In startups, we often hear “X for Y” in terms of business model, “Airbnb for backyards” or “Duolingo for Music”, but it’s also common for market locations. Examples include, “The Knot in the Middle East" or "Amazon for Australia". Great businesses in the US haven’t spread everywhere, and sometimes for good reason. The market may not be big enough to make sense.
Australia, for example, has 23 million people. It’s a large country but population-wise, it’s dwarfed by neighbors like Japan with 125 million people. And even though there are large populations there, it may not make sense that the market demand there are the same as market demand there.
Understanding the size of the pie first is important, especially when thinking about raising venture capital. It’s very easy to think: I want this product so everyone will too. It’s worth doing some quick analysis of what that pie looks like to avoid the “someone like me” problem.
Potential Customers matter
Well, being a New Yorker means I’m also an Urban Dweller, which makes me part of the 50% of the population (as of 2010) that lives in a city. And that number is increasing. So maybe catering to city dwellers, not just New Yorkers is a big pie.
That pie is big by population, but not necessarily by potential customers for your product.
Around 1.29 billion people (18.4% of the world population) live in extreme poverty, subsisting on less than US$1.25 per day; approximately 870 million people (12.25%) are undernourished. 83% of the world’s over-15s are considered literate. In June 2012, there were around 2.4 billion global Internet users, constituting 34.2% of the world population.(Source: Wikipdedia)
There are big problems for big populations of people. Those are pies worth thinking about. If your mission is to serve 10% of all internet users, that’s roughly 244 million people. That’s a big pie to shoot for, but it may be spread across different countries with different languages.
What other requirements about your product need to be true? Do customers need to speak English? Be a tech early adopter? Have a smart phone? Travel? College educated? Parent? Tech savvy? Know your market.
If you want to serve every mother living in New York City that makes over $100,000, that’s a smaller pie but maybe a bigger opportunity to sell a higher priced product.
You could build a big business selling 100M widgets with a $1 profit on each. Or you could sell 1M widgets with a $100 profit margin on each. What the market will allow matters, think about the margins and how they will change over time. It’s easy to sell a $5 coffee when you’re the only game in town, but what happens when competition moves in and you need to cut prices to maintain sales? Goodbye margin or hello decrease in customers. You could do either, but you’ll want to think about that before you start.
Even large, well funded companies sometimes choose to give up their own margins to drive more business. Sometimes they do this because they have the volume to maintain a profit, or sometimes they do it to squeeze their competition, driving competitors to cut prices too.
Pie ownership matters
Is this a winner take all market? Could many companies build big businesses in this space?
Walmart, Target, and local convenience stores co-exist. Walmart and Target have built massive businesses, they each own enough of a very large pie. It’s a massive market, so it doesn’t matter that they aren’t the only owners of the pie. Not winner take all, two winners take most.
Android and Apple are winner take most in operating systems. It’s a slightly different story in handsets, it’s Apple, Samsung, Nexus and a number of manufacturers competing for share, especially in the US.
For a good read on the US Brewery industry only having room for 3, not 4 big players, read 'How to Blow $9 Billion: The Fallen Stroh Family'.
Big businesses can be built without venture capital
The majority of businesses are not venture backed. There are a number, especially those recently making their way to the public markets, but that doesn’t mean every business needs to shoot for venture funding.
If there is a big pie that could benefit from a large amount of growth capital, that’s worth discussing. If it’s a business that can grow on it’s own revenues, that’s a great way to get there too.
If you look at the big picture, you can own 100% of your business, take 1% share of your market and build a $100M business. You could also own 10% of your business, take 10% share of your market and build the same $100M business. The goal would be to take 10% of a market that pushes your business to $1B+.
Go with the market
Markets move quickly, but if you understand the ceiling, it’s easier to be realistic about how to get to 1% of the pie and grow it from there.