Twitter | Search | |
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:
Reply Retweet Like More
Erik Torenberg Jun 2
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
Reply Retweet Like
Erik Torenberg Jun 2
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.” -
Reply Retweet Like
Erik Torenberg Jun 2
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.
Reply Retweet Like
Erik Torenberg Jun 2
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!
Reply Retweet Like
Erik Torenberg Jun 2
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.
Reply Retweet Like
Erik Torenberg Jun 2
Replying to @eriktorenberg
Thiel approach (Vertical): Own a small specialized market. Don’t go for large markets because there’s too much competition
Reply Retweet Like
Erik Torenberg Jun 2
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.
Reply Retweet Like
Erik Torenberg Jun 2
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.
Reply Retweet Like
Erik Torenberg Jun 2
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.
Reply Retweet Like
Erik Torenberg Jun 2
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
Reply Retweet Like
Erik Torenberg Jun 2
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”
Reply Retweet Like
Erik Torenberg Jun 2
Replying to @eriktorenberg
Oligopoly - Small number of winners Payments (Stripe, admen, PayPal) Ridesharing (Uber, Lyft) Storage (Dropbox, Box, AWS) Payroll (Gusto, ADP, Paychex)
Reply Retweet Like
Erik Torenberg Jun 2
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
Reply Retweet Like
Erik Torenberg Jun 2
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.
Reply Retweet Like
Erik Torenberg Jun 2
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)
Reply Retweet Like
Erik Torenberg Jun 2
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
Reply Retweet Like
Erik Torenberg Jun 2
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)
Reply Retweet Like
Erik Torenberg Jun 2
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.
Reply Retweet Like
Erik Torenberg Jun 2
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?”
Reply Retweet Like