I bought a flat-screen TV in 2007. It was Panasonic, 42 inches, £999, HD-ready and hung on the wall. Today I could buy a better, thinner, smarter, even more HD TV from the same brand for less than half the price. If I wanted to shop at AliExpress I could get a 42 inch flat-screen TV for £138.24. And if I wanted to spend £999 again I could get a 75 inch, ultra-HD smart-telly.
The market for flat-screen TVs must be huge. But would you want to start a startup to compete head-on in that market? Probably not. We all know TVs are getter cheaper yet better and we intuitively know that the profit margin on those TVs must have been competed away long ago. I reckon Amazon will be giving them away for free soon, as long as you buy a Prime subscription.
Yet every week I still get pitches from startups saying that the market they are going to start with and tackle head-on is already in the billions, or even trillions, of dollars. They say that even if they take a mere 1, 2 or 5% of it then we’ll all be millionaires. I’m not saying it’s a bad aim to be in a trillion dollar market — of course there’s a lot of cash flowing around and profits to be made. But for a startup? Are the others in that market just going to sit back and let you take it?
Make the market
The best startups make markets. There are more hotel rooms in Paris than ever before but there are also thousands of places to stay on Airbnb. How exactly did that happen?
If a startup pitches you and presents a huge, multi-billion dollar market saying they’re going to capture a tiny part of it then they’re just not thinking hard enough. They are chasing rather than leading, which is not what the best startups aim for. To get that tiny part of that huge market will be brutal, will require brute force and the chances are the incumbents have more firepower than the startup. It’s not impossible — perhaps the huge market is extremely fragmented with unsatisfied customers — but I think a better approach for angel investing is to find a startup at the intersection of two markets that no one else is looking at or one that is growing a niche market that others haven’t spotted or defined.
What can you learn from this?
Richard Koch calls businesses that succeed at being the leader in a high growth niche, and therefore gain a large relative market share, ‘Star Businesses’. His excellent book on the subject is The Star Principle, here, and goes through how to identify, invest in, work for or create a Star Business. As an angel investor it’s totally changed my way of thinking and I’m now a total convert. Be warned though, the ‘stars’ doing this are very rare.
Finding these Stars Businesses takes patience. Don’t let already big markets wow you and don’t let small, niche markets put you off. Small markets (like small minds) are often constrained by conventional thinking and what they see right now. Remember, some investors looked at the taxi market and passed on (the then niche) Uber. Others thought about banks, PayPal and Visa and passed on Stripe.
Offline is a luxury
Unplugged are one of my portfolio companies and they’re raising investment right now. If you want to find out more, AMA or see their pitch just email me by hitting the button below:
And you can book an Unplugged stay here.
Important: None of these posts are investment advice. If you are thinking about investing you should seek the advice of a suitably qualified independent advisor.