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.

€1B Market

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.

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

Investors often ask: If this is such a great idea, why hasn’t anyone else already done it?

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.

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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.

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  1. 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.
  2. 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?
  3. 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

In best cases, differentiation plans are based on hard-to-replicate technology and data.

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.