Select the Right Market for Your Startup and the Market Will Select You
Which of the following do you think is most important to a startup’s success?
- The product
- The team
- The market
Most engineers will say the product: Good tech can always find a home, and bad products will be rejected by the market.
Many businesspeople will say the team: A great team will find a way to succeed, and people are a company’s most valuable asset.
But the market landscape is littered with mediocre products that dominate categories (bloated Microsoft software, unhealthy energy drinks) and category leaders riddled by scandals and unethical executive behaviors (entertainment companies, VW, Uber).
From our perspective, the market is the most important driver of a startup’s success. A great market can elevate a mediocre product and hide the flaws of a dysfunctional management team. Given enough market success, the ensuing capital flows can fix the product (if needed) and replace the management team. A good team can pull a decent product into a really good market, but a bad team can still succeed in a great market (as long as they have a good enough product).
Where a great product and a great team can’t thrive is in a weak market. Marc Andreessen dives deeper into this in his 2007 post The PMARCA Guide to Startups.
Rapidly-growing markets are almost always desperately seeking your solution, and many of the buyers won’t be able to determine the best offering in the market. This gives you time to improve your product and people while you strive to become the category leader.
Market Selection for Startups
The biggest challenge facing most early-stage startups is market selection. Every early-stage entrepreneur is striving for the perfect product/market fit. When you find it, you feel it: the market is pulling you and you’re holding on tight while your business speeds forward.
When you don’t have it yet, you also feel it: You’re testing new marketing campaigns, seeking new distribution partners, and trying new ways to get more customers, faster.
Can great products create huge new markets? Absolutely, and that’s one of the best ways to build a category-leading company. That’s what makes the initial market selection so tricky: it’s not easily identified by standard market analyst reports.
The electric scooter, or last-mile transportation market, was nascent when Bird jump-started it in early 2018.
Airbnb launched the home-sharing market.
Uber launched the ride-sharing market.
Ripple launched the digital asset-settlement market for cross-border transactions.
When we’re reviewing potential startup investments with our Hinge Capital partners, the first thing that we review is the market — which drives over 70% of the investment decision. It’s OK if a market is new or loosely defined.
These are the questions we ask:
● Could the market be large, urgent, and valuable?
● Will it be meaningful?
● If this is successful, could it touch a billion people? And generate tens of billions in value?
● At the early stage, most importantly, we’re asking ourselves this: What could go right in this market?
It’s easy for VCs to list all the reasons why a new market won’t evolve, or why a company will fail. The numbers support it.
But if we can’t see the potential for the market to be large, urgent, and valuable, then we don’t continue with the company evaluation process.
As a startup founder selecting your first target market, you should consider the same (if you’re looking to build a large, venture-funded company). Identify the people or companies who are already searching for the fulfillment that your offering provides, and then identify the early adopters in this group. Craft a story that aligns your offering with their passion and watch what happens.
If done well, the market can select your startup and start you down the path to the perfect product/market fit.
