I’m Stronger Than You Think I Am
Hey <<First Name>>,
One of the predominant blind spots and primary reasons venture capitalists turn down making an investment is the notion that the market a company is focused on is too small, or too NICHE.
Ironically, the most successful businesses we all know are bound by one similar path; they made it big by embracing their niche! They always start, and dominate, marketplaces most considered too small.
Mark Zuckerberg started “The Facebook” initially as a way for fellow college students to list what classes they were taking. Netflix started as a DVD-rental-by-mail business; Amazon debuted as an online bookseller; Twitter started as an SMS service; Airbnb was an online Bed and Breakfast, but mainly renting out extra couches, not even bedrooms. Nike running shoes, Uber black car service, eBay beanie babies, and the list goes on and on.
Successful companies always expand their first niche marketplace. They address real pain points and are first and foremost amazing services that are far superior and often more affordable than the status quo.
By deciding early on to choose and target a market niche, CEO’s take the most significant step towards positioning their companies for scalable success and leadership. After they’ve dominated their initial target audience, the most successful companies use the exact same core competencies and strategy to disrupt other markets and industries. Just look at Amazon today.
Investors tend to miss the biggest opportunities for two primary reasons. (1) Many times a potential market is actually large, but it is perceived to be small. This happens because of a new behavioral change, a growing trend that is unnoticeable until it has reached a large scale. (2) Another reason we miss these niches is when the immediate market actually is small, but there are much larger markets that the startup can expand into. Facebook is the greatest example of this. It began by focusing on elite universities, but then rapidly expanded into the broader university market, then to high schools, then to adults, and today it covers more than 25% of the global population. The interest for a social network servicing elite schools was actually a small market, but Facebook’s ability to expand into new markets was virtually unlimited.
In 2000, a venture capitalist named James Altucher was in the position to buy 20% of Google for about $1M and said: "Search engines were all dead," citing the leading search engine at the time, Excite, which was going bankrupt. He passed on the opportunity to invest because “the opportunity is too small for us.”
One strategy to avoid missing these markets is to shift one’s attention away from what the market looks like today and focus on the potential application of the product innovation to a much broader audience. It’s not easy though. The ability to evaluate a “niche” companies’ growth into adjacent markets or the viability of the company becoming mass disruptor is a talent that very few investors possess.