We often ask entrepreneurs to “talk to us about the size of this opportunity”, and we often get the same answers: “There are [x] people in [insert geographic construct], and the market for our product is [y] gazillion USD, according to [insert big name consultancy firm]. If we can capture [z]% of the market, our revenues would be [insert as many zeroes as one can get away with].”
This is useful, no doubt, but one half of our team thinks it is incomplete, and the debate has split the firm in two. (Help!) The team in charge of this newsletter is biased in one direction, so we will make our case here, and let our colleagues take two paragraphs to make theirs next week. You’ll be the judge. This is fair and just.
The argument against
Big firms like Sequoia Capital target large markets, but hear us out: market size estimates are lazy. They might be good signals that a problem exists, but the market size number (“200 billion USD per year!” “500 trillion EUR per year!”) contains little information about how *important* the problem is to paying customers; it doesn’t say much about how well any one founder’s solution addresses the problem; and it does not tell a compelling story about whether/why it will grow over time. Market size does not equal market demand. That millions of Nigerians have clothes that get dirty does not mean they will use your ‘laundry app’ instead of hiring a washerman.
The second side to this is that large estimates often signal that a market is mainstream and that its ‘huge potential’ has become common knowledge.
Andy Rachleff has a good framework for thinking about this. Consider the above 2×2 matrix. All the bets we take on founders will either turn out to be right or wrong. Obviously, we won’t make any money if we’re wrong. But if we’re right, and everybody else agrees, the returns are … meh. Competition in such crowded markets quickly becomes a bullfight; a question of who can raise the most money; a matter of mutually-assured destruction.
This view is especially important in emerging markets, where population figures are deceptively large, and little is said of purchasing power or demand intensity. Better questions to ask are: what are the offline indicators that suggest that this problem is an important one? Is this solution 10 times better than the closest alternative? Will the intensity/volume of demand grow over time? How quickly? Why? Is there a moat this founder can build around her solution to prevent better-funded competition from steamrolling her? Is the market deep enough to sustain this venture at scale? Market quality > market size.
What do you think? Reply this email to let us know, or tweet at us (@vplatformhub) to get featured in next week’s newsletter.
- Build a product that people want. Adeyinka Adewale, Co-founder at Kudi.ai — Link
- Fireside chat with Benchmark’s Bill Gurley — Link
- History of WWW and a Caution About Prematurely Judging Modern Fintech — Link
- Swinging for the fences: How do top accelerators impact the trajectories of new ventures? — Link
- An Often Forgotten Characteristic About Your Startup’s Ideal Customer Profile — Link
Have a great day!
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