How NOT to pitch Mark Cuban – and likely any real VC

Earlier in September Mark Cuban gave an interview at TechCrunch Disrupt in San Francisco, where he talked about what he preferred to hear or not to hear in a pitch. As a die-hard Spurs fan and therefore an anti-Cuban when it's NBA time, I however respect him enormously as an entrepreneur and businessman. And I agree especially with one of his replies:

But don’t pitch Mark by starting out by implying your company will be a success if they just capture a tiny portion of a billion dollar market. That, he says, is something that makes his eyes glaze over.

During my time at Truffle Capital I reviewed at least 30 pitches while interviewed about a dozen of them. About 20~30% of them made the mistake of plotting out a huge potential market of several billion dollars and then said "imagine even if we just grab a small bite of it..."

In fact, this is a universal signal for real VCs to decline the entrepreneurs.

Peter Thiel's Zero to One also talked about this extensively. In short, if the market is well-defined and big, it means extremely fierce competitions, not just against the big guys but also against the other startups that have seen the same opportunity. That usually means a deadend for a startup.

The better approach is to define a particular market in a way where your product and service has the chance to dominate. And beyond this narrowly defined market both you and the VCs can see a path toward a more loosely defined market and beyond.

[Edit 2014/11/18] Here's Peter Thiel's Stanford CS183B talk about starting by dominating a small market and than expanding in a concentric way.

A good example would be PayPal that Peter Thiel founded. While the company is now a household name in payment system, it did not set out to challenge all existing giants such as banks or other financial institutes in payment when it started in 1998. Instead, Peter Thiel chose to focus on payment between people, such as settling a dinner bill afterward or paying back the borrowed money to a friend without having to schedule a face-to-face. Since there was at that time no real solutions for this, they were able to quickly dominate this small market.

Then they discovered a wider and even more relevant market – the busy eBay sellers. These people, while small in number compared to the total eBay users, had much higher transaction need and needed to receive 3~5 payments per day. PayPal's solution solved the problem nicely and with the track record built in the first narrowly defined market, they were able to quickly become the favorite among eBay sellers and buyers and eventually dominate the entire eBay user base.

What's amazing about this is, 16 years after PayPal's founded, there are still new payment solutions coming out, included those by PayPal. There are still lots of pain points to be solved in the payment system.

This suggested that 16 years ago PayPal could have imagined they could just grab a small piece of this HUMONGOUS, HIGHLY DISTORTED payment market and be rich. But even though the ultimate market is indeed big, PayPal would never have succeeded without starting by dominating a very narrowly defined market and move beyond that step-by-step. And there would never have been the PayPal mafia.

Hardware startups, the Promised Land of French ventures?

Evaluating $5bn+ startups with Peter Thiel's 7 questions