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Erik Torenberg
A common trope in VC is to ask whether the most important thing is the product, market, or team. agree: Markets are most important But how to evaluate and pick markets? and I are working on a definitive guide. Some preliminary thoughts:
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.” — Andy Rachleff
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Erik Torenberg 2 Jun 19
Replying to @pmarca
Conversely, “Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn't matter -- you're going to fail.” -
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
While markets are the most important thing, we barely have any frameworks for how to evaluate them. It’s relatively easy for founders and investors to evaluate teams & products--but it’s unclear what makes a great market.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Traditional advice can be to target markets that are large and / or growing quickly--but that’s too vague. Founders have an intense need to pick a good market - they are dedicating 5-10 yrs of their life to their startup, and while VCs are diversified, founders have one shot!
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Consider two frameworks: The Peter Thiel approach + Keith Rabois approach Thiel - pick a niche they can monopolize and expand outwards from there Rabois - go “horizontal” - find trillion dollar markets + build full-stack, vertically integrated solutions. Go big or go home.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Thiel approach (Vertical): Own a small specialized market. Don’t go for large markets because there’s too much competition
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Niches can be defined by demographics, geography, jobs-to-be-done, among other things. Facebook famously started with Harvard as a niche, then dominated all college campuses, then grew from there.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Rabois approach (Horizontal): Consider his startup Opendoor: He went to market with no specific customer type in mind - could have been retirees, families, millennials, etc.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Which approach to use--Thiel or Rabois? Understanding how many large companies the market can support at scale is important. Doing so allows you to understand what is the right approach and approximate how large the opportunity can be.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
It’s important to think about market structure and apply the frameworks accordingly. Monopoly - Peter Thiel approach (niche) Oligopoly - Rabois (general) Monoplistic Competition structures — Either
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Monopoly - One company owns greater than 75% and the entry of new companies are prevented or highly restricted. In other words, “Winner take all”
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Oligopoly - Small number of winners Payments (Stripe, admen, PayPal) Ridesharing (Uber, Lyft) Storage (Dropbox, Box, AWS) Payroll (Gusto, ADP, Paychex)
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Monopolistic competition Imperfect competition - many cos sell differentiated products, no perfect substitutes. Limited barriers to entry, but more crowded spaces. Unlikely to have enormous outcomes. E.g. Hotels, restaurants, designer clothing
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
For Thiel approach, you want a niche. Niches can be: Boring (packaging) High-end (Black car) Unfamiliar (drug development) Weird (online dating) Needs to be some reason why it’s not already a huge market.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
For Rabois approach, you need - a lot of capital - low NPS for incumbents - Highly fragmented market - Can vertically integrate w/ radically simplified solution (to control entire experience and get a high NPS score)
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Similarities across frameworks: Timing matters in both cases. Why couldn’t you do this two years ago? Why not two years from now? Why now? Good why now answers: Tech - emerging tech, platform shifts, patent expirations, exclusive rights
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
(Good why now answers cont.:) Infrastructure - changes in regulation, gov’t incentives, competitor exits, shakeouts in adjacent industries Data availability, new sales distribution channels, shifts in consumer behavior, new communities, unit economics (Instacart vs web van)
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
A why now often requires a “secret” -- something you believe that very few people agree with you on. It’s important but unknown, and hard but doable The key element of secrets is that they give you an edge. If it won’t give you an edge, it’s not a secret.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Where do we find secrets? “where no one else is looking. Most people think only in terms of what they’ve been taught; schooling itself aims to impart conventional wisdom. So you might ask: are there any fields that matter but haven’t been standardized and institutionalized?”
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Thoughts on GTM / execution in Thiel World Once you went to market, monopolized your initial niche, and built up a durable assets, it’s important to deliberately expand into adjacent niches.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
You want to be smart about what niches you expand into -- ideally related and slightly broader markets that allow you to leverage existing built assets and avoid competition as much as possible.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
The lure of greater market share is a powerful one, which has caused many successful specialist companies to sacrifice their distinguishing characteristics and dilute their competencies in a headlong pursuit of growth, only to end up in the ditch.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
As we have pointed out, such strategies are viable only if a clear, unblocked opportunity to occupy a generalist position exists. If not, firms would be far better off deploying the same resources into a geographic expansion within existing niches or creating new niches.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
GTM in Rabois world At Opendoor: “We stayed fairly laser focused on our core product - selling to Opendoor - and focused on that until we had grown significantly.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
“Only after our series C / after expanding to multiple cities, did we start to focus on our buyer experience, and we acquired Open Listings to speed that along. Opendoor is only now launching mortgages to expand the product offering and increase LTV of our customers.”
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
“As far as customer expansion goes, since started with Keith’s horizontal approach, so didn't need to expand customer types too much (the exception being first-time home buyers, which we previously ignored since they didn't have a home to sell)."
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
As this approach is more capital intensive, it’s important to capture value once established. Think about it in terms of payback time, a function of (revenue) * (margin), compared to (outlay). This equation works if either your cost is initially low or your margins are great.
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
You want to know what’s going to change over time. You don’t want to fund a permanently low margin business, but want to understand when will new dynamics kick in that create and unlock greater margins (thx to durable assets).
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Erik Torenberg 2 Jun 19
Replying to @eriktorenberg
Rabois mentions it’s reasonable to identify what are the step functions are to improve margins, triangulate what they will likely to get to, and then not worry initially because you know they will improve.
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