about what makes them tick.  Good on paper (or good brand) does not necessarily equal good spouse.

VCs often tell entrepreneurs that they want to see “traction” before they’re ready to invest.  What I believe they really want is to get to know you longer.  And part of what they’re looking for is how you adapt to the business you’re building over time.  Every entrepreneur starts with an idea that they believe makes sense.  But then your customers start using your products, your competitors come out with new offerings and your business partners decide to launch a similar product rather than working with you.  You’re forced to “pivot” on a regular basis.   The best entrepreneurs get market feedback regularly and change their approach based on the latest information.  The best entrepreneurs seek advice from everybody they need, learn lessons and make minor adjustments on a monthly basis.

To be clear: most serial entrepreneurs who are working on an early-stage concept know that whatever they’re working on in year 1 is likely to be dramatically different than what they’re doing in year 5.  That might even mean a totally different business or it might just be a totally different business model.  Google had no clue that they were going to make so much money in sponsored search.  They really just copied and out executed Overture (originally goto.com).  We all know Flip Video cameras by Pure Digital.  Did you know that their original product wasn’t a video camera?  What about PayPal – think you know their story?  Their original concept was transferring money via Palm Pilots!  Twitter was an offshoot of Odeo, a website focused on sound and podcasting.  It was originally called Twttr and didn’t initially get rave reviews from TechCrunch or GigaOm.  Seesmic (now a Twitter client) was originally a video blogging platform.  Geni.com beget Yammer.  I could go on and on.

Great entrepreneurs pivot.  Evan Williams, Loic LeMeur and David Sacks are great entrepreneurs.

This is the reason that I’m personally not that anal about your financial model.  I’ve stated publicly that you MUST have a financial model because it serves as your ongoing compass and strategy but it will change on a regular basis during your first 2 years.  So much so that you’re financial model 2 years out won’t resemble your starting model at all. But year 5?  Not so much.

So for me seeing how you respond to market challenges, what you learn and how you adapt is one of the most critical pieces of information I can collect about whether or not I want to invest in your company.  It’s one thing to be tenacious but if you’re not listening to the market and changing things based on that feedback you’re dead.  Unfortunately if you’re not street smart you probably don’t recognize the changes in the market early enough and the pivot comes too late.

I once wrote a piece called JFDI (a play on the Nike Slogan) in which I stated that entrepreneurs need to make quick decisions and take quick actions.  At best you’ll be right about 70% of your decisions.  It takes a wise leader to spot the 30% – what they’re doing wrong.  It takes a leader with humility to admit that he was wrong and reorient people in a new direction.  It takes a real leader to bring everybody with him when he changes directions.  Look at what Mark Zuckerberg achieved when he reoriented Facebook around the status update to combat Twitter.  That was an amazing pivot and why I believe Mark has achieved all of the success that he has with Facebook.  Let’s just say that the market didn’t exactly embrace his changes but directionally I think he was right (in hindsight).

An example:

My best recent example of this is Ophir Tanz and Ari Mir.  They are some of the most talented young technology entrepreneurs in LA.  They came to me 2 years ago with their company, GumGum, and were trying to raise an A round of capital.  They were trying to build a DRM system for digital image owners to protect and better monetize their images.  They had surrounded themselves with great advisers like David Sacks and Mike Jones.  Mike introduced me to them so they came qualified.

I instantly liked them but wasn’t sold on the DRM solutions for image owners.  They went away and made progress in their business.  The next time they came back they had changed their business plan to become a variable rate pricing mechanism for image owners to sell to websites and had created an image-based ad-network platform for remnant photos.  They had signed up Gawker Media and the New York Post.  More interesting but still not my cuppa tea.

They came back 2 months later and had raised money from Crosscut Ventures, an early-stage venture firm in LA run by Rick Smith and Brian Garrett.  I really respect these guys.  They had also raised money from Howard Morgan at First Round Capital who if you check out his bio you will see is legendary.  Hmmm.  These guys seem to be making progress.  They had signed up Glam Media and TMZ.

The next time we met they had launched a few new product concepts including the ability to buy clothes that were in an image through an affiliate link by clicking on the image itself.  I didn’t believe strongly in this product line but they just kept showing the ability to quickly launch and test new products and each time I met them they had made progress.

And then came came the second big pivot (the first being moving away from DRM).  They suddenly had Javascript on pages that covered 40 million unique users and they were coming up with innovative ad products that combated banner blindness.  They had started to launch new products that helped web site owners better load applications from third-party vendors and they started experimenting with totally new ad models that drove the daily revenue up by 7x in less than 30 days.

I had seen enough.  I knew that these guys had the right DNA.  They were product and cost focused.  They were rapidly innovating and involving customers.  They were pivoting when they launched things that didn’t monetize.  And now they were showing that they could ring the cash register.

And then the BIG pivot.  With their new products taking off Ari Mir came up with an idea.  He wrote a 7-page positioning paper that said, in essence, “publishers know best how to monetize audiences.  We’ve proven that through innovation and experimentation we can do significantly more revenue than we’re getting through Google AdSense.  What if we created a market place that let publishers create their own ad units and sell keywords to buyers who would want to buy these in real-time.  We’ve already proven that we can outsmart AdSense, which isn’t hard.  In essence publishers use banner ads that unless you’re a super premium site don’t drive high CPMs and people aren’t looking anyways.  Or publishers can use ad-words where they’re constricted to the Google container and contextual links.  Both of those models work for some but not for others.  What if we gave the publisher the ultimate flexibility?  What if keyword buyers had more choice than just buying expensive and competitive terms through Google?”

Damn.  That’s a great idea.  So the team did a 60-day sprint to get product out the door.  In this period we decided to invest in both GumGum and this new product line, that was later to be named Bedrock.  We then ran customer pilots for 30 days which proved very compelling.  We called a series of publishers who gave us input on what they were looking to achieve.  We spoke to buyers to understand their concerns.  After just 90 days the project was green-lighted and after a few more months we announced it.

I’m proud to work with these guys.  And as I told them when I wrote the check, “I’m not only investing in today’s business – I’m investing in your potential.”  So true.

Next up: resiliency.