Today’s entrepreneurs are obsessed with large markets, but it’s the smaller, untapped ones that investors are hot on.
In almost every pitch deck, I come across the following story: “Our market size is approximately $100 billion annually, and if we capture just 1% of that market, we will have $1 billion in revenue.”
Entrepreneurs believe that having a large market makes their company fail-proof, makes their idea worth more and makes the investors feel that the business is less risky. However, it’s quite the contrary.
Seasoned investors, in fact, like small, untapped markets that are growing fast. In those niche markets, startups have an immense opportunity to shine and make a mark.
In larger markets, it is almost impossible to compete, and the barriers to entry created by the existing players are usually underestimated.
One of our portfolio companies that have managed to do this well is Protein Bakeshop; it is the first company in UAE and India to make healthy, freshly baked items for mass retail.
The company started two years ago to cater to a niche market of healthy eaters. The healthy food market is comparatively small, but experiencing a tremendous growth, and as the market grows, the business continues to grow with it.
People are realizing that products like Oreo are not good for them or their children and they are looking for the next best alternative. Protein Bakeshop is capturing the market by offering exactly that.
Other examples of this phenomenon are companies like Facebook, which started with a niche market of Harvard Students only and then expanded from there. They managed to capture 60% of the market in 10 days. Amazon is also a good example; they started by selling only books online, a niche market segment, before going into other items.
Businesses can also gain a lot of value by either creating their market or expanding an existing one.
One way in which business can do this is by bringing value to something that was of no value before: AirBnB is a great example.
AirBnB simply brought value to your apartment when it was unoccupied, something that was of no value to you before.
As an entrepreneur, make sure you are focused on solving one small problem but solving it like no one else has before, this is the key to a good business model. If you are actually good at what you do, your business will organically expand from there.