What makes for a great market for a startup
I recently posted an article that argued how uncertainty is among the key factors that create the market conditions for a startup to thrive. Earlier in this product-market fit series of posts, I delved into key observations made about how baking value into the product is essential prior to exploring growth. This article explores if indeed there exists a market to break into. It will cover:
- The need to identify a great market, not just product
- Founder/market fit to be considered too
- Competitive advantage of use of partners & IP
- Jobs to be done market
- Why Now? and technology inflection point
The need to identify a great market, not just product
Many startups feel they are stuck in a circular reference.
You must find out if a big market is a great market in order to start building your product, but you can only find out if a market is great after you have a product that sells a lot in that market. So entrepreneurs have to rely on educated guesses and hunches and take on the risk of not finding a great market. In a nutshell, it’s not a bad way to describe what the startup journey is all about.
Anderseen comments: But what if you really just have a sharp understanding of the right product for the right user… but still lack a sense of the greater market opportunity of all the right users? What if it remains to be seen if there is a market beyond the 200 people you’ve found who love your product?
What macro story must play out in the market to substantially shock market-wide demand?
These words of wisdom from Paul Graham explain why the duty of the entrepreneur is to find out:
“When a startup launches, there have to be at least some users who really need what they’re making — not just people who could see themselves using it one day, but who want it urgently. Usually this initial group of users is small, for the simple reason that if there were something that large numbers of people urgently needed and that could be built with the amount of effort a startup usually puts into a version one, it would probably already exist. Which means you have to compromise on one dimension: you can either build something a large number of people want a small amount, or something a small number of people want a large amount. Choose the latter. Not all ideas of that type are good startup ideas, but nearly all good startup ideas are of that type.”
According to Andreessen, “product/market fit means being in a good market with a product that can satisfy that market.” But too often the focus is on latter part of the sentence (a product that can satisfy the market) and not the former (in a good market).
Product/market fit is when a startup has built a product that can satisfy a market that’s big (has many potential customers) and that easily and intensely buys/uses that product.
Founder/market fit to be considered too
The Startup Genome report identified that founders that learn are more successful: Startups that have helpful mentors, track metrics effectively, and learn from startup thought leaders raise
7x more money and have 3.5x better user growth.
Further to this, balanced teams with one technical founder and one business founder raise 30% more money, have 2.9x more user growth and are 19% less likely to scale prematurely than technical or business-heavy founding teams.
Josh Kopelman argues that a great founder is one that has an initial, compelling, and unique insight. Peter Thiel also famously argued that a contrarian thesis (i.e, why do you think the existing players are wrong) and why you think a startup (and yours specifically) will win makes for a great market opportunity.
Domain experiences and insights really do matter. Experience is particularly important in the B2B space, where domain knowledge is critical. Without a strong understanding of the space you can’t identify real gaps and real opportunities.
Competitive advantage of use of partners & IP
The Startup Genome report states that “Startups need 2-3 times longer to validate their market than most founders expect. It categorized the progression of startup by the challenges they face through key phases:
and mapped them as follows:
The Startup Genome report further notes that partners can be used to validate markets with little traction. For example, the deal Microsoft struck with IBM to develop the DOS operating system, allowed them to take on a complex project with high certainty that if successful they will have a huge market to tackle.
Intellectual Property (IP) gives a startup a market edge because it creates a moat around a market opportunity created around a discovery or intellectual research.
As per the chart, IP, is surprisingly high in the discovery phase and takes a big nose dive in validation. This is probably because many startups were born from the commercialization of IP but begin doubting the importance of their IP when most people don’t want to user their product. In stage 3 and 4 IP becomes more important because the startup is clearer about the market created by targeted users of their IP.
Jobs to be done market
The jobs-to-be-done definition of a market, says that a market is the sum of all customers (people or organizations) that have a need and that are open to using a solution to fulfill that need. And a great market is a) huge (size), b) has people/organizations with intense needs (pain), that are c) very open to using something to solve that need.
Andreessen Horowitz, in his The Only Thing that Matters post, says that product/great market fit, is where a great market is, as we’ve seen, defined by its size, by the amount of pain it has, and by the willingness of the market to buy a solution now for that pain.
Why Now and technology inflection points
The seminal discussion on what makes a great market is the “Why Now?” argument, brought to the fore by Idea Labs, when they stated that there is a time for a solution and a wave emerges from that point.
Andy Rachleff has observed that this is where technology inflection points can play a role: “Truly great technology companies are the result of an inflection point in technology that allows the founder to conceive a new kind of product. ‘WTF’ level features that are not merely compelling – they rise to the level of changing people’s points of view about what’s even possible and create intense delight in customers.” My most recent experience of this was the Revolut App, with its ease of use and immediate impact on the user – sending money to my friends was all too easy now, there was no way I was ever going to use a different mechanism for this task, and all my friends had to get the app.
Once that inflection point in technology emerges, it’s up to the startup to find a great market and you will note multiple great companies emerge in that market.
Arthur Rock explains: “give us a technical problem, give us a big market when that technical problem is solved, so we can sell lots and lots and lots of stuff”