Nick Kozak for the Toronto Star

How-To: The best tips for moving your small business into the startup world

In the early 90′s, IBM’s business model broke. Instead of companies buying computers for their entire enterprise — IBM’s principal source of revenue — individuals had started driving sales. By 1993, the tech giant was losing $8 billion annually.

Then, the company turned around. Despite pressure to split its divisions, the CEO at the time pushed the business into a new field — the services industry.

“No matter what, you always have to focus on reinvention,” said Virginia Rometty, the current chief executive and chairman of IBM, to the New York Times. “Never love something so much that you can’t let go of it.”

The ability to “pivot” can make or break a company. A crucial ingredient in the successful startup secret sauce is the capacity to change direction to win new markets.

Entering a new market requires serious commitment, says Rajah Lehal, founder of Multiplicity Accelerator, a company that specializes in networking events.

“A start-up, or even a mature company, will need to reserve resources,” says Lehal, “as a rule of thumb, can you dedicate four solid months to investigate that market? If not, don’t go about it in a haphazard way. The current business and opportunities will suffer.”

Chris Kay, Lehal’s partner, says the founder must embody the changes he wants to make.

“A company will often develop a culture derived from the founder’s personalities,” says Kay, “so he will need to be aware of their impact on their co-workers and employees. For the culture to change, the founders need to change.”

Be aware of new opportunities in your field at all times, says Kay.

“Have one eye on your startup and one eye on the market,” he says. “Your customer’s needs and competition move fast, you can’t build your product in a vacuum.”

Just ask Josh Borts, an entrepreneur with first-hand experience. After graduating from Waterloo with a degree in computer engineering, Borts worked in Hong Kong before being approached by a friend to launch a business. Seed capital came easily and they built SocialStreet, a similar app to the ubiquitous FourSquare that lets users find their friends, in any city, at any time.

“We made some crucial mistakes,” says Borts, “when we eventually released the first version, it became apparent consumers didn’t understand or want much of what we were trying to do.”

So he took his team and from the company’s ashes created Functional Imperative, a boutique web design and development business that helps entrepreneurs realize their ideas.

Today, Borts preaches what he practised.

“Almost every startup needs to pivot many times over their life. The goal is to do that as early as possible,” says Borts.

“The hard part is convincing any business owner that they may not know their target market,” he says. “To successfully pivot a business, companies need to understand their market and their users. This generally means a lot of listening. Your clients will tell you what they want, you just need to be open to hearing it.”

The costs of switching revenue models can be “very high and hard to assess,” says Eugene Fiume, a computer science professor at the University of Toronto who specializes in startups. “For example, a service model is generally less scalable than a product model and margins on service must reflect that.”

Communicating is essential to easing the transition, says Fiume. Depending on the size of a company, the board must be involved, middle-management must be able to communicate the new vision, and shareholders must be informed of changes.

And a skills gap may be unavoidable, says Fiume.

“Outsource the gap, retrain from within, or reduce and hire,” he recommends. Then there are the loose ends, such as pre-existing funding agreements and intellectual property rights.

Still, Fiume says a switch is not only possible, but necessary.

“Virtually every company I know has changed their business models,” he says