TL&DR. Rate of Change is much more important than Total Market Size when you are talking about innovation. Don’t be fooled just because something is excelling in a niche, as history has proven many times that those niches become the monster markets of the future.
This BMi post was inspired by a recent post on the Wealthfront blog titled ‘What Analysts Get Wrong About Innovation:”
Many Analysts are focused on the gross size of a market; the general formula is to invest in a ‘charismatic entrepreneur’ with a venture in a vertical that has a ‘large addressable market:
Innovation tends to start in niches that appear to be too small to be worthy of investing resources into. But by solving an important problem in a niche that is growing rapidly (rate of adoption), the door is opened to ride the adoption curve up through a rapid growth phase:
The goal of a company innovating in a new market is to reach the tipping point. But many companies focus on taking a small piece of a big market, rather than ‘dominating a niche’ simply because the general theory is that it’s better to get a ‘small piece of a big pie:’
Thiel’s strategies – captured in the book Zero to One – focus on the idea of dominating and then “gradually expand into related and slightly broader markets.” The Wealthfront post parallels this insight in relation to how a few of the most notorious ‘disruptors’ were perceived in their early days:
We have all seen how Facebook and Amazon turned out. But perhaps a more salient and intriguing example in the current global context is the story of Airbnb. They were turned down by several prominent investors, including the famous and well-written VC Fred Wilson:
As we wrote in a recent blog post ‘Rentals, Sharing Economy and the Future of Living,’ Airbnb nailed both trust and timing, the latter in relation to a massive shift in the travel market driven by Millennials, a demographic that spends $200B/year on travel. Airbnb is currently valued at $30B because of their future runway into not just hospitality, but tourism as a whole. People trust the brand. Investors back in 2008/09 just couldn’t translate trusting someone to sleep on an air mattress in your living room into a category-defining, once-in-a-generation company like Airbnb is today. And it wasn’t just Wilson that missed the boat:
If we reference Airbnb’s story back to the original focus of the post – BMi and the rate of adoption – we would have seen that the market Airbnb was entering in its early days was both small and difficult to define. In today’s world we would probably call it P2P Accommodation (sharing economy) or Hospitality (traditional), but back then it was difficult to chart a path from renting out air mattresses in living rooms (hence the name Air bed & breakfast) into global domination. But they dominated that niche, then as the surrounding factors in the market started to change – trust in digital, web design, Millennials, local experiences, etc. – Airbnb was able to grow exponentially and expand into adjacent markets.
In the current context of the global economy, we are moving towards a point where the right innovation, with the right team and investors behind them, can reach adoption rates never seen in history:
This is why it is important that we understand how to assess an innovation from the rate-of-adoption perspective rather than a magnitude-of-adoption perspective.
With so many opportunities to solve problems across all layers of society – socially, economically, environmentally and culturally – it is not only technological innovation that is required, but also Business Model Innovation (BMi).
from an entrepreneur’s perspective, start small and ‘dominate a niche’ – solve a real problem
from an investor’s perspective, don’t always look for companies that have a ‘large addressable market,’ scratch beneath the surface and try and understand whether a given entrepreneur or team is resolving something in a small market that could become much bigger in the future
strategically speaking, if you are trying to understand ways to accelerate up the adoption curve to get a bigger slice of the pie, look to the edges of the market where firms are making seemingly small and insignificant breakthroughs rather than trying to continually ‘beat the competition’