Hidden market potential and vision showing high growth is more important than market size
In March 2014, Facebook, Inc. acquired Oculus, a VR startup for US$2.3 billion in cash and stock. According to some reports, Oculus had roughly $20M in sales of it’s developers kit and many people were surprised by Facebooks’ move, especially since the VR market wasn’t very big in 2014. It did have hidden potential. This was evident in the analysts reports that were published in those years.
What made Oculus market so attractive was not it’s size, but it’s potential. It will be big. It will be great. It will be HUGE! When? 3-5 years. Always 3-5 years.
Being able to tell the story about the market potential is very valuable since high growth allows playes to take market share without computing which allows for higher margins and stronger market position down the road.
So in short - even if currently the market is not there, but you believe it will be big and can convey it in a good storytelling, you can convince others to support you in the journey. It’s important to note that while market potential is always hidden, since the sales numbers in the market are low, a potential is “highlighted” by the ecosystem in the form of journalists and analysts. You need to be in close contact with both stakeholders if you operate in an industry that is on the brink of booming or at least is promising to.
Case study: VR market promise 2014-2020 and beyond (with reality check at 2020
2020 (when this blog was first posted) - actual numbers
I’m actually a huge believer in the VR market and I believe it still holds a lot of potential, but as an an anecdote compare the actual numbers of 2019 vs. the forecast 5 years before. The forecast had envisioned over 18 million units sold in 2018. The reality was much slower - less than a third of forecasted units sold number and 1 years later.
A huge market potential is meaningless if you can’t survive to see it materialize
I learned this lesson the hard way. I was fundraising for a tech company in the field of enterprise IT. Luckily for us, or so I thought, we were operating in a very well-defined market with many prestigious analysts reports quoting multi-billions of dollars for the market size. But a VC I met challenged me to provide a very rough breakdown of all the players in the market, and how much each sells per year. No matter how hard I tried, I could not come up with a complete number that would explain even 20% of the market size quoted in those reports. The meeting spiraled down from that point since I was caught with my pants down on a fundamental topic - “what is your market size?”
Another typical example is from the Automotive industry. Let’s assume you had a working solution for an autonomous car. There is no question it is a valuable solution, with a commercial potential of trillions of dollars. However, under the current regulatory requirements, you might not be able to monetize any of it.
You need to map the gap between potential and current market sizes very consciously. If you don’t generate enough cash today to pay the bills, a huge potential market is useless for a small startup.
The market size might not be YOUR market size - use Porter’s five forces analysis (or an equivalent)
Michael E. Porter is a Harvard Business School professor considered a business guru and authority on competitive strategy. Four decades ago, Porter published his 5 forces model for market analysis.
While the model requires some updates as suggested by many, it’s worthwhile to analyze your target market according to it at least once as it can potentially highlight parts of your business model you might not have considered and require a change. When analyzing your market using the 5 forces model, try to be as conservative and realistic. Seeing things through pink glasses will only bite you down the line.
For example, let’s take a startup that creates a new model for actuary calculations that can improve the results by 0.1%. This improvement might sound negligible, but if you consider the worldwide insurance payouts come at ~$750B/yr, it gives a potential (and skewed!!! Don’t use this system) market of $760M a year. Not bat.
However, when you analyze the market based on the 5 forces model, you get interesting insights. For example, in this case:
The threat of substitutes - the entrepreneur’s tendency is to think that since his actuary brings value - it will be bought. The reality is that creating “savings potential” has inherent unknown risks. What if the model fails? What if the outcome is worse? The insurance companies (and potential customers) can simply NOT save and keep on using existing models. This behavior may shrink the potential market substantially to a real market that is very small. I would score it as a NEUTRAL-HIGH threat.
Bargaining power of customers - as you can mostly sell to insurance companies, and as there is no strong driving force obliging them to implement the solution - I think this is the worst threat. Creating a savings of $750M, one may assume a fair 50/50 “split” between the startup and the corporate. But in reality, the savings may be split at 90/10 or worse - making the actual market size very small. I would score it as an EXTREMELY-HIGH threat.
It’s best to run this kind of analysis before you even start your company, but it is a great tool to identify go-no-go points when pivoting to a new market/model.
Competition structures in your market
While understanding the market size is essential, it is equally important to understand what sort of competition structure you will face, how to tune your offering around it, and structure your story to reflect it.
Competition structure can take many forms, but in short, we care to understand which vendors are solving the same problem in the market, and what is the probability a customer will compare them for a specific deal. To understand the competition structure, “dissect” the market into niches (that might be overlapping) and identify the niche you operate in. In an ideal scenario, you aim to serve an underserved niche that is growing and does not allow easy transfer from another niche.
There are endless ways you can cut a market into niche. Let’s give a few examples to simplify this concept.
Let’s say your business is a pizza delivery service. No matter if you look at your market as the food market, or restaurant, and fast food market, specifically the fast-food market or even the pizza market, one thing is obvious. The pizza delivery service market is very local. As that is the case, if you show the location you are penetrating is underserved and enjoys high demand, it will show tremendous potential. A competitor that operates in another city can’t merely “move-in” into your niche without effort and risk. In the digital world, a similar breakdown is achieved by language. If customers are not served in their native language and do not consume an “international” service due to language barriers, you can own the language niche.
You have started a remote computer analysis tool. It is a massive market with many players offering different solutions and aggressively competing on every desktop computer.
But what about modern TV’s? In 2020 these are practically computers with CPU, memory, network and internet access. You can tailor your solution to service only TV’s and break away from the pack. So while there will be a high level of competition in the “computer analysis tool”, you can show there is very little competition in the “remove TV analysis tool”.
Both H&M as well as Louis Vuitton sell clothes. Of course this sentence is blasphemous. The guys at LV are “a fashion house and luxury brand” while H&M is fast fashion. This difference in positioning helps them both avoid from competitive situation. Every market provides an opportunity to create a new “high” niche as well as “low” niches, depending of course if there is enough customer demand. This will allow you to claim you will not get into competitive situations simply because the competition doesn’t sell in your price points or provides the same quality as your products.
What are VC’s looking for when they look at your market
First and foremost - regardless of which VCs you meet, you’ll need to convince them that the business opportunity which is directly derived from the market, is substantial. How substantial? You’ll need to show them you can get to at least $100M in revenue within 5. For this the market will need to be assessed at at least $1B. Larger VC’s will require $10B. As that the case, founders focus on showing a slide with a large $XXB at the center. This is a mistake since while the VC wants you to aim at a big market, they also want you to do it smartly and navigate your way in the complex competitive market. It is better to show how you can take on a $100M market and own it under the “own the niche before you expand”.
Except for the size, you’ll encounter varied opinions from VC’s as you would encounter various business models. Some would prefer customer clusters, while others will prefer small distributed customers. Some will prefer disruption of a proven market (uber to taxis) while others will prefer blue oceans (social media). Some will be very meticulous about how much a customer is willing to spend vs. your customer acquisition costs (CAC), while others will look at the target, assuming you and your team will figure out how to crack the CAC issues.
All the VC’s will hate regulated markets, unless the regulation plays in your favor. This is why healthcare companies are usually invested by VC’s who specialises in this type of companies.
Just like most VC’s would have some focus ranges along each spectrum (stage, check size, industry etc), they would also have clusters of markets with similar traits based on their personal opinions of where is the best probability to build a successful company. Don’t be discouraged if one VC doesn’t like the market you aim at. Get their feedback on why they don’t like it and see if it is a matter of fact (regulated market) or a matter of taste (the market is made of too many small customers). If it is the latter, like anything based on taste - you’ll find a VC that LOVES your market.
So - what is your market size?
Understanding your true market size will give you an edge in fundraising and in running your company. You should go through a complete market analysis at least every year and keep communicating with analysts and journalists to make sure that your vision is aligned, or at least have a good explanation why everybody forecast a specific market size, while you see a different number. Be it hidden potential, unserved niche or technological disruption opportunity
What’s a Rich Text element?
Static and dynamic content editing
A rich text element can be used with static or dynamic content. For static content, just drop it into any page and begin editing. For dynamic content, add a rich text field to any collection and then connect a rich text element to that field in the settings panel. Voila!
How to customize formatting for each rich text
Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.