By LIZETTE CHAPMAN

Technology entrepreneurs of past eras took two years to build a product, hire a staff and figure out whether there was any real market for their service. But today all that typically takes only a few months as founders cycle quickly through different ideas until they find one that sticks.

Kevin Systrom’s Instagram, which started out as a virtual “check-in” site and wound up as a photo-sharing service, is a recent high-profile example.

How did someone go from wanting to build his company to the sky on Thursday to selling it for $1 billion on Sunday? Still, it’s hard to say no to a billion. Andrew Dowell reports on digits. Photo: Getty Images.

The 28-year-old Mr. Systrom started a company about two years ago that attempted to put a new spin on the idea of virtually checking in at various locations via smartphones, then broadcasting that visit to one’s social network. His company, which he called Burbn Inc., enabled people to leave messages via their phones that could be retrieved by others visiting the same location.

Over the next few months the idea evolved, and soon Mr. Systrom had seized on the concept of a mobile app that would allow people to take photos, alter them visually and share them. That app was called Instagram. Earlier this month, Mr. Systrom and his co-founder sold the company to Facebook Inc. for $1 billion.

Mr. Systrom is part of a new breed of entrepreneurs in their 20s and 30s who strategically “pivot”—try out new ideas, shed them quickly if they don’t catch on, and move on to the next new thing. Their companies are mostly in the mobile and Web sectors, where it’s relatively cheap and easy to tinker with software and create new products on the fly.

Words like “pivot” and the related “iterate” have been used in and around Silicon Valley for several years, generally to describe failing gracefully.

But their use has picked up significantly in recent months amid the broader public’s fascination with the entrepreneurs behind high-profile start-ups, some of whom were able to get funding from investors despite significant changes in their original business plans.

Ben Horowitz of venture-capital firm Andreessen Horowitz used the word “pivot” three times in a nearly 800-word blog post earlier this week to discuss the firm’s investments in businesses such as Burbn.

Investors say the founders who made left turns are generally more experienced—and less fearful of failure—than past generations of tech entrepreneurs. The founders who change products and markets between one and three times raise more money than those who don’t, according to Startup Genome Compass of San Francisco, which tracks more than 13,000 Internet start-ups. In fact, they raised roughly 2½ times more capital than founders who changed products and markets either four or more times or not at all, its research says.

“You pivot as many times as you can, as fast as you can, until you run out of money,” says entrepreneur Evan Kuo, a 27-year-old University of California, Berkeley, engineering graduate. He’s currently working on a site he calls Curios.me, now in its second iteration.

Patrick Chung, a partner at New Enterprise Associates, a Menlo Park, Calif., venture-capital firm, says that what he once might have described as “failed seed investments” he now calls “experiments.” And he’s backing more of them. Just two months ago, NEA launched the Experiment Fund at Harvard University to invest in very early stage companies in the Boston area.

Many of the new breed of young guns have made mistakes, all the while gaining the seasoning and experience that may increase their chances of succeeding with their next idea, investors say. Like Mr. Kuo, Mr. Chung says, they may fail at one start-up idea but “don’t just go away with their tail between their legs. They go on to do something else.”

It has become easier to do this thanks to the rise of social-media platforms like Twitter and Facebook and the advent of stores that distribute mobile “apps,” or applications. These advances have sharply reduced the cost of distribution, making it cheaper to get products into the marketplace fast.

“‘You pivot as many times as you can, as fast as you can,’ says one entrepreneur.”

“Pivot to me is not a four-letter word,” says Tony Conrad, a partner in the early-stage venture capital firm True Ventures. “It represents some of the best methodology that the Valley has invented. Starting something, determining it’s not working, and then leveraging aspects of [that] technology is extremely powerful.”

The start-ups in the tech incubator Y Combinator, whose acceptance rate is less than 3%, change products and markets so frequently that the idea they applied with is often irrelevant to the final product, says founder Paul Graham. That prompted Mr. Graham to launch a program targeting groups that don’t have an idea yet. It will begin this summer in Silicon Valley.

Even after what seems like a failure, an ability to quickly adapt is considered a key skill among founders. While Mr. Kuo was at the tech incubator 500 Startups, he founded the Facebook fan-site network CrowdRally, which had 40 million viewers. He says he decided to close it after Facebook lawyers contacted him. Facebook confirms its legal team flagged certain CrowdRally uses as inappropriate, but says it didn’t shut down the start-up.

Keeping the same team intact, Mr. Kuo was able to stretch the $150,000 that 500 Startups invested in CrowdRally across eight months of experimenting. He tested a handful of ideas before deciding to create a version of question-and-answer site Quora.com for college students.

He built a prototype for Curios.me in four weeks, launched it, got student feedback and then presented the working idea as a company to NEA, which promptly invested $400,000.

“Everything could be wrong or everything could be right, but you don’t know until you get it to consumers,” says 33-year-old Mike Ouye. He worked at three start-ups before he launched his first product, a mobile social-gaming app for smartphones, at Red Robot Labs, which he co-founded. The app was just 40% complete and he wasn’t happy with it, but he says he went ahead anyway because he needed feedback on his initial thesis before seeking funding.

Mr. Ouye collected player data and used the suggestions to tweak the product. About five months later he secured a $2 million seed round for his company.

By pushing ahead, Mr. Ouye says, he benefited: “I’ve learned how to apply metrics to products, iterate quickly and make decisions without overthinking it.” In September, he raised an additional $8.5 million, and he got $5 million more last month.

—Emily Maltby contributed to this article.

Write to Lizette Chapman at lizette.chapman@dowjones.com

Corrections & Amplifications

Mr. Kuo built a prototype for Curios.me in four weeks. An earlier version of this article incorrectly spelled the site’s name as Curious.me.

A version of this article appeared April 26, 2012, on page B6 in some U.S. editions of The Wall Street Journal, with the headline: ‘Pivoting’ Pays Off for Tech Entrepreneurs.

By VICTORIA MCGRANE

WASHINGTON—When the next crisis brings a major financial firm to its knees, U.S. regulators will seize the parent company but allow its units around the globe to keep operating while the mess is cleaned up, according to a planned announcement Thursday from the Federal Deposit Insurance Corp.

The equity stakeholders of the large bank or other financial firm will be wiped out, and bondholders will face losses as their holdings are swapped for equity in a new entity, as a part of the FDIC’s plan.

Nearly four years after the massive government bailouts of the financial crisis, regulators are looking to chip away at the tacit understanding that the government will step in to save top financial institutions seen as vital to the economy or banking system.

Bloomberg News

Martin Gruenberg, acting chairman of the FDIC, speaks with the Securities and Exchange Commission’s Mary Schapiro last month.

As part of that effort, acting FDIC Chairman Martin Gruenberg will outline the agency’s strategy in a speech in Chicago Thursday, his first public remarks on the dismantlement plans for banks. In recent weeks, FDIC officials discussed the plans with The Wall Street Journal. If several federal agencies and the Treasury Department agree to seize a firm, the FDIC will unwind the parent bank holding company of the faltering firm, placing it in receivership and revoking its charter. The firm’s subsidiaries around the world would continue to operate, supported with liquidity the FDIC-held parent company can borrow from the government under the Dodd-Frank financial overhaul.

Next, the FDIC would transfer most of the firm’s assets and some of its liabilities into what’s known as a “bridge company,” according to FDIC officials. There, regulators would oversee a debt-for-equity swap akin to what occurs under a Chapter 11 restructuring: Equity holders would be wiped out, but creditors would get equity in exchange for the claims they held. The company eventually would emerge from the process as a new, recapitalized private entity.

To be sure, markets have been skeptical about regulators’ willingness and ability to unwind a major financial institution in real time. The top U.S. financial firms still enjoy a funding advantage over their smaller peers, in part because investors believe their money is safer there. Credit-rating firms including Moody’s Investors Service and Standard & Poor’s Corp. say they still believe the government may bail out the biggest banks.

The FDIC, known more for its bank deposit insurance, is working to persuade major investors, analysts, economists and bankers that it is building an apparatus that could cleanly guide a massive financial firm to failure without a taxpayer bailout.

The 2010 Dodd-Frank financial overhaul gave the regulators new powers to seize a faltering financial giant and wind it down in a way that doesn’t send markets panicking.

The mechanism, called “orderly liquidation authority,” was designed to give regulators options other than the stark decision they faced in 2008—either commit billions in taxpayer dollars to prevent failure, as in the case of American International Group, or let its messy failure disrupt financial markets, as happened with Lehman Brothers Holdings Inc.

FDIC officials say their strategy could avoid some of the destabilizing disruptions caused by multiple Lehman Brothers subsidiaries entering different insolvency proceedings in the U.S. and abroad after the parent company filed for bankruptcy in September 2008.

Eighty-eight percent of the international assets and derivatives of top U.S. banks are based in the U.K., where FDIC officials say they are actively seeking cooperation. Former Fed Chairman Paul Volcker, who is helping advise the FDIC, said he is “impressed” with the agency’s close work with the U.K.

Critics argue that the FDIC doesn’t have the expertise to wind down a Lehman-like financial firm, or they say that the international complexities would render the agency’s powers meaningless.

Former Federal Reserve governor Kevin Warsh said in April that the new FDIC authority “is unlikely … to be up to the task” of mitigating harm in the next financial crisis.

A group of institutional fixed-income managers called the Credit Roundtable, which includes the California Public Employees’ Retirement System and Vanguard Group, expressed concerns that the FDIC could pull off such a complex undertaking, according to a person who attended a meeting at the Fairfax Hotel in Washington, D.C.

The FDIC’s new powers are important but bank dismantlement “has to be done in the right way,” said Anne Simpson, senior portfolio manager and director for corporate governance at Calpers.

For now, regulators can continue to sow doubt about the likelihood of future bailouts in the minds of market players and financial institutions, Mr. Gruenberg said. “Look, until you do it, I’m not sure you’re really persuading the market conclusively,” he said in an interview.

Some critics are taking a second look. David Skeel, a corporate bankruptcy expert at the University of Pennsylvania who has been critical of resolution authority, called the FDIC’s strategy “a really intriguing proposal” that makes the best out of what he considers a bad set of rules in Dodd-Frank.

A version of this article appeared May 10, 2012, on page C1 in some U.S. editions of The Wall Street Journal, with the headline: Avoiding Next Big Bailout.

By KATY MCLAUGHLIN

Chef and restaurateur David Burke’s business sounds like a financial-crisis perfect storm. Consider:

His restaurants are mainly in hard-hit areas including Manhattan’s Upper East Side and Las Vegas. Mr. Burke has no experience owning restaurants in a down economy; he launched his empire during restaurant boom times, starting in 2003. And the $7 billion fine-dining industry will see a 12% to 15% drop in sales this year, according to Technomic, a Chicago restaurant industry consultant.

And yet…Mr. Burke reports overall growth, some of his restaurants are booked to capacity on some evenings, and restaurant-industry analysts say he is one of the few high-end players with the right idea for the times.

How could this be? Mr. Burke, it seems, has figured out a way to navigate the downturn. His strategy is to throw out the high-end-dining playbook that says discounting should be subtle. Instead, he is offering dramatic, attention-getting and significant discounts. By engineering the menu carefully and keeping labor costs in check, he is able to slash prices without losing money, he says.

His promotions have included $20.09 three-course meals with items such as oysters and lobster at many of his upscale restaurants, including two in Manhattan (where, without discounts, entrees run $29 to $44), and $5 burgers and milkshakes at his Chicago steakhouse (where a 14-ounce sirloin is $48 on the regular menu). On one menu, he crossed out prices of wine and listed new prices with the term “sale” — a rarely seen word in fancy restaurants.

TRY IT! David Burke’s promotions include a wine auction and $20.09 three-course meals

One of his most unusual promotions is the Wine Auction at the tony David Burke Townhouse in Manhattan. Diners are handed a list of high-end wines with prices ranging from $200 to $600 struck out with red ink. The sommelier approaches the table, suggests that diners make him an offer and begins a negotiation. Wine director Bruce Yung says he sells an average of five bottles a night, meeting his reserve price or better.

“It’s worth a shot,” says Mr. Burke of his unorthodox approach to selling fine wine. “I’m sitting on close to $200,000 worth of wine anyway, already paid for.”

The D Word

Discounting is a strategy high-end restaurateurs have traditionally avoided or carried out in subtle ways, out of fear of eroding the cache of their brands. But this winter and spring, an unprecedented number of fine-dining restaurants slashed their prices.

Mr. Burke tries to set his restaurants apart from other bargains being offered mainly by making his discounts as drastic, easy-to-grasp and catchy as those of one of the few restaurants doing well these days: McDonald’s.

“I have teenage kids who go to McDonald’s for a dollar meal,” Mr. Burke says. The snappy ring to that promotion inspired him to come up with a high-end equivalent. “I see that it’s working for them at a buck, so it might work for me at $20,” Mr. Burke says.

 

Wooing Diners in a Down Economy

2:07

Chef David Burke is known for his creative cuisine. Now he’s using that same creative approach to weather a downturn in dining out. He talks with WSJ’s Beckey Bright about his strategy.

Starting in January, he rolled out $20.09 meals on Sunday nights at David Burke Townhouse and Fishtail in Manhattan, and at David Burke Fromagerie in Rumson, N.J. At Primehouse, in Chicago, he offers the $20.09 deal for lunch six days a week, excluding Sunday. At David Burke at Bloomingdale’s, in Manhattan, he serves a $20.09 dinner every night of the week. For a $5 supplement, diners can have a one-pound lobster or filet mignon entrée.

Last year, DB Global, Mr. Burke’s New York-based company, had $35 million in revenue, and for this year he predicts $45 million. Like many multi-unit operators, he reports that his less-expensive restaurants are doing well this year. For instance, David Burke at Bloomingdale’s, which has both a sit-down restaurant and a Burke in the Box take-out area, is up 2% over last year. Sales at all three Burke in the Box restaurants — the others are at McCarran International Airport in Las Vegas, and Foxwoods Resort Casino in Connecticut — are up from last year.

Still, even his high-end restaurants, while taking a hit, are doing better than many of their high-end competitors: Primehouse had a 2% decline in sales in the last quarter of 2008 and beginning of this year, compared with the prior year; Fromagerie is down 5%, and David Burke Townhouse in New York City saw an 8% sales drop. Across Manhattan, meanwhile, fine-dining operators are reporting sales declines of around 15%, and some celebrated restaurants, including Fiamma, a highly praised Italian eatery in the same price range as Mr. Burke’s fanciest restaurants, recently closed.

Some of the impact of Mr. Burke’s discounting is measurable: The Sunday discount dinner at Townhouse in Manhattan turned a night that typically grossed $5,250 into a $12,750 night, Mr. Burke says. There are softer benefits, too, such as increased goodwill, publicity, and customers who discover the restaurants and return on full-price nights, Mr. Burke says.

Internal Breeding

Mr. Burke is somewhat insulated from the risk of besmirching his high-end image with discounts because of his unique public persona, says Ed Levine, founder of the food blog SeriousEats.com. “David Burke is the master of the culinary grand gesture, so this is perfectly in keeping with his brand,” Mr. Levine says. Mr. Burke now has “pricing gimmicks” that link up with other gimmicks he’s used over the years, Mr. Levine says. Mr. Burke, for example, bought his own breeding bull to sire the beef cattle used at Primehouse. He also lines his beef-aging cave with Himalayan rock salt, which he sells for $29.99 for a two-pound box.

Discounting, if done too often for too long by too many players, can erode pricing power in the long term, says Dennis Lombardi, executive vice president of WD Partners, a restaurant and retail consultant in Dublin, Ohio. Citing one example, “customers have been trained to expect to buy pizza at a discount,” because of all the coupons and deals, Mr. Lombardi says.

Mr. Burke says that by limiting most of his discounts to Sunday and varying the deals, he avoids such expectations.

Less Bass

With careful planning, Mr. Burke says he is able to keep food costs on his discounted menus at about 45% of the menu price, which is higher than the traditional 35% most fine-dining restaurants aim for but still enables him to earn a profit, because people tend to order more drinks when they are paying less for food. He sprinkles in luxurious ingredients, though some, such as dry-aged beef or black bass, are served in smaller portions than on the a la carte menu. He caught a break this winter when the wholesale prices he was paying for lobster fell to about $5 a pound, from a norm of $7.50, enabling him to include on the discounted menu items such as lobster carbonara and half an “angry lobster,” a spicy signature dish.

Stephen Hanson, a New York-based restaurateur who manages operations for the Chicago hotel where Primehouse is located and who helped devise the concept for the restaurant, disagrees with the discounting approach. Mr. Hanson says he fears that the customer will think, “Were you gouging me beforehand?” But Mr. Hanson, whose company, New York-based B.R. Guest Restaurants, owns 14 other restaurants in New York and Las Vegas, says he is content to let Mr. Burke, whom he calls “a marketing genius,” decide the menu pricing.

During a weeklong promotion in October at Primehouse in which Mr. Burke sold normally $12 burgers for $5, the restaurant made money, Mr. Burke says. Serving lunch to 30 to 40 people on an ordinary day yields about $8,000 per week. During the promotion, the restaurant served 300 lunches a day, Mr. Burke says, for a weekly lunch take of $30,000. While food costs were higher, because more was served, labor costs stayed almost the same, because waiters at the restaurant make most of their wages through tips and the kitchen required only two extra line cooks, who make $15 an hour, he says.

In addition to discounting, DB Global is reducing labor costs. Every week the company analyzes how many bookings have been made at each restaurant and looks at past history to determine how busy it will be. Then it pares or increases hourly staff — about 70% of all employees — accordingly. In winter, about a dozen cooks usually return to their home countries, including Mexico, India and France, for six weeks of unpaid vacation; this year, Mr. Burke encouraged them to take two or three months off. Because his three Manhattan restaurants are in close proximity, he also moves staff from less-busy to fuller restaurants and asks them to multitask. For example, the company butcher now also makes ravioli and crab cakes.

DB Global also focuses on retaining every potential customer. On a recent Tuesday, Fishtail was too full to accommodate more patrons. Mr. Burke instructed the Fishtail hostess to send patrons to nearby David Burke Townhouse, promising a free drink would be waiting. Out of 20 potential guests, 18 took the offer, Mr. Burke says.

—Ms. McLaughlin is a staff reporter for The Wall Street Journal in Los Angeles.

Write to Katy McLaughlin at katy.mclaughlin@wsj.com

Printed in The Wall Street Journal, page R3

By ANDREA COOMBES

An unexpected letter from the Internal Revenue Service can make your stomach drop, but you can take steps to reduce your audit risk.

Taxpayers overall face a low audit risk: The IRS audited 1.1% of all individual tax returns filed in 2010, or 1.6 million returns of 141 million filed.

The vast majority of those audits—1.2 million—were done by mail. Just 392,000 involved an in-person meeting with the IRS. That’s not necessarily good news. Taxpayers often are confused by IRS correspondence, and with such audits they don’t have the benefit of working with one single agent, the National Taxpayer Advocate says.

But the risk of an audit skyrockets for some. Fully 12.5% of taxpayers whose income topped $1 million faced an audit. And self-employed people who filed a Schedule C with gross receipts of $100,000 or more faced an audit rate of about 4%—four times higher than average taxpayers. Here are seven red flags:

Schedule C

Sole proprietors filing a Schedule C can reduce their audit risk by sticking to the facts—or at least making sure their expenses and income are not dramatically different from similar businesses.

For example, one Chicago-based hot-dog-stand owner said his cost of goods sold was 50% of gross receipts, says Robert McKenzie, a partner in the law firm Arnstein & Lehr. “I know Chicago hot dogs are great, but he had a high cost.”

The IRS found the hot-dog salesman was reporting his expenses but only part of his revenue. He faced “a lot of tax and penalty,” Mr. McKenzie says.

Check out BizStats.com for an idea of whether your numbers are out of line; Mr. McKenzie says the IRS tells its agents to review that site for average business costs.

Over-the-Top Deductions

Taxpayers who claim large deductions attract attention. “Anything that is significantly above what persons in your income bracket might deduct is likely to be looked at,” says Mr. McKenzie.

“The mantra I preach to my clients is keep good records,” says Audrey L. Griffin, an enrolled agent in Centerville, Ga. “You’re going to get the best possible, honest, legal result and you have nothing to fear.”

Business or Hobby?

The IRS may decide your business is a hobby—especially if you have other income sources. For example, Mr. McKenzie says, the IRS disagreed with an executive who, in addition to his annual salary of $500,000, deducted expenses for his yacht, claiming it was a business charter operation.

In another case, a young man with annual trust-fund income of $300,000 decided to become a race-car driver. He wrote off his costs, including the car, maintenance and the like.

In both cases, the taxpayers settled with the IRS for a partial write-off, Mr. McKenzie says.

Rental Losses

If you show income from your job or business and claim rental-property losses, be wary. IRS rules limit deducting those losses in the current year, unless you prove you’re actively involved in managing the property.

“It’s a real hot item right now: Audit people who make significant income from their jobs and also claim rental losses,” Mr. McKenzie says.

In one case, the wife of a real-estate attorney—a stay-at-home mom with three young kids—managed the family’s rental properties, but the IRS said the couple couldn’t deduct rental losses in the current year. On appeal they won their case, Mr. McKenzie says.

“We were able to prove yes, he couldn’t have devoted 50% of his time [to the rentals] and made $600,000 a year, but she could,” he says.

Business Use of a Car

Ms. Griffin’s clients often insist that 100% of their driving is related to business and thus their costs are 100% deductible, but when she digs deeper she finds they often use that same car for non-business purposes.

“Then it’s not 100%, which is the reason the IRS requires you to keep mileage records,” she says.

Home-Office Deduction

You may be able to claim a deduction for expenses related to your home office, including home-insurance and utilities costs, but be prepared for the IRS’s attention.

“I would not discourage a client from taking that deduction if they qualify. I just try very hard to make sure they know the requirements and keep good records,” Ms. Griffin says.

But is it worth it? You would claim a deduction for a percentage of the housing expense related to the square feet of office space divided by the home’s total square footage. “It may be a very small percentage and it may not be worth raising this red flag,” Ms. Griffin says.

Earned-Income Tax Credit

Among people who claimed the EITC—a refundable credit worth up to $5,751 in 2011 for moderate-income taxpayers—2.2% of returns filed in 2010 were audited.

There’s a “high level of noncompliance,” Mr. McKenzie says, often because fraudsters exploit this benefit to line their own pockets. For instance, scammers will provide an extra Social Security number so taxpayers can claim an extra dependent—and increase their credit.

It’s a valid tax credit—just mind the scams and stick to the truth.

Write to Andrea Coombes at andrea.coombes@dowjones.com

—Andrea Coombes is a personal finance editor for MarketWatch. Read more at marketwatch.com.