Product/Market Fit: The one thing that can stop a startups in their tracks

Key points at a glance

  • A trap that can ensnare unsuspecting startups, the ‘trough of sorrow’ occurs when product and market don’t yet synergise.
  • By focusing on R&D and new markets, the ‘trough of sorrow’ might be avoided.
  • For Australian startups, funding is available via the R&D Tax Incentive to provide crucial cash runway extensions.

It’s a common pitfall plaguing startups and entrepreneurs around the world. Responsible for sleepless nights, caffeine addiction and considerable uncertainty, budding businesspeople must beware the dreaded ‘trough of sorrow’.

As perplexing as it is mysterious, a trough of sorrow forms whenever a new product is released into a market – which then promptly stagnates, failing to find a receptive audience.

Over time, if customers or other stakeholders continue to show disinterest, the startup’s momentum can grind to a halt, new revenue streams can’t develop, and cash runways begin to disappear at alarming rates.

But what causes a trough of sorrow to develop, and can it be successfully avoided or navigated through activities such as research and development?

Survival of the fittest

The trigger behind the trough of sorrow is a concept known as the ‘product/market fit’. Coined by technology venture capitalist Marc Andressen, to have a product/market fit is to be “in a good market with a product that can satisfy that market”a.

What does this mean, exactly? In short, a new product doesn’t have to be immediately perfect for it to be successful. Instead, what’s required is for the product to address a previously-untapped need – whether it’s connecting electronically with long lost friends (Facebook), having the power of a computer in your pocket (Apple iPhone), or enjoying the taste of an iconic soft drink without sugar (Coke Zero).

If a new product doesn’t answer an underserved market, there be troughs ahead.

Product/market fit done right

A good example of a product with an instantaneous product/market fit was Skype. The peer-to-peer voice service enjoyed a customer acquisition cost – the amount of money it needed to spend in order to land a new user – at a staggering $0.001a. In contrast its competitor at the time, the USA-based Vonage, was spending a whopping $400 in customer acquisition, primarily through marketing.

Essentially, Skype’s product/market fit was so good it was acquiring new customers en masse for free. For Skype’s Scandinavian and Estonian founders, there would be no trough of sorrow to trip over and fall into.

When the going gets trough, the trough gets going

Not all companies can enjoy a fairy-tale product/market fit. One household name that had a particularly compelling trough of sorrow story was the online accommodation provider Airbnb.

According to one of its founders, the company was experiencing a trough of sorrow so deep in its early startup days that the founders had to resort to selling custom-made breakfast cereal boxes – modelled after the 2008 US presidential election – to pay off their card and keep the company afloatc. This unconventional revenue stream would later secure their place in a prestigious startup incubator, putting them onto the path to finding their product/market fit and climbing out of the trough.

To exit the trough, extend the runway

There’s no one surefire way to avoid or escape a trough of sorrow. Marc Andresson, the coiner of the phrase, recommends doing anything and everything that might be required – from rebuilding the product from scratch to entering entirely new marketsa (like custom-made cereal boxes).

Such strategies take time and money, so startups languishing in a trough of sorrow would do well to maximise their cash runways. In Australia, one way this can be achieved is through government grants such as the R&D Tax Incentive or the Export Markets Development Grant.

While these grants won’t solve the product/market fit conundrum, they can provide precious extra income from an alternative source, buying more time for startups as they look to scale the trough of sorrow’s slippery walls.

To learn more about the R&D Tax Incentive and the Export Market Development Grant, visit the Nifty website.

a https://web.stanford.edu/class/ee204/ProductMarketFit.html
b http://abovethecrowd.com/2011/05/24/all-revenue-is-not-created-equal-the-keys-to-the-10x-revenue-club/
c http://www.chicagotribune.com/business/success/inc/tca-how-airbnb-got-out-of-the-trough-of-sorrow-20161019-story.html