Spotting the growing markets and building products for the future is one of the keys to building a strong tech company. At the end of the day, it doesn’t matter how great your product or team is: it’s impossible to succeed in a bad market, be it too small or too crowded. The main things are to aim for big enough markets of the future and know your competition.
This guide by Icebreaker.vc goes through several elements of a great idea. To look back, you can read the first part discussing about why ideas are not worthless, second part explaining different idea catalysts and third part going through what we mean by founder-idea fit.
You can grow and expand your original idea as you build your company. This means you don’t need to have every little detail planned out, but you should want to have certain elements of a great idea in place already in the beginning. Thinking about the growing markets and bigger trends affecting your business is crucial.
The definition of a market size is the number of customers or users for your product times the price that they are willing to pay for the product on annual basis. If someone says that the market size is €1 billion, it can mean that there are 1 billion customers willing to pay €1 (p.a.) for the product. Or that there are 1000 customers willing to pay € 1 million (p.a.). Or anything between.
And in order to build a big business, your addressable market size should be over €1 billion. And you need to have customers who can pay you for solving a problem or fulfilling a need. If you have a market that craves for a solution to a problem, you can actually have a pretty bad product in order to make a business – especially if there is a lack of competition.
Aim for the fast-growing markets
The most interesting markets are the ones that are small or almost non-existing today but very large in the future. The most successful entrepreneurs can predict the future – they are the ones selling umbrellas when the storm comes while the competitors are still building their umbrellas.
The problem with currently existing big markets is that there are always a lot of competing products catering to the same need. Unless you are building a product that is 10 times better or cheaper than competing products, you are probably going to have big problems winning the market.
Investors often ask: If this is such a great idea, why hasn’t anyone else already done it?
Ideally, the answer is that it only recently became a good idea, because something changed, and no one else has noticed it yet. And to recognize when something becomes a good idea, you need to keep your eyes on big external waves.
Ride on external waves
Behind every successful company is some external wave they are riding on.
Megatrends are huge external waves – they swipe over almost every aspect of our lives and affect everyone on this planet. One example of this is urbanization – more and more people live in growing cities, which makes it possible to offer way wider services than before.
Macro trends often affect businesses and are somehow related to megatrends. For example, a shift towards more customer-centric world is a macro trend that has been one key to Zendesk’s success. Yes, their founders have great execution capabilities and they have built a great product – but if no one cared about the customer experience and serving customers better, would Zendesk be as big as it is today?
The most successful tech companies are in markets that did not exist before some specific technological development that they spotted early on. Looking at examples we have used before, Osgenic could not have been building their hyper-realistic simulators just a couple of years ago, because the technology just wasn’t there yet. As a more widely known example, Uber could not have existed before smartphones became so common.
Right now we can assume that developments in the field of AI and machine learning, the blockchain, and AR/VR will create new opportunities we don’t even realize yet.
One of the most common nominators in our investments is that the founder sees a market which is about to become very large due to the technological development or technological enablers. And it’s the founders who know and envision the market – not the investor.
Competition kills profitability
When building a scalable strong tech company, being profitable isn’t enough – or even a goal before long. In a crowded market, competition kills profitability before you can say “AI” and someone will build a better product than you in no time – if you don’t have a competitive edge.
In order to build a sustainable business in the tech field, you need to be able to build a competitive edge that will differentiate you from the competitors. In best cases, differentiation plans are based on hard-to-replicate technology and data.
Understanding your competitive edge naturally requires that you know your competition. In this case, again, industry expertise and/or domain knowledge helps: a founder who has deep domain and market knowledge almost always knows the competitors; their strengths and their weaknesses. A founder who has no clue about the competitors usually does not have enough domain knowledge.
At the idea-stage we expect the founders to tell us how they are planning to differentiate from the competition. You don’t need to have a detailed plan but you need to have some idea what are you going to do about it: what do you have that others don’t?
In practice, building your competitive edge is a never-ending story. Strong tech companies often work on markets that are in constant change, and you need to improve and differentiate your product & brand all the time in order to stay ahead.