Updated: Mar 3, 2020
The factor that determines most of the outcome of your startup is the one you have the least control over: Timing.
If you want to start the next $100M revenue, $1B+ valuation company, you have to find a market that is small enough but growing quickly.
There four types of markets you can find yourself in as a startup:
Your startup’s fate depends on if and when there is growth in the market you’re addressing. I know two of these scenarios well. My first startup, reMail, was an email productivity startup in 2009, which fell neatly into #2: Email was a saturated market, and we were only able to carve out a small niche. With Namo Media, we hit the jackpot of scenario #4 and landed in the native ads space just as the space experienced rapid growth in 2013 and everyone was looking for new products.
Let’s look at each one and break them down
1. Small market, not growing
If you find yourself building a small market with no path to growth, your efforts will be futile. There are few startups in this bucket, as they tend to be about selling or servicing old technologies: Don’t start a company selling or servicing fax machines, copiers, landline phones, or photo film. There’s no story to get to growth, and it will be impossible to find venture dollars.
2. Large market, growth in the past
Imagine starting a new smartphone manufacturer today. You’d be battling incumbents all day, and just to get your product on shelves, you’d have to invest tremendous amounts of money into building table stakes features. The larger incumbents can use their existing revenue streams to fund development, while you’ll have to give away your company piecemeal to VCs. These are markets best left to large companies with more resources, as they can quickly deploy large teams and lots of capital to address whatever opportunity they see. But even they might be too late if the market has already made up its mind: Just think about how Microsoft failed with Windows Mobile.
There is one special case here: I recently heard Elad Gil call them “crowded uncrowded markets”. There are markets that are seemingly “over” but still have opportunities for new and differentiated entrants. For example, this was the case for social networks in 2010:
When Pinterest, Instagram, and Snapchat came around in 2010 and 2011, respectively, it seemed like the social space had been won by Facebook and Twitter. But all three enabled new use cases: Pinning articles from the web, sharing filtered photos, and disappearing messages, features that made sense on their own and weren’t catered too by the incumbents. In my personal opinion, all three of these players just barely squeezed by, but it validates that investing in a market like this sometimes does work.
With my first startup reMail, I was in the email productivity space. There were tons of incumbents, with the 800-pound gorilla being Microsoft Outlook. Trying to build a useful product felt like pushing a boulder up a hill, and we spent a lot of our funding building table stakes features.
3. Small market, too early
You found a brilliant startup idea, but you found it just a bit too early for your venture funding to last long enough for the market to take off. Your startup didn’t take hold in time and your startup crashed and burned.
The annals of startup history are littered with stories like this:
WebVan burned through almost $400M in venture funding in the late 1990s only to crash and burn, yet ordering groceries online is commonplace today.
WebTV pioneered Internet-connected TVs in the 1990s but was a failure as a product — meanwhile today it’s more common for a TV to be Internet-connected than not.
Dodgeball pioneered social location sharing via text messages as early as 2003. The company was acquired and the product was later shut down. Checking into locations is now common behavior on Facebook and similar platforms.
Being early is the same as being wrong: Venture rounds are raised with an 18 month time horizon, and if the market you’re addressing doesn’t grow during that time, you have to fold.
If you’re an established entrepreneur with a strong track record, you can win these markets, as you’ll be able to raise more money and give yourself a longer time horizon. For example, Elon Musk, coming off of PayPal’s success relied on boatloads of venture funding for Tesla and SpaceX — companies that went years before finding product-market fit.
To avoid the fate of the companies above, I recommend applying what I call the “Sam Altman test” of distinguishing fake trends from real trends: Ask yourself whether enthusiasts of your technology actually use it all day? For example, VR is cool, but even enthusiasts of the technology don’t use it on a daily basis.
4. Small market, growing quickly
This is where you want your startup to be. The ideal scenario is that you arrive just in time. Large incumbents are still paralyzed: A forward-looking executive may have spotted an opportunity, but it’s too small to make a serious investment, which at large companies often occurs in increments of 50 headcount, and requires getting lots of internal buy-in.
The common thread in opportunities that are of this shape is that they are powered by either a shift in user behavior, a shift in technology, or both. Here are a few examples:
Each of these shifts enabled multiple $1B startups. But you had to be there right when they happened. To find opportunities like this, you have to be an early adopter, try all the new products, and also not be tied up with other projects just when the opportunity hits.
With my second startup, Namo Media, we found ourselves in this scenario. We started in the native ads space just as it was getting hot. I still remember the moment that it clicked for me: In late 2012, the narrative was that Facebook had real difficulty monetizing their mobile app, and that they hadn’t successfully translated the business to mobile. Then, in Facebook’s Q3 2012 earnings report, they reported that mobile ads revenue had jumped from essentially zero to $152.6M that quarter, powered by native in-stream ads. Native ads were working, and publishers of other apps wanted a solution too. It was an early market with buzz, potential, and growth. That buzz easily got us meetings with VCs, publishers, and advertisers. It felt like we had the wind at our back, which is running a startup in a small, quickly growing market feels like.
Timing your startup determines much of your outcome. If you’re an entrepreneur thinking about startups, consider the size and phase of the market you’re entering:
Don’t waste your time with small markets that are not growing.
Large markets with all the growth in the past are extremely difficult — incumbents have distribution, product, and funding advantages. Sometimes opportunities for differentiated products are overlooked — these are “crowded uncrowded markets” — but they’re extremely rare.
You can be in a small market where you think a lot of growth may happen in the longer term future. Being too early is the same as being wrong, and you risk becoming the next WebVan. In these markets, try to raise a large VC round and conserve your spend as long as possible.
Try to find a small market that’s growing quickly, enabled by a technology or behavior shift. Landing in a market like this feels like having the wind at your back — fundraising, sales, and hiring will feel like a breeze.