90 percent of startups fail. 42 percent of those failures are due to misreading the market.
A similar pattern often plays out something like this: The founder comes up with a solution idea, then spends a lot of time and money perfecting the solution. They find out after it’s too late that either the solution does not solve a real problem, or the market opportunity for that solution is too small. They try to pivot but are out of cash and can’t find more.
Many founders have been formally trained to solve problems and build solutions. The idea of clearly defining the problem, and then having the discipline to evaluate if the problem is even worth solving, is not as much fun as working on an ingenious solution.
This bias toward solutions is further bolstered by only following the rhetoric of the lean startup approach — “fail fast” or “launch the product and iterate” — but skipping the rigor in the lean startup approach which requires researching customer needs and market demand before building solutions.
Jumping to solutions too early creates tunnel vision, inhibiting the ability to see the problem clearly. In the startup world, this means that if a team is too attached to their solution, they can become blind to indications that problems in the market do not align with their solution. This is confirmation bias. It is the subconscious tendency to favor and recall information that supports prior beliefs — or prior solutions, in this case.
This bias becomes even stronger if the team is emotionally and financially invested in a solution. Thus, if a team has spent several years and their life savings on a solution, it will be difficult for them to hear the signals from the market suggesting a pivot is needed.
In general, pivoting while still in the problem discovery phase is easy and inexpensive. Pivoting once a startup begins investing in a solution is expensive and time-consuming. If the need for a pivot is realized after a lot of time and money are spent on the wrong solution, it can spell disaster.
The key to increasing chances of success for startups is early intervention to validate the market before solution tunnel vision and confirmation bias set in. It is important that new founders stay away from too much solution work before the disciplined work of customer and market discovery. It is all about separating problem space from solution space.
Problem space
- Customer need: Clearly understanding the customer problem that needs to be solved before investing time, money, hopes and dreams into a solution. Many pivots to find a compelling problem are cheap and easy in this phase.
- Opportunity: Evaluating if the customer problem is significant enough to make it worth solving. This not only involves assessing the size of the market need, but also the competitive landscape and potential business models.
Solution space
- Solution definition: Defining and validating a solution to the problem so that the business opportunity can be realized.
- Solution development and validation: Developing a solution with only enough fidelity to be quickly validated and modified. This is not the final product; it balances simplicity with sufficiency to test and get feedback on the product functionality, value and business model.
Following this disciplined separation of “problem” and “solution” forces pivots to occur very early in the startup’s evolution when they are cheap and easy. It also increases the likelihood that the solution solves the problem in a way that will meet customer needs and can be monetized into a successful business.
Although misreading the market is not the only risk for startups, it is the most lethal and should be mitigated as early as possible to beat the statistic and increase the chance of startup success.
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