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So...to me this article illustrates the dramatic differences in objective and mentality between bootstrappers and VCs. This VC looks at this idea, figures out

• anstosa 7y ago
  Ansel from PSL here. Absolutely. Because we're venture-backed and are spinning out venture-backed companies, we are limited to billion dollar ideas. It's not uncommon for us to kill great ideas that could "only" make tens of millions of dollars. We're hoping through blog posts like this and other means to be able to share more of them because we want those companies to exist, we're just not set up to create them!
  • crikli 7y ago
    Hey Ansel, thanks for responding and for validating my train of thought...I don't have that much exposure to the VC world so the things I suspect far outweigh the things I know. :)
  • sprsimplestuff 7y ago
    feel free to start sharing those "small market" ideas haha
    • chiefalchemist 7y ago
      After they've been vetted of course ;)
  • awb 7y ago
    > we are limited to billion dollar ideas How did matchmaking for music lessons get into the discussion as a billion dollar idea? Referrals for tutoring in any subject (math, reading, music, etc.) would be a bigger market, but even then it might not be a $1B company.
    • rubyn00bie 7y ago
      Well I was right there with you, thinking it was a completely shit idea, but a little math shows how it at least popped up on the radar (and I don't think its quite so bad myself after some thought): 100,000 music instructors, $60 per hour, at 365 days per year is roughly: $2.19 billion gross revenue per year-hour in the segment. Assuming, the average hours per day are like 3.5 (I can't imagine folks doing this are giving lessons for a full 8 hours per day, 5 days a week), that gives a total market of like: ~$7.65bn. Assuming they could earn a 20% stake in 100% of the market, that's like $1.53bn. Looking at the numbers, I think there is likely more potential than they realized[1]. I would suspect that by and large, digital advertising is capturing almost none of the market as kinda proven by their analysis. Looking at how low the frequency of searches were compared to the sheer number of employed individuals tells me something is off as a whole with the analysis. That is to say, digital advertising isn't showing the volume of or demand for musical teaching service because it's highly likely everyone believes it's incapable of doing so or adding value... That (driving the market online) is the problem to be solved in the space, because it sounds _hard_, and solving hard problems tends to be the way to make a lot of money. The other opportunity I would look at is, sort of from the other side: how to fix (what I assume to be likely) most music instructor's "underemployment" problems (i.e. inconsistent, few, or not enough hours). I imagine this angle would probably net more gross sign-ups as well since users (instructors) would be advertising the platform for you. With all that said, you'd have to assume there is latent under-served demand (25-35%) in the market too to bother with anything I've said... that 25% is essentially what would be left over for others after you've captured the niche. One last thought, for the VC since it looks like they're reading HN. Have you thought about doing retroactive market analysis where unicorns now exist to see what the market looked like then (e.g. short-term vacation rentals in ~2006)? Might give you some strong signals for where there is potential... [1] They are indeed a VC so it may not be in their best interest (time value of money, opportunity costs, etc)... Edit: Adjust some bad arithmetic.
  • arminiusreturns 7y ago
    Does this apply to the vast majority of VC's? So if I want to do a yc pitch it needs to be able to have unicorn level potential? Who would you target as investors for tens of millions ideas if so? I'm guessing a larger focus on angels and IB's after a more proven, traditional profit model is shown (often a much different model than VC-startup profit model).
    • barry-cotter 7y ago
      Yes, VC returns are dominated by the huge hits, so everyone is chasing those. Google almost certainly returned more than every other investment made that year for example. For a tens of millions pitch go to Earnest Capital who will be perfectly happy to invest. https://earnestcapital.com/ https://earnestcapital.com/
    • anstosa 7y ago
      Yes due to how the economics of traditional venture funds work, in order to achieve the returns that limited partners expect, investments are made in companies with unicorn potential. Some will do well, most will fail, sometimes one will actually become a unicorn but because you don't know which is which you need every at bat to have a path to a home run. This means that if your business is the right shape, VC is a fast way to raise a tremendous about of money. But that's NOT to say that every company can or should raise a tremendous about of money. There are less traditional VCs, angel investors, debt, and other financial vehicles that can help businesses succeed. There are tons of examples of companies worth hundreds of millions of dollars who raised little or no money to get there (Webflow and Atlassian are two top-of-mind examples). - Ansel from PSL
  • snowwrestler 7y ago
    Have you found many billion-dollar ideas by following this ad-testing methodology?
    • anstosa 7y ago
      We have spun out 20 companies over the last 4 years which we are confident meet this criteria using this methodology. All are venture backed (led by investors other than us) and still operating (except for 1 which sold to Nike last year) - Ansel from PSL
  • TheKarateKid 7y ago
    I understand the logic, but I can't help but feel that this type of assessment is really shortsighted. Would Facebook have passed this "test"? There was Myspace and Friendster dominating. How about Instagram? Why would anyone want to share photos elsewhere when everyone posted their lives on Facebook? We all know how those stories ended. Your firm's method only addresses the current market in current conditions. Having the foresight to see the currently unseen before anyone else is what yields amazing results. And if this is the main reason for killing something like this off... let's just say I'm glad I don't have my funds there. :)
• DevX101 7y ago
  You're also ignoring the probability of success. This project is only worth $shitton ($30 million) if the project were perfectly executed and other market participants didn't dynamically react to this new entrant. This isn't the likely outcome. The expected value of this project is probably only $5-10 million once you factor probability of success into account and thus not worth the time and effort at trying in the first place. A $5-10 million E.V. project is very much worthwhile for two founders who wanted to bootstrap though! One reason VCs target billion dollar ideas is that you'll probably fail. But in the unlikely scenario that you succeed, it more than makes up for the 10-20 other projects in their portfolio that DID fail.
  • thorwasdfasdf 7y ago
    You won't even make 1 penny, if you can't break even on your user acquisition costs. That's what usually breaks a business not the fact that it's not profitable enough, but that's it not profitable at all.
    • shiftpgdn 7y ago
      But music lessons are an ongoing (hopefully) expense. If your pockets are deep enough you can run out all the other players and capture the market.
      • tacon 7y ago
        The lessons are an ongoing expense, but the principals will rather quickly eliminate the middle man marketplace after meeting and being happy with the connection.
        • patmorgan23 7y ago
          Unless you can provide other useful services to help the teacher to manage thier students. Maybe scheduling, accounting, payments.
          • 7y ago
• novok 7y ago
  Often though, many successful VC startups start from a niche and expand from there. For ex: uber started with luxury black car service only in SF (a niche) and then expanded into normal cars, carpools, food and the rest of the world. I think the real requirement is a foreseeable future that you could potentially expand into a bigger $billion market. Small niches that have proved themselves are often more attractive from an investment standpoint.
• thelittleone 7y ago
  Had a similar experience running a consulting practice for a global software company. Our practice revenue was growing with profitably around 20% EBIT. Software sales where not growing as fast. As a result consulting was an increasing % of regional contribution income but at a lower margin. So my practice was lowering regional EBIT margin. We got told to slow down. I put an amazing guy in charge and resigned. Millions of incremental profit... unwanted. Of course it's logical given shareholders, but remains strange all the same.
  • xenadu02 7y ago
    There's a large opportunity cost to that strategy. If you allow consulting to make up 80% of revenue by default the business will inevitably turn into a consulting business, not a software business. Consulting can be a great way to bootstrap but you need to know when the tail is at risk of wagging the dog.
    • deleted 7y ago
      [deleted]
    • chasd00 7y ago
      money is money IMO. If the business turns into a consulting business because that's where the money is then so be it.
      • rchaud 7y ago
        during a business downturn, it can be hard to get consulting contracts as everyone is under pressure to cut costs. That's when having a viable software business can be helpful.
        • chasd00 7y ago
          i totally agree, i was being overly terse. To me, if something is working well then you should do more of it but, yes, you have to manage risk and see the whole picture. Like everything, it's a balance. It's counter intuitive but in downturns consulting can tick up. The first place companies go to look to reduce cost is headcount but the work still has to get done. In come the consultants to implement a new system to increase efficiency and reduce headcount (it rarely turns out that way though). Also, I think it's easier to finance money for consultants than FTEs because of where the expense falls on the accounting books.
• briandear 7y ago
  Using that case study, getting $21k in revenue for $80k in expense makes zero sense ever. That doesn’t even count the actual startup cost to build the platform or even get the “talent” to deliver the lessons — which is an expense not to be ignored. So the real $80k is probably much higher because for a marketplace to exist, you have to attract buyers and sellers. And a 30% commission means that music teachers would have to sell at 30% more than they would for their own off-marketplace customers. And, unlike app sales, 1-1 music lessons don’t scale, so that 30% is a real hit because they can’t really make it up in volume: 1 hour can only yield, 1 hour of lesson for one person. I know this problem well: I founded a therapy marketplace that has been surviving for 10 years now, but it took 8 years to actually become profitable and still, just barely.
  • dragontamer 7y ago
    Real world music lessons scale better, with many beginner classes at Guitar Center (or private centers/homes) scaling to 5ish students per teacher. It's not as high quality as 1 on 1 instruction, but the benefits of scale cannot be understated. Offer lessons at 1/3 price but make double the revenue.
    • sqrt17 7y ago
      In that case it's the regional "Guitar Center" or "Yamaha Music School" or whatever that provides (i) a marketplace that also lends credibility to the instruction and (ii) scaling via group lessons and as a result take a cut from the pie.
• orasis 7y ago
  I’m a bootstrapper and I also use a similar metholodology to this article. I only go niche if the larger addressable market is big enough. It might be okay if the initial niche offering only makes $5k its first year, but I should see some path to expand to $500k+ per year or the opportunity cost is too high.
• Iv 7y ago
  Totally makes sense for both sides really. VCs look at this and are like "We can't do that with run-off-the-mill webdevs and marketers". And they have a formula to express what to expect from this reasonable effort model. Comes a founder with awesome experience in pedagogy, a reputation in, say, Montessori teaching, and publishing records. She knows 10 musicians who could potentially teach, 100 potential students to bootstrap the idea. VCs re-reun the numbers with these new assumption and discover a potentially ten times higher return after Q1. VCs and bootstrapers and founders make different assumptions in efforts and time and need each other, fit different niches.