This XSeed blog was written by Venture Partner, Jeff Thermond, and originally appeared on Forbes.
In a previous article, I argued that great startups solve large, and even more importantly, immediate pain points for customers by positioning products more like a pain killer and less like a vitamin. This is the essence of product/market fit: when your sales prospects have almost no choice but to buy now because the pain they feel is immediate and unrelenting. A great indicator to prove you have this nailed is when sales cycles are shortening. Another is that you’re making or beating your operating plan.
Life is good when that happens, but almost every startup goes through at least one moment where they don’t have that. Here’s what to do to recover and the one mistake you must avoid.
First of all, figure out how long your cash lasts you. This is the maximum amount of time left you have to fix the problem. Two, do everything you can to extend that period of time. The obvious place to start is to reduce your cash burn. Look very critically at every dollar you’re spending and figure out ways to stop or reduce it. The sooner you take action, the more you extend your runway.
Those two steps are essential, but they don’t solve the mismatch problem. They just give you more time to solve it. When you raised money, you told your investors a story about a big market opportunity and how you could make them a lot of money fixing it.
Yet, in this situation, something is still wrong. Sales are taking longer to close, conversion rates are below plan, and finding good leads is harder than expected. The next step is to figure out what went wrong in your assumptions because taking the right steps to fix the situation will depend on the cause of the problem. I’ve seen four causes of product market mismatch:
1. The product is not doing what you said it would. Customer bug reports are far more numerous than they should be, and conversions from trial are way below what you anticipated when you built your bookings plan.
2. Your go-to-market plan is not working. Whatever channel you took to get to your target market is not delivering the goods. Like the first cause, trial conversions are not leading to sales, but it isn’t because the product is not working. It’s because your go-to-market approach is not conveying the full benefits of the product to your prospects.
3. Your timing is off. You assumed that some predicate condition would be in place well ahead of when it did happen and your conversion rate is going to be well below plan until that condition finally arrives. Your deal count will also likely be below plan.
4. Your positioning is wrong. You’re attacking the wrong problem, or worse, one which doesn’t exist. A smaller than expected amount of deals in your sales pipeline is a great indicator of this. So is indifference to your elevator pitch from prospects you thought would be ideal.
Just as each cause is different and has different tell-tale signs, so does the solution to your problem. Let’s take each one in order.
1. If your product does not work as planned, you have to estimate quickly how long it will take to fix compared to the amount of runway you have left. Often the reason the product doesn’t work is because of poor execution by your technical leadership. Unfortunately, that’s the same team you probably need to ask for a reasoned estimate of how long the fix will take. The biggest mistake a CEO can make here is to assume that the person who executed poorly will not do it again. They will. Find who is responsible and reassign or eject them as quickly as possible. This will set the proper tone about consequences of poor performance by management as well as freeing up the slot for someone who can execute.
2. If your sales channel is not working, change it as fast as possible. The vast majority of times I’ve seen this happen it occurred because someone tried to sell a complex or new proposition through an indirect channel which has neither the skill nor sense of urgency to close business fast enough to make the sales plan. Fortunately, the time it takes to hire sales people who work directly for you and live or die by your success is, at best, a few months. Resist the temptation to hire overlay sales people to help an underperforming go-to-market channel. There may be a time down the road for that approach, but in this instance you must change things quickly.
3. If your timing is off, you have to establish with confidence how long it will take before your timing is correct. Look at this question with a fresh set of eyes and assumptions from when you first made that call. If the gap is as long as your runway, or even longer, you need to determine if there is another market which can support your operating plan. If not, you need to have a very candid discussion with your investors.
4. The best problem to have is incorrect positioning because it has the shortest time to fix. This problem can have two distinct causes. The easiest problem to fix is that your messaging is wrong, but the customer pain point is real and your product does solve the customer’s pain point. The fix in this case is to change your messaging to better fit the customer pain point. Your happiest customers can be rich sources of material to help you better align your claimed benefits with their pain point. Much like the case of a product that doesn’t work, you probably have someone on your marketing team who executed poorly. Reassign or let them go immediately. The other problem you may have here is that you have a valuable product or service but have attacked the wrong initial market. If so, find that other market as fast as you can and attack it with urgency. Even when you feel you’re attacking the right segment, you should be thinking about when to branch out to another segment. Hopefully, you’ve already given the next segment to attack some serious thought so you’ve got a head start on your pivot to another segment.
Worth noting is that there is one critical mistake to avoid, common to all four causes: Do not kid yourself about how severe the situation is. You have no longer than your cash in the bank to fix this problem. You should assume there will be no more funding available to the company if you fail to fix the problem and prove it won’t happen again. This is why the first step is to calculate the runway you have left and then to estimate the time to fix. You must act now.
If you respond urgently to the right source of the problem with the right fix, you have a fighting chance. If you don’t, you have none at all.