Is the "1% Market Fallacy" Holding Your Startup Back?
Is the "1% Market Fallacy" Holding Your Startup Back?
Avoiding the Pitfall: Founder's Common Market Sizing Mistake | Remote VC Jobs
When founders pitch their startups to investors, it's common to hear them proclaim…
Every Founder, “This is a trillion dollar total addresable market.,”
“If only we can capture 1% of trillion dollar market, We’re going TO BE RICH!”
While it may sound enticing, this mindset is known as the "1% market fallacy," and it's a common mistake many startups make. If you find yourself thinking that focusing on 1% of a trillion dollars will make you rich, you're falling into this trap as well.
Perhaps you've come across a tweet by Sara Letterman, a venture capitalist, that captures this sentiment. To paraphrase her message:
Now, may be wondering why even the venture capitalist saying the TAM is all about a “Totally Made up the number” and most of the founders fall under this fallacy of a 1% market.
In today’s newsletter, we will delve into it, which will help us to avoid this 1% market fallacy. So grab your coffee and let’s deep dive into it!
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It's easy to understand why the allure of a large, rapidly expanding market can be captivating. Founders often get excited about the sheer size of the opportunity and believe that securing even a tiny fraction of that market will guarantee a substantial payday. But let's take a closer look at why this line of thinking can be misleading.
So what’s the problem with saying you’ll capture 1% of a giant market?
First and foremost, 1% of a large market is still a significant number. Achieving such a milestone requires considerable resources, effort, and time. Merely stating the intention to capture 1% of a massive market does not automatically translate into achieving that goal. It's crucial to recognize that without a clear focus or differentiation, a startup may find itself lost in a vast landscape, struggling to gain traction and relevance.
An Important Illustration of Pie
Furthermore, assuming that capturing a small slice of a vast pie is an easily attainable goal is a fallacy in itself. If it were truly that simple, everyone would be doing it.
The reality is that building a successful startup and capturing a significant portion of any market is a complex and challenging endeavour. It requires strategic thinking, a deep understanding of customer needs, relentless execution, and continuous adaptation.
Also - There is no unfair advantage within a Big Market?
One more challenge with focusing on a big market is that most early-stage startups (and even later-stage ones) have no legitimate unfair advantage. You quickly become another player in the space clawing to get that mythical 1% market share.
You should never start a company on a level playing field.
It makes no sense to jump into a market without any advantage whatsoever, and yet many people do. They see a gigantic market, figure they’re smart and capable, and go for it. Those founders usually get chewed up. While a lot of startups aim to compete on speed versus incumbents it’s rarely enough on its own.
To overcome the 1% market fallacy, startups should adopt a different perspective—
one that focuses on capturing a substantial share of a smaller, well-defined market. By narrowing their focus, startups can better understand their target customers, tailor their offerings to meet their specific needs and develop a competitive advantage. This approach allows for a more concentrated effort, optimizing resources and increasing the likelihood of success.
Starting with a smaller market segment provides several advantages. Firstly, it enables startups to gain a deep understanding of their customers and build strong relationships. By delivering exceptional value to a specific group, a startup can create a loyal customer base that acts as a foundation for future growth. Success within this niche market can also provide valuable insights and a proof of concept that can be leveraged to expand into adjacent markets.
Secondly, by establishing a solid presence in a smaller market, startups can build credibility and a reputation for excellence. Customers are more likely to trust and engage with a company that demonstrates a deep understanding of their needs and consistently delivers outstanding products or services. This reputation can serve as a launchpad for further growth and market expansion.
Once a startup has secured a significant share of a specific market, it can then consider expanding its reach. Armed with a clear understanding of customer preferences, feedback, and emerging trends, the company can strategically target new market segments or even disrupt adjacent industries. This approach allows for more calculated expansion, reducing the risk of spreading resources too thin or losing sight of the company's core strengths.
In conclusion, the 1% market fallacy is a misconception that can lead startups astray. Instead of aiming for a tiny piece of a vast pie, entrepreneurs should prioritize capturing a substantial portion of a smaller, well-defined market. By focusing their efforts and resources on understanding and delivering value to a specific customer base, startups can lay a solid foundation for growth and expansion. Once success is achieved in one market segment, the lessons learned and the reputation built can be harnessed to conquer new challenges.
Remember, building a successful startup is not about grabbing a small piece of a giant pie; it's about creating an irresistible recipe that resonates deeply with a specific group of customers. Start small, think big!
A Quick Summary of Why Focusing on Big Markets is a Bad Idea
I definitely appreciate the appeal of big markets. Those 💰💰💰 look so exciting!
But chasing a big market—certainly early on—is a mistake.
It’s hard to define a big market and really understand your place in it. TAM, SAM, and SOM are generic and don’t do justice to how markets really operate.
Focusing on a big market likely means you have a superficial understanding of users/customers, their needs and what will get them to try & buy your solution.
You set what seems like reasonable expectations (i.e. 1% of a big market) but it’s a meaningless number, and still almost impossible to achieve.
You have no real advantage in a giant market because there are too many competitors with too much money, history and control.
So, what should you do?
Define your niche:
Rather than pursuing a broad market, identify a specific segment where you can excel. Understand the unique needs and pain points of your target customers and develop a tailored solution that addresses them effectively. By becoming the go-to provider in a niche market, you can establish a strong foundation for future growth.
That’s it. I hope this will help you to understand the “1% market fallacy” and make you avoid this next time.
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