Finding Open Seas and Strong Winds

Here recently on the Andreessen blog, there was an amazing truth posted:

The #1 Company-killer is lack of market.

It's one of those things that seems blatantly obvious. However, I'd like to elaborate further on what makes a market and how that's defined. Not having invested a massive portion of my life into obtaining an MBA, I've only come to know what I know through experience and books. There are two books in particular that have impacted me the most in understanding markets and how they are created:

Blue Ocean Strategy
The Deviant's Advantage

The cool thing about thinking about these 2 books together is that you get some very interesting insights: the Blue Ocean is more about innovation in existing spaces, whereas understanding the Deviant is about understanding the cultural fringe and how they come up with new ideas. In examining how the lack of a market can destroy a startup, it's interesting to view how a startup is positioned.

When we look at existing markets, we define it with variables that give us an idea of a company's strengths. One of my favorite views from Blue Ocean is this graph:


Not sure how the quality of this is, but hopefully you can see enough - across the variables, Dr. Seuss innovated by establishing a place where no one else was; thus becoming the first in an untapped market. One particularly good example they use is Yellow Tail wines - how they basically brought a high-end, high-education product to the masses. Now there's a ton more theory and evidence around the tenets of this (value-cost balance, differentiation and all that) but we can generate simpleton equations (maybe there's a layman's guide to market theory in here somewhere):

x = number of market forces/segments/functions
y = number of players on the board
z = size of market
q = ability to a new "x" all for yourself
M = the draw factor of any "x" (demand)

As x increases, y increases. By addressing additional market functions, you attract other competitors. This is seen through companies that try to do too much, and instead of creating a blue ocean, they just put themselves in a bigger red ocean.

As y increases, the number of possible x's decreases. Maybe... but we don't like to think this way. This is the idea that there is some invisible pie, and over time people eat it - it never comes back. This is consistently disproved .001% of the myriad of mISVs out there who become successful in established their own "x".

A low x and a low y = a high q. Although this is certainly true, you can much more easily create new factors (blue oceans!) when there aren't many factors and not many players, this doesn't always mean we get a high M. As proven by the myriad of companies who have a whiz-bang idea, but no one is yet to buy it.

In my own humble opinion (I am just an unfrozen caveman lawyer) the key here is the corollary between M and x, not q. This is where many folks fall into the gap that if they can increase the likelihood that they'll find a niche, they will be successful. Not exactly true! The list of market functions can go out a mile and have no sufficient demand attached to them. So, when we pitch our VC friends, we can't expect to make a list a mile long and say we've create a new Blue Ocean, because we've combined the 418 factors that already exist in the marketplace.

This is the key to "product market fit" as Marc mentions. You've got to have something that opens up demand, and this isn't always the last item on the market function list ahead of the other players.

"The only thing that matters is getting to product/market fit." This could be the understatement of the year. Here's where the variables really get tricky, like timing, and most importantly - capital. Even if you have identified the market demand function, if you don't have the capital to get there, you're toast.