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Ask HN: How big does my target market have to be?
I have an idea for a business - a service that solves a particular pain point for a well-characterized market. The thing is that this market is not large - I would say at most a million US citizens, at least 150,000, plus perhaps a hundred thousand more worldwide. This market is currently served by a brand that is horrendous, but which is a solidly established market leader due to network effects and a freemium business model. By offering a better service, with backwards compatibility (Spolsky 100% sold me on this point), I plan to disrupt and replace the current market leader. In addition to the matter of size, this is not a market with a potential for explosive growth - if I get it right, it'll have perhaps a year or two of fast growth, but will plateau into growth at single-digit percentage rates after it's soaked up market share from the current market leader. As well, this idea requires more lawyering up than the average "here is a website through which we provide a service" startup, because of concerns with user-generated content and the normal way that a startup that makes money becomes an appealing lawsuit target (this one more so than most). On the bright side, apart from retaining counsel, the business costs are perfect for the lean startup model; create the software, scale it up with EC2 and other on-demand cloud computing/storage services as needed. It's not like it's unusual, either, for a startup to live in a position of "if we get sniped by a lawsuit, we go out of business."
That's the background for my question - am I targeting a big enough market to seriously pitch this idea to angel investors? It's a tempting thought, because $100,000 would buy me two years of runway as a solo founder, three years if I did a good job of running lean - but because of the business model I'm targeting, I probably can't offer investors the classic startup upside of "if we win, you get a 20x or more payout." This is not a business idea that's headed for a big acquisition or an IPO - the reason that I'm not telling you the specific business idea, in fact, is not because I have a Winklevossian fear of my idea being stolen, but because the idea sounds like a joke, especially in the context of an IPO or a high-octane acquisition. Should I go for bootstrapping and/or friends-and-family funding? The tradeoff there is that at that level, I can't quit my job to work on this idea, and on the nights-weekends schedule, I estimate it'd take 2+ years to get the product developed, marketed, launched, and ramen-profitable. I'm a hacker: I'm greedy and impatient, and I want to be able to quit my job and work on my great idea, dammit! But I've created enough hacks in my time: I know that the ideal way to do it, sure as heck isn't the only way to do it.
Which, in turn leads to another way to phrase the question: is this a proper startup, or is this a lifestyle business?
- retroafroman 15y agoThe question you'll have to figure out how to answer is then: how would you pay back $100,000 and in what time frame? Think about the other side. As someone with $100k, why should I chance it with you if the reward doesn't warrant the risk? Angel investors are just that: investors. They would likely put the money into a situation that is less risky. Also, the number of people in the market is only an important metric when you also include what kind of conversion rate you can get of those, and what dollar amount would the average sale be? Take Ford and Lamborghini. One makes a lot of different models that cover a large portion of market possibility and sells a large number of cars at a small profit, while the other has few models, sells a much smaller number of cars, and has a higher profit per vehicle. If each customer nets you $100k, and you can get 0.1% of the possible market, then of course it could be worth an investor's time. If this is a web app you want to charge $2 one time for, then even if you could sell the whole market it may not be worth it.
- sedev 15y agoI definitely hadn't thought of the Ford vs. Lambo angle - thank you for pointing that out. I think one could also phrase that as the Apple vs. Dell angle. Revenue-per-customer is definitely important. I think that I could offer an investor a positive return - the revenue model is subscription-based with strong network effects - but not an explosively positive return. So if I were developing a pitch, I think I'd want to include something about the opportunity cost there, and like any founder, would want to explicitly say "here's why I'm less risky than other things you might fund."
- noahc 15y agoSome Investors (many?) need HIGH risk, HIGH return. You probably have a lifestyle business on your hands and people tend to not want to fund those.
- sedev 15y agoThat's what it's starting to look like, yeah. Which is reassuring, in a way - the upside of a lifestyle business is that you're not particularly beholden to investors.