Beware of the Donut: Why Founders Should Think Twice Before Biting into Donut-Shaped Markets
Donuts might be a delightful treat for your taste buds, but consuming too many can be unhealthy. Similarly, for start-up founders, indulging in a "donut-shaped market" could lead to a business that's anything but sweet.
In the world of start-ups and entrepreneurship, the concept of a donut-shaped market is an intriguing yet cautionary tale. Picture a donut: a ring of delicious dough surrounding an empty centre. In market terms, that hole represents a core group of potential customers who would derive the most value from a product but are, paradoxically, the hardest to reach. They might lack the financial means, face technological barriers, or be constrained by regulatory hurdles. Surrounding this void is the dough: a larger group of customers who are accessible and capable of purchasing the product but would gain less value from it.
The Hollow Centre of Opportunity
Consider the agriculture technology sector as a prime example. Innovative solutions like advanced sensors, AI-driven analytics, and drone technology stand to revolutionize farming practices. Small to mid-sized farmers would benefit immensely from these advancements, increasing yields and optimizing resources. Yet, these are the very customers who often lack the funds, technical expertise, or time to adopt such technologies. They form the hole in the donut: a market segment rich with need but poor in accessibility.
Other examples of donut-shaped markets include Healthcare Technology, where advanced medical devices that could greatly benefit underfunded clinics in rural areas are sold instead to well-funded urban hospitals that may not need them as urgently. And Educational Software, where platforms designed to revolutionize learning in low-income schools are mainly adopted by affluent institutions with better funding.
Start-ups targeting farmers, 3rd-world clinics, or low-income schools end up finding themselves in a conundrum. To survive, they pivot towards the surrounding dough, in the case of agriculture: larger agribusinesses, seed and fertilizer companies, equipment manufacturers, and insurance firms. While these entities have the resources and willingness to adopt new technologies, their needs almost always diverge, making product development more costly and complex. Even then, the value proposition isn't as compelling. They might use the products to enhance existing services or gain incremental efficiencies, but the transformative impact is muted compared to what small farmers would experience.
A Recipe for Limited Growth
Founders venturing into donut-shaped markets often face limited growth potential. The accessible market may provide enough revenue for survival, but scaling becomes an uphill battle. The core issue lies in the mismatch between the product's ultimate value and the customers who can actually buy it. This disconnect can lead to a business plateau, where expansion stalls and opportunities dwindle.
Moreover, these start-ups might find themselves attractive acquisition targets for larger companies within the doughy ring. However, the valuations are frequently modest, reflecting the limited market reach and scalability challenges. Selling out becomes a pragmatic choice rather than a triumphant exit.
Should You Take a Bite?
Donut-shaped markets aren't inherently bad, but they demand a clear-eyed assessment. Founders passionate about a particular "idea space" might find fulfilment in serving a niche market, even if it doesn't promise exponential growth. For them, the journey isn't about dominating the market but about making a meaningful impact where they can.
However, for entrepreneurs aiming to build scalable, high-growth companies, the donut-shaped market serves as a warning. It's essential to recognize whether the core customer base is accessible and willing to adopt your product. Ignoring this could lead to investing time and resources into a market that can never fully deliver on its potential.
Avoiding the Donut Dilemma
To avoid falling into the trap of a donut-shaped market, entrepreneurs need to be strategic and proactive.
Talk to potential core customers to assess their willingness and ability to adopt and pay for your product; this can reveal whether they are truly inaccessible or if barriers can be overcome.
Engage with other founders in the same space to learn from their go-to-market experiences and challenges, gaining insights that could save you from costly mistakes.
Consult investors who specialize in your industry; their knowledge of the core market segment can provide valuable perspectives on market viability.
Connect with stakeholders in the surrounding "doughy" market to understand their needs and see if adjusting your product could open up new opportunities without compromising your vision.
Conduct thorough market research to identify any hidden obstacles or untapped potential, ensuring that your target market isn't a hollow centre but a solid foundation for growth.
Navigating the Donut Dilemma
If you find yourself either inside or eyeing up a donut-shaped market, consider these strategies:
Bridge the Gap: Develop affordable, user-friendly versions of your product to lower barriers for the core market.
Strategic Partnerships: Collaborate with organizations that have established relationships with the inaccessible customer base.
Policy Advocacy: Engage with regulators to ease restrictions that keep your core customers out of reach.
Value Enhancement: Tailor your product to offer more value to the accessible market, justifying a higher price point.
Conclusion
In the same way that overindulging in donuts can lead to health issues, sinking resources into a donut-shaped market without a solid strategy can be detrimental to your start-up's well-being. These markets may be best suited for founders driven by passion rather than profit, those who are content with modest growth and are unfazed by the challenges of limited scalability.
Before you take a bite, assess whether the sweet allure of the donut is worth the potential pitfalls. Sometimes, it's better to seek a market that's whole, rather than one with a hole at its centre.
Christopher is a management consultant and interim-executive. When not writing about market dynamics, he can be found sipping coffee and trying not to be tempted by delicious-looking donuts.
