Thread by @eriktorenberg

A common trope in VC is to ask whether the most important thing is the product, market, or team.

@pmarca @eladgil @arachleff agree:

Markets are most important

But how to evaluate and pick markets?

@nujabrol and I are working on a definitive guide. Some preliminary thoughts:

“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.” — Andy Rachleff

Conversely, “Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn't matter -- you're going to fail.” - @pmarca

While markets are the most important thing, we barely have any frameworks for how to evaluate them.

It’s relatively easy for founders and investors to evaluate teams & products--but it’s unclear what makes a great market.

Traditional advice can be to target markets that are large and / or growing quickly--but that’s too vague.

Founders have an intense need to pick a good market - they are dedicating 5-10 yrs of their life to their startup, and while VCs are diversified, founders have one shot!

Consider two frameworks: The Peter Thiel approach + Keith Rabois approach

Thiel - pick a niche they can monopolize and expand outwards from there

Rabois - go “horizontal” - find trillion dollar markets + build full-stack, vertically integrated solutions.

Go big or go home.

Thiel approach (Vertical):

Own a small specialized market. Don’t go for large markets because there’s too much competition

Niches can be defined by demographics, geography, jobs-to-be-done, among other things.

Facebook famously started with Harvard as a niche, then dominated all college campuses, then grew from there.

Rabois approach (Horizontal):

Consider his startup Opendoor: He went to market with no specific customer type in mind - could have been retirees, families, millennials, etc.

Which approach to use--Thiel or Rabois?

Understanding how many large companies the market can support at scale is important.

Doing so allows you to understand what is the right approach and approximate how large the opportunity can be.

It’s important to think about market structure and apply the frameworks accordingly.

Monopoly - Peter Thiel approach (niche)
Oligopoly - Rabois (general)
Monoplistic Competition structures — Either

Monopoly - One company owns greater than 75% and the entry of new companies are prevented or highly restricted.

In other words, “Winner take all”

Oligopoly - Small number of winners

Payments (Stripe, admen, PayPal)
Ridesharing (Uber, Lyft)
Storage (Dropbox, Box, AWS)
Payroll (Gusto, ADP, Paychex)

Monopolistic competition

Imperfect competition - many cos sell differentiated products, no perfect substitutes.

Limited barriers to entry, but more crowded spaces. Unlikely to have enormous outcomes.

E.g. Hotels, restaurants, designer clothing

For Thiel approach, you want a niche.

Niches can be:

Boring (packaging)
High-end (Black car)
Unfamiliar (drug development)
Weird (online dating)

Needs to be some reason why it’s not already a huge market.

For Rabois approach, you need

- a lot of capital
- low NPS for incumbents
- Highly fragmented market
- Can vertically integrate w/ radically simplified solution (to control entire experience and get a high NPS score)

Similarities across frameworks: Timing matters in both cases.

Why couldn’t you do this two years ago? Why not two years from now?

Why now?

Good why now answers:

Tech - emerging tech, platform shifts, patent expirations, exclusive rights

(Good why now answers cont.:)

Infrastructure - changes in regulation, gov’t incentives, competitor exits, shakeouts in adjacent industries

Data availability, new sales distribution channels, shifts in consumer behavior, new communities, unit economics (Instacart vs web van)

A why now often requires a “secret” -- something you believe that very few people agree with you on.

It’s important but unknown, and hard but doable

The key element of secrets is that they give you an edge. If it won’t give you an edge, it’s not a secret.

Where do we find secrets?

“where no one else is looking. Most people think only in terms of what they’ve been taught; schooling itself aims to impart conventional wisdom.

So you might ask: are there any fields that matter but haven’t been standardized and institutionalized?”

Thoughts on GTM / execution in Thiel World

Once you went to market, monopolized your initial niche, and built up a durable assets, it’s important to deliberately expand into adjacent niches.

Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative

You want to be smart about what niches you expand into -- ideally related and slightly broader markets that allow you to leverage existing built assets and avoid competition as much as possible.

The lure of greater market share is a powerful one, which has caused many successful specialist companies to sacrifice their distinguishing characteristics and dilute their competencies in a headlong pursuit of growth, only to end up in the ditch.

As we have pointed out, such strategies are viable only if a clear, unblocked opportunity to occupy a generalist position exists. If not, firms would be far better off deploying the same resources into a geographic expansion within existing niches or creating new niches.

GTM in Rabois world

At Opendoor: “We stayed fairly laser focused on our core product - selling to Opendoor - and focused on that until we had grown significantly.

“Only after our series C / after expanding to multiple cities, did we start to focus on our buyer experience, and we acquired Open Listings to speed that along. Opendoor is only now launching mortgages to expand the product offering and increase LTV of our customers.”

“As far as customer expansion goes, since started with Keith’s horizontal approach, so didn't need to expand customer types too much (the exception being first-time home buyers, which we previously ignored since they didn't have a home to sell)."

As this approach is more capital intensive, it’s important to capture value once established. Think about it in terms of payback time, a function of (revenue) * (margin), compared to (outlay). This equation works if either your cost is initially low or your margins are great.

You want to know what’s going to change over time. You don’t want to fund a permanently low margin business, but want to understand when will new dynamics kick in that create and unlock greater margins (thx to durable assets).

Rabois mentions it’s reasonable to identify what are the step functions are to improve margins, triangulate what they will likely to get to, and then not worry initially because you know they will improve.

Low margins can be okay, especially if customer acquisition cost is low. Rabois adds “if you have the entire world asking for product for free + not much you need to do, it’s not bad to have a low margin business as all your margin is going to be free cash flow.

For example, if you primarily attracted customers through search engine optimization (SEO) and that was free, and it scaled to 100k users, Keith doesn’t care about 10% margin as that’s all profit. The equation does not work with low margins and high costs.

Other items to be aware of:

Thiel framework (niche)

- More likely to achieve a successful outcome for a founder, although upside may be capped

- It is just as hard and challenging as horizontal and can arguably take longer (7-12 years)

Easier to go to market successfully in this approach as it’s a narrower segment, but also harder to get feedback on because you’re not sure if it’s your product or you just chose a bad niche

Sometimes it’s too easy to solve narrowly, and then confuse your ability and internal competency with solving the real problems. If you solve too narrowly, you don’t build a muscle to solve broadly

Rabois approach:

While less likely to win, if you do win, you’ll win bigger.

Requires more capital and higher bar for founding team.

Other things to think about:

Just as interesting as market size might be market structure

Qs to ask:

At scale, is this winner-take all?

network effects?

Are there structural reasons why everyone should be on one common platform (e.g liquidity, low search & transaction costs?

Another thing to consider is fragmented vs consolidated markets.

As an e.g of fragmented, consider: CRM

Salesforce ~20% of the market. 80% using something else.

Which implies It’s hard to build a product that serves all customers. So need to own a niche (Thiel) h/t @chudson

Other things to think about: Market Types:

Consumptive vs non consumptive markets.

Consumption markets are pre-existing markets.

They require an order of magnitude better idea than non-consumption markets as you are dealing with incumbent & pre existing inertia.

This is the “make something 10x better or else” stage, the 1-10 stage, instead of the 0-1 stage.

These opportunities (consumptive markets) are huge, just hard.

Non Consumption markets, by contrast, are the markets no one knows about or the products that don’t exist yet: the 0-1 stage.

For these markets, you don’t need to figure it out all on day one.

Being directionally right will give you a meaningful head start.

Non consumptive markets are higher beta, because you are inherently creating something that doesn’t exist, but the prize is also enormous. After all, AT&T, GE, Apple, Google, and Facebook were all non-consumption markets.

How should you think about TAM / growth rates?

three barriers that make TAM misleading:

First, it’s hard to predict the future. You want to be in a growing market--especially if you’re in a non-consumptive market--but it’s hard to correctly predict how large things will grow

Second, and by extension, all non consumption markets have 0 TAM

Third, TAM is highly correlated with value prop. If product is amazing, TAM will expand. Uber is classic example— it’s 3x the size of the taxi market. Uber reduced the friction to get a car, so more people did it.

Other Q's:

How much value you are creating for someone? The more value you are creating, you are going to capture some fraction of that as a company (~10-30%).

Who are you creating value for? Is there is a reasonable amount of people in this world that have this problem?