When an entrepreneur gets an idea for a new business, one of the
earliest questions that he or she asks is: how big could this be?
It’s an important question. After all, how ‘good‘ an idea is likely
depends on how big the potential market for it is. That’s especially
true for entrepreneurs who intend to seek outside funding.
More often than not, the potential size of a market for a new (or as yet non-existent) product or service is evaluated numerically. Analyst A predicts that some market will be worth $5bn in five years, while Analyst B predicts that it will be worth $4bn. If you read a business plan for a technology startup, chances are you’ll find predictions from seemingly reputable analysts and market research firms mentioned.
But do the numbers matter? Two interesting posts from two tech industry investors suggest that narratives are better. Angel investor Chris Dixon writes:
The only way to understand and predict large new markets is through narratives. Some popular current narratives include: people are spending more and more time online and somehow brand advertisers will find a way to effectively influence them; social link sharing is becoming an increasingly significant source of website traffic and somehow will be monetized; mobile devices are becoming powerful enough to replace laptops for most tasks and will unleash a flood of new applications and business models.
Venture capitalist Fred Wilson agrees and adds:
Another reason narratives are better than numbers is that it is easy to challenge numbers. You’ll get “Where did you get those numbers?” or “They didn’t do that math right.” A narrative is just a story and you are the storyteller. It’s harder to poke holes in a story, particularly if it is told well.
Both make good points, and I agree that far too many entrepreneurs get caught up in the trap of relying too heavily on numeric projections that may or may not come to pass. While numbers can be helpful, if you don’t have a credible qualitative explanation as to why your idea could be something big, numbers are somewhat irrelevant.
But that said, I think both narratives and numbers distract entrepreneurs from the tough reality of building a new business. While it’s absolutely true that entrepreneurs seeking outside funding will need to address the ‘market size’ issue convincingly, it’s also important for entrepreneurs to remember that ‘market size‘ is really of minor importance early on. Convincing yourself and potential investors — quantitatively or qualitatively — that your market is set to explode doesn’t mean that you’ll be able to successfully tap into that market.
While it’s nice to build a company attacking business challenges in a billion-dollar market, for example, what does ‘market size‘ really mean? A business with, say, $100,000 in annual revenue in a $10bn market is still a $100,000/year business. The actual size of the market may limit the business’ ability to grow if the market is small, but for most new businesses, the impediment to growth isn’t market size; it’s execution (eg. sales, distribution, etc.).
That’s something Dixon seems to ignore when he writes that “venture-style startups are bets on broad, secular trends“. For entrepreneurs (and investors incidentally), betting on a broad, secular trend is alone rarely a strategy for success. It’s all about the execution — and a little timing/luck. Execution, timing and luck are the difference between the handful of social media startups that are thriving and the literally thousands of ‘me too‘ clones that have failed, for instance. Betting on a broad, secular trend clearly didn’t work for the entrepreneurs behind those.
An entrepreneur who is blinded by market size often fails to consider that his or her success or failure will almost always be based upon this execution and little else. Only execution answers the really important question: how much business can I realistically drum up? In other words, the size of your market is, when you get right down to it, the amount of money your business can generate. Forget trends and narratives. You can assume your market is going to the moon but if you’re not executing, you’re not going along for the ride.
Twitter provides a good example here. Fred Wilson explains his narrative for Twitter, which is one of his investments:
I wanted to explain to everyone why I thought Twitter was going to unleash a potent new economic model on the web. I could have gone and found some analyst’s projections and thrown some big numbers on the screen.
Instead I talked about search versus social…by comparing social to search, I created a narrative that suggested something very big. Paid search is a $30bn market and is still growing. I didn’t even have to show any numbers to make that point.
That’s fine and well, and Wilson’s bet on Twitter may prove to be a good one, but how much revenue is Twitter generating right now? Narrative and numbers aside, the only thing that truly matters for Twitter long-term is how much revenue the company can make in the real world. Thus far, after being in business for years, it hasn’t generated anywhere near the amount investors like Wilson believe it could.
Which gets to the heart of the issue. For entrepreneurs who want to go out and raise a lot of money pursuing an idea that excites VCs and operate for years without obtaining real-world validation that they have a viable business, market size matters. It’s the ultimate foundation for ‘hope‘ and ‘belief‘.
For entrepreneurs who are interested in building a new product or service, monetizing it ASAP and building a self-sustaining business, projections and narratives are of limited pragmatic importance because the time between launch and validation (in the form of revenue) shouldn’t leave room for ‘hope‘ and ‘belief‘.
In short, the only narrative worth telling is “we’re making money” and the only number that counts is how much.