What makes a good market?

Find your moat

Let’s create a new online banking application

Many founders enter the entrepreneurial world with no precise ideas, nor do they target a specific market segment. Most of us simply possess a set of useful skills, a bit of specific knowledge, and a genuine interest in building something that generates revenue and could potentially become big one day.

As I've said many times, I am not talking to the small minority of founders who have succeeded with VC fundraising and have a couple million dollars in an SVB¹ account to implement their first iteration. I am primarily speaking to those who bootstrap and need to make rational decisions and test market hypotheses through short iterations.

Today, we will begin discussing markets, and how to find valuable segments where solopreneurs and bootstrapped startups can quickly generate revenue and potentially upsell or scale to more valuable segments.

Finding your market might be the single most critical decision in your entrepreneurial journey, as I do believe a terrible product well distributed to the right clients will go further than a killer solution competing with a massively scaled, cheap solution with an almost unbeatable moat².

Narrow spots

Regrettably, the chances of discovering a market with absolutely no competition are extremely slim, and I would even say it's nearly impossible. It's highly likely that there are other companies already addressing the same problem you've identified, albeit with distinct differences that you intend to capitalize on. Here are the most common scenarios, both leading to the same conclusion:

1. The market you are working in is highly fragmented, and no solution combines the benefits of all the others³.

2. There's a situation close to monopoly, where the main provider has key vulnerabilities or clear flaws.

A good market is one where you identify segments that are underserved and struggling due to either a lack of alternative providers or the existence of a default one to which they demonstrate minimal loyalty. These clients might be willing to pay for a solution if you manage to identify and address a crucial pain point that no one else is effectively solving.

For instance, consider some successful optical character recognition startups. They began with very narrow use-cases such as scanning receipts or bank statements. By exploring overlooked or underexploited segments within the robotic process automation industry, they discovered small niches — such as SMBs and even larger retailers eager to digitize a portion of their paperwork. These startups' focused solutions served an immediate, specific need, paving the way for their eventual growth and success.

Seek out customers who are using your potential competitor’s solutions simply because they have no alternatives. Identify a segment that has been overlooked or dismissed because it's either too marginal for a larger competitor, or because other companies made the mistake of trying to attack the market horizontally from the outset. Instead of this approach, they should have been brutally vertical, focusing on a narrow, underserved niche, a dimly lit market cavern where you can earn your first pennies by assisting those who are generally ignored ⁴.

Lone wolf-niche-fit

The ideal niche is one filled with clients who need your assistance immediately, because you possess a unique set of non-substituable skills that you can apply sooner rather than later to help them.

You may have heard of product-market-fit, and perhaps founder-market-fit, but these concepts can seem too large when you have no money, no “friends and family with a spare 500k”, no support, just a bit of time and a functioning laptop. You are looking for the Lone-wolf-niche-fit — that very small market spot where you are the only one capable of solving problems in the short term. Find where you feel real empathy.

Etsy is an interesting case of a startup that began in a very specific niche fitting founder’s specific knowledge. It was founded in 2005 by Rob Kalin, Chris Maguire, and Haim Schoppik, who were all friends attending New York University at the time. Kalin, a carpenter and artist, found himself frustrated by the lack of online outlets where he could sell his handmade goods. Noticing a similar difficulty faced by other DIY artists and crafters, Kalin decided to create a solution himself.

With a personal understanding of the specific needs and pain points of the market, Kalin and his friends developed Etsy as a platform specifically tailored to independent artists, crafters, and vintage sellers. The platform allowed these sellers to establish an online presence and reach a global customer base, something that was previously challenging and costly for small-scale craft businesses.

As a founder, you want to identify users with whom you can empathize because you have either lived the same situation or understand it perfectly well, and can apply your skills to offer a narrow, one-feature solution that can resolve their issue in the short term. Finding a market is about knowing a hidden spot where you can cast your hook, attracting the larger fish later, rather than attempting to convince big fish to work with you at the beginning.

Saying sayonara to the hamster wheel

Finding a niche provides you with a golden opportunity to set your own price and foster loyal customers right from the start. Your early adopters won't be focused on your price, but rather on the unique solution you're offering. This approach allows you to escape the often punishing environment of price-based marketing and avoid the clamor and competition of overcrowded market segments where everyone ends.

By focusing on underserved segments, you also buy yourself precious time. These are segments that have been neglected for extended periods, often because existing players are content with their current earnings and see no need to innovate or expand to that micro segment nobody care about. Find the segment where you can ship immediately.

Possessing the specific skills needed to cater to your chosen niche is a significant advantage. These skills will guide you in identifying the single feature or service that your target audience needs the most. If you can deliver this key value rapidly, you'll solidify your place in the market and gain an edge over potential competitors even if they are way bigger.

An example of failure in this regard can be seen in the ill-fated adventure of the streaming giant, Quibi, a short-form streaming platform that launched in April 2020. The founders, Jeffrey Katzenberg and Meg Whitman, raised nearly $2 billion in funding with a vision to revolutionize mobile entertainment.

However, instead of carving out a unique, underserved niche in the entertainment market, Quibi aimed to cover broad ground. They hoped to compete directly with giants like Netflix, YouTube, and TikTok. Despite offering an innovative "turnstyle" feature for seamless switching between portrait and landscape modes, the service was met with mixed reviews and finally shut down. That’s a fail.

Final thoughts

In this introductory article on market fundamentals, I've discussed the importance of finding a market by seeking out areas others often overlook - the underserved segments of fragmented markets with large capitalization (among others).

Next time, we'll dig deeper into other aspects of the market, such as whether it's growing or shrinking and explore potential regulatory hurdles. It's important to note that not all underserved niches are worth pursuing, and we'll investigate how to differentiate the fruitful opportunities from the dead ends.

In the meantime, be brutally vertical, focus on a narrow spots, and solve the problems that nobody else cares to address.

1. Or maybe they don’t … well I’m joking

2. Read about Google+ social network fail

3. Then one smart kid from Stanford raises millions and build the Universal Software the world needed and … well sometimes it works, but it often fails.

4. They don’t read this blog though