I don’t care about crowded markets

One of the most common objections you hear from investors is that the market you are going after is too crowded. I have been on the receiving end of this many times and had to convince investors about the vision we saw for disrupting that market despite the existing players.

As an investor, I don’t care if a market is crowded. And history backs me up on this. Online search was crowded before Google showed up. Anyone remember Geocities or Ask Jeeves? MySpace was ruling social networking till Facebook came along. And nobody thought there was a file storage and sharing problem till Dropbox arrived. The list goes on and on.

It’s not competition (or lack of it) that matters. It’s how much better you are than alternatives. Google won because it was hands down better than the considerable competition it faced.

Also, when it comes to true innovation, it’s important to remember that ‘big’ companies suck at it. This could be partly deliberate. While it’s hard to innovate inside a big company, those companies, with several notable exceptions (Apple being one), are scared of failure and its impact on brand. You can’t innovate without being completely open to failing.

When I look at an opportunity, I spend little time thinking about current competition and a lot more time thinking about market movements and how your vision is placed to create or ride these market movements.

There’s an old saying that to disrupt an existing market you need to be 10x better than the competition. That sounds comforting and is probably true but I have no idea how you can measure that upfront. So it’s of little value to me.

The only exception to my disregard for competition is in markets that are completely dominated by one or a few players. Because there, even if you have a 10x advantage, that incumbent can just deprive you of oxygen.

We saw this play out in mobile and infrastructure back when carriers ruled the roost. Now that the “walled garden” has come tumbling down these are now fertile grounds for innovation and venture investing.

So, next time an investor worries about the competition help them see the future rather than worry about the present. Show them how your vision and innovation, coupled with some awesome market timing are creating an opportunity that the competition can’t or won’t go after.

  • Pingback: Market Strategy: The Market is Too Crowded is a Terrible Excuse | OpenView Labs()

  • It is all about story telling and painting the vision. Don’t get dragged down in the weeds.

  • Great post. Agree 1000% and I have argued with many that a lot of competition doing very similar things allows for big disruption.

  • terrencebullcok

    very well written Mark –

  • Wholeheartedly agree Mark. If a market is crowded, there probably a reason. It’s probably a lucrative market, with lots of data to help an entrepreneur find the little things that make a big difference…aka innovation.

  • Good post Mark. Reading this post for some reason flashed in my head this line from a recent Fred Wilson post “You just need to look for sectors where the incumbents can’t and won’t adapt to new emerging models and where the innovators look like and are being derided as “toys”. I think that fits well with some of the points you are making – here is the link to where that quote came from http://www.avc.com/a_vc/2012/12/arduino-3d-printers-kickstarter-and-bitcoin.html

    • Thanks for sharing the article. Many industries where the incumbents are vulnerable for just these reasons.

  • I like to compare this to the pizza world. There are thousands of pizzerias in the world. Probably a dozen just in a kilometer radius. Still, some are able to build large business out of pizzas. I’m thinking of Papa John’s who built the third largest take-out and delivery pizza restaurant chain in the United States (behind Pizza Hut and Domino’s Pizza) in 25 years. I don’t know if their pizzas is 10x as good as Pizza Hut, but that guy sure has some real talent to perform in a crowded market.

    What about GoDaddy? Bob Parsons didn’t invent domain names reselling, but he democratized it and sold his company 2 billion one year ago.

    I guess the offering, product or service, is as good as the execution plan can be.

    • The pizza market is a great example except that done right in tech, the new most innovative pizza maker would kill the rest. Whereas in the actual pizza market you see some casualties but mainly just more fragmentation.

  • Well said. Totally agreed. Timing is so critical. It’s like the wind in your sails. Either you have it or you don’t.

    • Luck and timing are at least half of every great outcome I have had

  • So the question from an investor perspective is how do you assess whether a startup going into a competitive marketplace has technology or a product that is better than the incumbents? How much traction does a startup need before this can be determined?

    • It’s not about traction per se. By the time there is enough of that, the startup will likely have been funded by someone else. The best investors proactively find companies on the cusp of breakout traction. Frank and Oak is a great example of this. Lightbank (the new investor) studied the market and reached out to them.
      It’s a mix of things:
      Founders’ vision and passion
      Domain expertise
      Progress to date (which may or may not be traction)

      Everything boils in to the founder’s insight about an opportunity. That insight should seem clear and obvious, though the realization if it will be the opposite

  • duckjockey

    most investors think they are the future and they simply disagree. theres only a small chunk of them that have this philosophy of market making, the rest are just looking for the obvious bets.

    • I don’t think you can make money with obvious bets. Perhaps that’s why most vcs don’t make money. To be clear, I haven’t yet as a vc. Still a newbie.

      • That is interesting. So if the opportunity is obvious it simply cannot be as large as one where the team is targeting the edge of innovation and adoption. A place where it is risky to live but could be very rewarding based on your list above. What makes a VC successful is the same as what makes a founder successful (but much more so since a small exit can be life changing for a founder).

        Do you feel that entering an existing market is less risky than creating a new market? Or are most tech startups incremental, meaning the pace of change is allowing disruption and new products to be less risky because we expect them to happen and we are (mostly) comfortable with it now?

        • There has to something new and unproven – either in the user experience, tech or both.

          And it’s generally better to disrupt existing markets. It is very hard and very expensive to create a market from scratch.