I was talking to a friend the other day that was contemplating doing a startup. He is a tech guy and tech guys tend to come at company building from a specific technology innovation and then look for a problem (market and product) to solve with it. It's not right or wrong but has its own challenges.
I was replaying my experience with Lijit and the old startup adage "Market Size fixes all problems". I had never really considered in great detail what that statement meant or all ramifications. The simple concept is if there is a huge market, you don't need to own a huge part of it to make a good size company. The Lijit experience however has given me new clarity around some of the dynamics of market size and tech company formation.
Lijit is in the AdTech space. AdTech has been a heavily funded sector by VC's in the last 5 years. This is due to two major things. First, online advertising is a huge macro market in the US, over $34 billion will be spent in 2012 trying to reach consumers online. Secondly, there is a huge discrepancy of advertising spend verses consumer time spent on the Internet.
Put another way, people are spending more time online but advertising dollars have not proportionally moved to online (yet). Hence this has created a huge opportunity for tech company's to facilitate advertising on the web. Not only is the market already huge, there is a forcing function of cash (like water pressure in a hose) that makes everyone complicit in spending advertising money as fast as possible and in ever increasing amounts. I have heard this referred to as "product pull" as well – meaning people want to buy, you don't need to convince them.
Interestingly however, there is a second dynamic of a frothy market that makes tech companies easier to build in very strong markets. They don't have to be that Innovative. After observing different AdTech companies over the last 18 months, I would classify most as reasonably successful and exhibiting a revenue growth rates that are healthy if not explosive. But when you look under the covers the innovation they have produced in term of products and intellectual property is marginal at best. Most developed a little trick here of there but nothing on the scale of market moving.
I have a theory that the larger and hotter the market a tech company lives in the, less disruptive or innovative the actual product needs to be. By contrast, my friends that live in more conventional markets need to have extremely innovative products that are major market disruptors. By definition that's a lot harder to do. And when you do finally find that product, you of course then need to own a huge portion of your market to make the company successful. If the market is too small, you may even have to enter a new market to keep growing the company. That's probably the worst of all worlds in my opinion. You have to effectively build two companies.
But, the benefits of market size and velocity don't end there. Naturally it's easier to get a company in a hot market funded but it's also easier to keep the company funded. Any startup takes a bit of experimenting to get the equation correct. In hot markets investors are more likely to stay with the vision. In smaller slower markets investors get concerned much quicker about the likelihood of success. Part of Lijit's success was that the investors stayed onboard and part of that was due to market size and velocity.
My advice to most people I meet with is do something in a market you absolutely love because you are going to be there a while. It's equally important to pick a market that is on-fire, or about to be on-fire. You're still going on a marathon run, but at least the wind will be at your back.