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It's not obvious, except in hindsight, which startups are venture-scale. How big is the audience going to be for a new product? How much can you charge? Who kno

by gizmo 3y ago

It's not obvious, except in hindsight, which startups are venture-scale. How big is the audience going to be for a new product? How much can you charge? Who knows? Some products start out in a small niche, get fanatical users, and then become mainstream. eBay, pinterest and etsy are big today, but who could have predicted that? Does pinterest solve a Large, Urgent, and Valuable problem? I don't think it does. Pinterest is basically another photo sharing app. Exactly the kind of thing that this author argues isn't venture scale, and yet it was valued at $50bn last year. Anything that has a few hundred million users is worth a lot. It's trivial to tell whether a startup is venture-scale in hindsight, and impossible to predict in advance. A startup is venture-scale if the founders have growth as their #1 priority. Otherwise, not so much.

luckyt 3y ago
Yeah, it's not clear how to estimate the market size or TAM of an idea even if there already is a market, like take random examples of a dog walking or podcasting app. You can easily find sources that claim the dog walking or podcast business are $1 billion dollar markets. But how does that translate to evaluating growth in a startup in this business, and how big can it realistically grow?
- jschveibinz 3y ago
  There is an answer to this question, so I’ll give it a try in this context. Let’s assume “dog walking” as the example. Assume the sales price of a dog walk is in the $25/session range, +/- $5 depending on location. That walk has an underlying cost of labor and overhead. Assume 50-50 for each. That means the walker receives about $12.50 for the walk. The overhead pays for the transit time, the admin time (phone calls, scheduling, bookkeeping, insurance, etc.). It also includes marketing and sales. For a local dog walker, the cost of marketing and sales is very low. It’s mostly done by word-of-mouth and referrals from good customers. So the salary is acceptable if they can get 2-3 walks in per hour. Now, to scale this business from local to regional, some things have to change. More people are required. Training is required. And brand recognition is required. The marketing costs must go up, the admin costs must go up, and ultimately the value to the customer must go up (to beat out the local provider), etc. More customer value probably means a lower sales price (to compete). And all of these extra costs doesn’t leave much of the pie left over for labor. So there is a lower labor salary-maybe only $5 per walk-which doesn’t attract very good talent. In the end, you can see that it makes it extremely difficult to “scale up” a business like dog walking. It’s too labor intensive, the bar is too low for competitors, and it’s tough to create additional value for the customer. You can do a similar analysis with other startup business ideas to test if there is really an opportunity for scale.
  - luckyt 3y ago
    Hmm, so is your conclusion that dog walking startups are not venture scale? But there are several dog walking startups that have received VC funding, and at least one that's IPO'ed. I agree with all your points that makes these types of gig economy businesses difficult to be profitable, but they similarly apply to many businesses like food delivery -- so this can't be right. (unless you believe none of these gig economy apps are successful, which some people argue, but is a bit of a stretch imo).
unusualmonkey 3y ago
I have to disagree. An auction website that everyone in America can use? A marketplace for small crafts that is nation wide? A social network that connects a large creative community and show cases brands and products? It's not hard to imagine any of these having huge TAM's. On the flip side, there are tons of ideas that just don't have the market size - an app that helps students memorize the latin numeral system is unlikely to have a large market. I agree it's not easy to predict if a startup will succeed - but that's different from seeing if there is a market worth going after.
- gizmo 3y ago
  It's easy to imagine those marketplaces having huge TAMs /today/. With the benefit of hindsight, it's easy. And it's easy to extrapolate to similar businesses. It wasn't obvious then, not even to the founders. eBay started as a hobby project. Only after it took off did Omidyar realize he might have stumbled onto something important, and started taking it seriously. TAM itself doesn't tell you anything. Take flying cars. Huge TAM and yet the space is uninvestable. An app that helps students learn a single thing won't get huge. But the educational software space is huge, and it's fine to attack a big market by starting out in a tiny and unprofitable niche. An app that helps students learn a single subject isn't an obviously worse business than helping collectors find their last missing Beanie Baby (which was the big growth driver for eBay back in the day).
  - unusualmonkey 3y ago
    Let's say your correct and the founders didn't know ebay could scale (even though this was during dotcom bubble and raised millions of dollars in investment) so what? That doesn't mean it's not possible or that a savvy entrepreneur shouldn't estimate market size today. The flying car example you give is correct. Yes, I fully agree that a flying car (at right price point and specs) would have a huge TAM. That doesn't make it inherently investible (though I nite a number of companies have received investment in this space). There is a huge difference between a huge TAM is desirable, maybe even necessary and a huge TAM is all you need. You seem to think people are arguing for the latter, when they are arguing the former. I fully agree that the educational software space maybe huge. As such building an app to capture a portion of that might well be worth doing! I think you just demonstrated the power of thinking in terms of TAM - while X doesn't look huge on the surface, it's actually just the first steps to Y which is.

by gizmo 3y ago

luckyt 3y ago

Yeah, it's not clear how to estimate the market size or TAM of an idea even if there already is a market, like take random examples of a dog walking or podcasting app. You can easily find sources that claim the dog walking or podcast business are $1 billion dollar markets. But how does that translate to evaluating growth in a startup in this business, and how big can it realistically grow?

jschveibinz 3y ago
There is an answer to this question, so I’ll give it a try in this context. Let’s assume “dog walking” as the example. Assume the sales price of a dog walk is in the $25/session range, +/- $5 depending on location. That walk has an underlying cost of labor and overhead. Assume 50-50 for each. That means the walker receives about $12.50 for the walk. The overhead pays for the transit time, the admin time (phone calls, scheduling, bookkeeping, insurance, etc.). It also includes marketing and sales. For a local dog walker, the cost of marketing and sales is very low. It’s mostly done by word-of-mouth and referrals from good customers. So the salary is acceptable if they can get 2-3 walks in per hour. Now, to scale this business from local to regional, some things have to change. More people are required. Training is required. And brand recognition is required. The marketing costs must go up, the admin costs must go up, and ultimately the value to the customer must go up (to beat out the local provider), etc. More customer value probably means a lower sales price (to compete). And all of these extra costs doesn’t leave much of the pie left over for labor. So there is a lower labor salary-maybe only $5 per walk-which doesn’t attract very good talent. In the end, you can see that it makes it extremely difficult to “scale up” a business like dog walking. It’s too labor intensive, the bar is too low for competitors, and it’s tough to create additional value for the customer. You can do a similar analysis with other startup business ideas to test if there is really an opportunity for scale.
- luckyt 3y ago
  Hmm, so is your conclusion that dog walking startups are not venture scale? But there are several dog walking startups that have received VC funding, and at least one that's IPO'ed. I agree with all your points that makes these types of gig economy businesses difficult to be profitable, but they similarly apply to many businesses like food delivery -- so this can't be right. (unless you believe none of these gig economy apps are successful, which some people argue, but is a bit of a stretch imo).

unusualmonkey 3y ago

I have to disagree. An auction website that everyone in America can use? A marketplace for small crafts that is nation wide? A social network that connects a large creative community and show cases brands and products? It's not hard to imagine any of these having huge TAM's. On the flip side, there are tons of ideas that just don't have the market size - an app that helps students memorize the latin numeral system is unlikely to have a large market. I agree it's not easy to predict if a startup will succeed - but that's different from seeing if there is a market worth going after.

gizmo 3y ago
It's easy to imagine those marketplaces having huge TAMs /today/. With the benefit of hindsight, it's easy. And it's easy to extrapolate to similar businesses. It wasn't obvious then, not even to the founders. eBay started as a hobby project. Only after it took off did Omidyar realize he might have stumbled onto something important, and started taking it seriously. TAM itself doesn't tell you anything. Take flying cars. Huge TAM and yet the space is uninvestable. An app that helps students learn a single thing won't get huge. But the educational software space is huge, and it's fine to attack a big market by starting out in a tiny and unprofitable niche. An app that helps students learn a single subject isn't an obviously worse business than helping collectors find their last missing Beanie Baby (which was the big growth driver for eBay back in the day).
- unusualmonkey 3y ago
  Let's say your correct and the founders didn't know ebay could scale (even though this was during dotcom bubble and raised millions of dollars in investment) so what? That doesn't mean it's not possible or that a savvy entrepreneur shouldn't estimate market size today. The flying car example you give is correct. Yes, I fully agree that a flying car (at right price point and specs) would have a huge TAM. That doesn't make it inherently investible (though I nite a number of companies have received investment in this space). There is a huge difference between a huge TAM is desirable, maybe even necessary and a huge TAM is all you need. You seem to think people are arguing for the latter, when they are arguing the former. I fully agree that the educational software space maybe huge. As such building an app to capture a portion of that might well be worth doing! I think you just demonstrated the power of thinking in terms of TAM - while X doesn't look huge on the surface, it's actually just the first steps to Y which is.