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Investors and Funding
5 minute read

Are Million-dollar Markets Better Than Billion-dollar Markets?

Entrepreneurs have been hardcoded to aim at billion-dollar sized markets with their solutions. However, such lucrative markets will appeal to many others and thus, are hard to succeed in. Going after smaller market sizes may be the more logical path to success.

As an investor, I see a lot of pitches—some good, some bad; some funny, some sad. Many take a cringe-worthy turn for the worse at some point during their short-lived journey. More often than not, this happens around the “competition” or the “go-to-market strategy” slide. Why do so many founders misstep at this crucial juncture? One big reason has to do with investors signaling bias, which favors targeting billion-dollar markets.

Many investors follow a herd mentality, largely guided by industry influencers who push the “homerun investing” ethos, which—based on empirical data—is needed to return a fund. Since only about one in 10 investments achieve a homerun status, investors rationally invest only in deals capable of achieving such returns. Investors also frequently use non-confrontational arguments to reject deals, “the market is too small” being a fan favorite. These feedback-loop signals drive founders to claim unrealistic market opportunities, as conventional wisdom dictates market opportunities that don’t start with a “B” substantially diminish their odds of raising a successful round. And they’re generally right, but only partially.

Billion-dollar Markets Are Not Underserved

In his book Zero to One, Peter Thiel indirectly articulates the hidden truth to billion-dollar markets while discussing competition. Thiel posits that a lucrative monopoly is more likely to draw scrutiny from regulators, so monopolists downplay their position and “lie to protect themselves.” This is how entrepreneurs tend to get it wrong. First, a multibillion-dollar market opportunity is presented. The founders then proceed to argue that their widget—and their widget alone—can capture substantial market share, but investors don’t buy it, the pitch ends, and the entrepreneurs walk away empty-handed. And why don’t investors succumb to the allure? Because they know intuitively what Thiel states explicitly: Billion-dollar markets attract intense deep-pocketed competition with seemingly endless resources compared to the would-be disruptors (if only you invest in their Series A!).

Million-dollar Markets > Billion-dollar Markets?
Success may be better had by trying something new: Pitch million-dollar markets instead - markets you can dominate through differentiation.

Amazon and eBay both serve multibillion-dollar markets, but that’s certainly not where they started. Amazon, for example, started with a niche market—books—and gradually moved into adjacent markets, a process that’s taken nearly two decades for Amazon to achieve its current status. Similarly, eBay focused on niche markets at the outset—in 1997, for example, Beanie Babies accounted for 10% of all listings—before moving on to other hobby enthusiast categories, and then eventually into big-ticket items like cars and industrial equipment.

Beachheads Are Created in Smaller Markets

Million-dollar markets are uninteresting to large firms competing in billion-dollar markets—the spoils are too small and simply don’t move the needle. For startups, however, market opportunities measured in millions could breed opulence for the founders if exploited effectively. Setting aside the opportunity for a significantly enhanced lifestyle, million-dollar markets offer an additional benefit: a platform of execution. Focusing intently on small markets allows small firms to drive learning cycles and gain market experience without worrying about competition. Often referred to as the “beachhead,” it is from this platform that a small firm can launch attacks upmarket, targeting more attractive segments. Note that “upmarket” does not necessarily imply increased cost to the firm. For example, Tesla’s initial focus was on high-end car enthusiasts who were willing to support a purchase price of more than $100,000, but the real prize in the auto industry lies in volumes. As such, notwithstanding lower prices, “upmarket” refers to the size of the overall market opportunity.

Some startups—often those whose founders understand these issues around markets and competition—present a compelling case for attacking a beachhead market. However, many quickly fall off track with their go-to-market tactics. (Startups intentionally don’t include a “go-to-market tactics” slide, but when you cut to the chaff, more often than not, that’s exactly what they are.) The story often goes something like this (and this is completely made up):

“We have created a lining for swimming pools that eliminates the need for chemicals. We are targeting homeowners with backyard pools as our initial beachhead. From there, we will expand to community pools, and finally to high schools, universities, and athletic complexes.”

This example is admittedly trite, but the pattern is consistent. Time and time again, startups dress a series of tactics as “strategy” and present a logical—and seemingly rational—approach to market expansion, whether targeting applications that gradually scale in size or markets that incrementally scale in value. Not only is this bad strategy, it indicates a lack of understanding of how markets actually work. Going from millions to billions requires much more careful planning.

Business Plans Often Ignore How to “Cross the Chasm”

Geoffrey Moore offers a compelling solution for this problem in his classic: Crossing the Chasm. Moore segments customers based on the likelihood of adopting a new technology and provides a framework for overcoming a dire pattern common to many startups: rapid initial adoption followed by stagnation and—ultimately—failure. It’s not rare for a startup to go to market with a novel product or service and experience wild growth initially. This, in Moore’s terminology, is driven by the Innovators and Early Adopters, who just gotta have it the minute “it” drops. However, these customer segments represent a fraction of the overall market. The real prize is in getting the Early and Late Majority to adopt. But herein lies the rub: Innovators and Early Adopters adopt new technology to be at the forefront of a trend and tend not to have a reference group—a customer segment to which they look to validate a purchase. The Early Majority, however, does have a reference group: itself. Members of the Early Majority reference other members of the Early Majority to validate a purchase decision and look to buy from established market leaders. This dynamic results in the namesake chasm—the gap between Early Adopters and the Early Majority. Entrepreneurs fly over the chasm when pitching and pitch into the chasm while trying to fly.

Business Plans Often Ignore How to Cross the Chasm

There are plenty of examples of successfully navigating this approach to go-to-market. Tesla, for example, focused intensely on the luxury auto market, differentiating from the competition through an appealing, clean, electric alternative. Given the price point of the luxury auto industry (the Roadster base price was ~$100,000 in 2008), the overall market was still pretty big (~$245 million, given the 2,450 Roadsters produced). But prior to Tesla entering the market, there were few—if any—electric alternatives; therefore, Tesla dominated the entire market, which at the time was not a billion-dollar market.

PayPal offers an example at the other end of the market. In the early days at the start of the millennium, the company focused on eBay PowerSellers, users who transacted thousands of times per year. At a time when internet commerce was in its infancy, PayPal’s 25% market share of PowerSellers represented a far cry from a billion-dollar market—it may not have been even a million-dollar market—but the company dominated this niche, rapidly expanded, and the rest is history.

Navigating from million- to billion-dollar markets

Get Your Go to Market Strategy Right

Successfully navigating from million- to billion-dollar markets is predicated on developing a sound, rational go-to-market strategy. Delivering a compelling solution to a significant unmet market need drives rapid adoption. Doing so within a socially networked group of customers drives rapid segment expansion, forming a leadership “halo” perspective, which becomes a flywheel for attacking larger market segments. Continually iterating and improving on the solution enables rapid market expansion.

If you want to get funded, pitch millions, not billions. If you want to get from millions to billions, find a common thread that will drive organic demand and give it everything you’ve got.

Understanding the basics

Differentiation means providing a different solution to what other competitors are providing, which prevents competition from being based purely on elements of price. This differentiation is predicated on protection through unique resources like trademarks or geography.