Unicorn Hunters (2): Small Markets Are a Poor Fit for VC

Unicorn Hunters—2 Market size Unicorn hunters look first at the team, then at the size of the market. If your market is too small, it limits your startup’s growth. It is like keeping a whale in a glass tank: a business can grow only as large as its market. That does not mean a company starting in a tiny niche cannot expand beyond it. But it becomes particularly important to see a clear path to a larger market. Without that path, your startup will eventually have to change direction or stagnate. Either way, you are in trouble. Venture capital firms have many reasons to avoid small markets. First, it is a trade-off between risk and return. However delicious a local bakery’s croissants may be, it can make only so much money. The risk may be low, but the returns are limited too. If the founder’s vision is to create a distinctive bakery chain using unique recipes and an innovative business model, however, that attracts more attention. Building a national chain is very risky, but the returns can grow exponentially. Another factor investors consider is exit potential. A slow-growing small business has little chance of going public and receives few acquisition offers. Even if a small business has an incredible new technology, that technology’s value almost never matches the value of a company targeting a large market and already gaining momentum rapidly. Large companies with the resources to make major acquisitions often focus on growing markets, rather than niches with no room to expand. Early-stage investors also consider whether follow-on investors will be there later in the company’s development. Investing in a business that serves only a small market automatically rules out later-stage venture capital participation. Venture capital firms are not interested in small exits. That is not their business model. They need enormous returns, which means a large market and rapid growth. If a startup cannot deliver that, top-tier venture capital firms will not get involved, and the startup will have trouble in subsequent funding rounds. Smart angel investors therefore do not put money into a company they know is unlikely to attract follow-on investors later. Finally, a very large market often brings more attention. Some smaller startups are little known, but almost everyone knows the leading unicorns. On a venture capital firm’s website, the company logos you see are usually household names, not small businesses that can be acquired for just $25 million—even if those small businesses could deliver a return of at least ten times the investment. So it is all fair: bigger is not only better; it is often the only option that fits the logic of venture capital. Keep this in mind when your startup begins fundraising. If your market is not large enough, do not rely on venture capital: those investors will not be coming to your party. #穿越寒冬 #SurvivingAStartup