The myth about market size

But how big is the end market?
— An investor
The market doesn’t seem to be big enough.
— A Corporate VC

Perhaps the biggest debate I've had with people during my past trip back to Taiwan is the market size.

My argument has always been the same: forget about exact market size. If you can describe the market size to a certain accuracy, that means this particular market is already on the radar of many startups and investors. There is probably already a lot of competition.

The holy grail is to go from a niche market and expand the use case into a brand new market segment, sometimes on top of the existing market structure.

And what Henry Blodget reported on Business Insider today about Uber's revenue in San Francisco basically gave me yet another perfect example for this argument:

According to Uber CEO Travis Kalanick, who spoke at the DLD Conference in Munich yesterday, the whole taxi market in San Francisco is about $140 million per year.

Uber’s revenues in San Francisco, meanwhile, are now running at $500 million per year.

That’s more than 3-times the size of the taxi market.

You now see the fallacy of valuing a real game-changer such as Uber using market sizes estimated with public information. And this is essentially the problem of employing classical equity analyses and strategic analyses – be it Porter Five Forces or SWOT – on startups. There will always be new markets coming up if the changes introduced by new business entities are fundamental enough. To value a game-changing startup using the visible market size goes essentially against the notion of disruptive startups.

In the same spirit, when an investor comments on the size of the end market, it could also go either way – either he's right and the startup's offering is crap, or he's just not forward-looking enough and fails to see the potential of creating a brand new market.

The right startup question to ask about the market is product-market fit, not absolute market size. If a startup could identify a great product market fit, there's always a chance for it to create a brand new segment in a certain market – or even a brand new market, instead of simply "replacing" the existing suppliers. And when that happens, the startup's upside is way larger than what analyses on existent markets could figure out.

That would also be where the real fun is!

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