I’ve spent a reasonably amount of time looking at the various blogs writing about how to evaluate entrepreneurial ideas. Market size, first mover advantage and the idea of a hot or trendy business model are often mentioned as key factors, but I would argue that their impact is not quite as straightforward as some would argue.
1. Market size != potential for success
It is better to go for a credible-sized opportunity instead of a lemonade stand. However, counting on the idea that the company “only” needs to capture a small percentage of a large market is often a cop-out from coming up with an actual plan which relies on some kind of genuine advantage. In the long run, it is probably better to be a big fish in a small market rather than a small fish in a big market, given that as one of the “best known brands” in a market one can often achieve a sustainable position among pragmatist customers.
Saying that you have a 500 billion market and only need to capture 0.01 percent doesn’t mean you are in a better position than someone aiming at capturing a larger percentage of a smaller market. It is often true that the bigger the market, the easier it is to find customers – but larger markets also frequently mean more competition, lower dollar amounts per sale, a more heterogeneous set of customers, larger advantages for being established in that market and larger capital requirements.
2. First-mover advantage != potential for success
I read about this so often it makes me sad. Having first-mover advantage isn’t really as great as it might intuitively seem. I am pretty sure that the obsession with being “first” to do something is more hurtful that useful. When people talk about “first mover advantage”, what they actually mean “first-successful-mover advantage”: being first to come up with an idea that was possible to scale profitably.
To me, that is not really about being there first, it is about being there at just the right time to get the product out to match the overall trend (in technology development, in market terms) to succeed.
Pioneers are the ones with arrows on their backs. They may have to develop a technology and a market for a long while just to find that a “fast-follower” gets there at the right time to capitalize on their work. Fast follower and first-to-market are both valid models for building a business, and not being there first may have it’s advantages. Paul Tyma has an awesome anecdote on this:
“One of my favorites was [..] the idea of selling a new product that creates a brand-new niche – often a very difficult task.
He likened it to the first person that had to break ground selling thermometers. Not the “How’s the weather” thermometers, I mean the “Do you have a fever thermometers”. Surely nowadays these are digital little gizmos, but when they came out they were the old-fashioned mercury based ones.
I can imagine the sales-pitch:
Customer: So, whats it good for?
Salesman: It will tell you your temperature.
Customer: Why do I care about that?
Salesman: Well, then you will know when you have a fever.
Customer: Um. I already know when I have a fever.
Salesman: Yeah, but now you’ll be sure.
Customer: Erm.. k.. What’s it made of?
Customer: Whats that stuff inside it?
Salesman: Mercury – careful, its toxic.
Customer: How do I use it?
Salesman: You just put it in your butt for 2 minutes.
Customer: Um. So basically, you want me to take this toxic-substance filled thermo-thing made of breakable glass, stick it and leave it in my butt for 2 minutes so that I’ll know something I pretty much already knew.
Customer: Awesome – I’ll take 2 !
That had to be a hard job. Solve a problem that was perceived as not needing solving and then do it in a new, dangerous, and highly uncomfortable way. “
3. Hotness/next big thing != potential for success
Being told that China is the next big thing, or biotech is the next big thing, or that energy and food is the next big thing is really only good if you are in those specialties. Chasing the next big thing just because someone thought it might be great is hardly a winning strategy.
Next big things have a wide margin of error in terms of timing and in terms of actually coming to fruition. Pursuing a trendy area of enterprise might find it easier to get funded, but that has little to do with actual success. Tools for Twitter might be the hot market now, but is it a good business to be in? For some, perhaps, but is it any better than some non-trendy market if you are thinking betting into it now? Not necessarily.
Factors that might actually matter
So what might actually matter? Here are a few good factors from experienced entrepreneurs/VC’s:
James L. Woodward (here):
- “Do you have an experienced team that knows the industry inside out?
- Do you have an overwhelming and defensible advantage?
- Is your market the right size?
These remain the keys, with people, always people, first. And remember, that while the second point implies some sort of technology advantage, technology is not the primary driver of successful companies. “
Philip Greenspun (here):
“Don’t start your own company because you want to be your own boss. There are three ways in which a company can make more profit than an investment in a Vanguard S&P 500 index fund:
- You know how to do something that nobody else can do (the typical MIT tech spinoff approach)
- You have a lower cost of capital than anyone else (the “my dad was really rich” approach taken by Bill Gates and others)
- You have a better understanding of one kind of customer than anyone else.”