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The Difference Between Big Markets and Great Markets

It’s been said over and over again that VC’s (and all investors) look to invest in great market segments.  I’ve also heard different folks say “you are better off backing a bad team in a great market than a great team in a bad market.” I believe Warren Buffet is credited for saying something like this, although I can’t quite find the quote.

Investors, entrepreneurs, and executives are all looking for great markets.  It’s always much much easier to be successful when the wind is at your back.  However, it’s not that obvious what makes a good market vs. a bad market.

At first, it seems obvious.  A great market is one that is really big and growing fast.  Simple enough, right?  Wrong - there are quite a few examples of big and growing markets that are actually quite challenging.  Also, some markets that are small or stagnant may actually be great places to start a new company.  Below are a couple tips that I’ve found helpful in figuring our how challenging or attractive a market really is (drawing heavily from Michael Porter’s famous Five Forces Analysis).

Tips for Evaluating Great Markets

1. Understand where power lies in your supply chain.  Do either your suppliers or customers hold unusually high bargaining power?  What would it take to become meaningful enough to level that balance?  Two classic examples of challenging value chains is the music and mobile industries.  In both cases, there are very big players that have significant bargaining power (ie: carriers and music labels) and can extract a disproportionate amount of the value created by other players in the market.

2. Know the difference between value creation and value capture.  Value creation is the difference between the cost of creating product and the willingness of customers to pay for that product.  I think some companies get into trouble because they mistake user engagement for willingness to pay.  Some companies also get into trouble because they assume that they can capture all the value that they create - which is not always the case.

3. High and low barriers to entry.  This is a double edged sword.  Low barriers to entry suggest that it’s an easy industry to enter, but it’s hard to extract a lot of value because someone else could enter and charge less.  On the flip side, high barriers to entry make it difficult to enter a market, but there the potential for greater value capture.  Both sorts of markets can be viable places to compete, which is why we invest in both types of companies at Spark.

4. Watch out for industries that have already been disrupted.  Often times, this disruption comes in the form of shrinking a market because a technological or business model innovation enables a company to deliver a comparable service for less.  Josh Koppelman talks about this a lot and the encyclopedia market is a classic example.  The problem is that companies will sometimes see a market getting disrupted, and jump on board because the market seems “hot”.  But usually, once a market has been shrunk by a couple leaders, a new entrant has a hard time piling on without doing something radically different.

5. It pays to create a market, but these rules still apply.  At Spark, we love investing in companies that are truly revolutionary and are creating new markets altogether.  But even in a new market - the tips above still apply and should have a major impact on product, business model, and pricing decisions. For a great article discussing some of these implications when establishing a new “two sided” market, check out a great paper by Tom Eisenmann at HBS.

This isn’t meant to be a catch all or a checklist.  But just some considerations beyond the “is it big and is it growing” analysis.  Would love to hear examples, counter examples, or other factors folks think are important.

Can I Sign Up My Daughter for a Singaporean Education?

When I was growing up, my parents were adamant about providing me an “American Education”.  Luckily, I had the means and opportunity to attend an American international school both in the Philippines and Hong Kong, and got a pretty good K-12 education.

However, I’m not sure how attractive an “American Education” really is these days given how the US stacks up against some other countries in areas like Science and Math.  Looks like there may be a lot of other good models out there:

Recently, my brother’s family moved to Singapore (#1 on the list above).  His daughter Rachel is in 4th grade, and while I know that she was studying hard at her old school, Singapore is a whole new level of intensity. An email I got from my brother was particularly interesting:

A Completely Different Model for Higher Education

Readers of this blog will know that I think that education is a ripe market for innovation.  It’s something that I’m excited about and that we as a firm have been focusing on recently.   Most of the time (for the sake of practicality) I talk about education on a micro level - thinking about specific companies that can disrupt particular market segments.

But just for fun, I want to start a discussion here on how higher ed could be completely revamped on a macro level.  It’s just a thought experiment really - and I recognize that the suggestions below may be impossible to implement.  But let’s suspend our disbelief a little bit - sometimes you need to redefine the end goal to figure out what steps are needed to get there.

First, the Problems in a Nutshell:

Very succinctly, college is too expensive and poorly designed for the vast majority of people. Actually, I think the poor design is the main driver of the cost.  Is sitting in a classroom for 4 years, listening to lectures, taking tests, reading textbooks, and getting drunk at frat parties the most efficient use of our education dollars? I think not.  I informally polled dozens of people to ask them what % of the material they learned in college is really relevant to what they do.  The answer was almost unanimously 15% or less.  Most folks though did say that they got tremendous value from the relationships or the college “experience”.  But couldn’t that be delivered in a more cost effective, and maybe less time consuming way?

Suggestions to Completely Change Higher Ed

1. Significantly reduce the number of institutions of higher ed that operate in the current “traditional” format. I think there is a place for the existing model, but I think it should be the exception rather than the rule.  I think alternative educational delivery methods should arise such that excellent students have to make a very real choice about whether to go to a standard university or something different.

2. Replace traditional universities with excellent vocational programs. Instead of the traditional 4-year university experience, I think there should be a proliferation of high-quality vocational programs for everything from medicine, to accounting, to engineering.  The focus of these programs should reduce the time it takes to complete a degree and the readiness of the graduate to participate in their desired field upon completion.  Also, the instructors in these programs don’t necessarily need to have PHD’s in their fields (isn’t it kind of silly to have a PHD teaching intro economics)?

3. Establish a broad community service or military service program for high school graduates. Before you think I’m completely crazy, remember that this happens all the time all over the world. University graduates from Singapore or Taiwan often say they made their best friends and build the foundation of their professional network in the military.  This adresses the cameraderie and “life experience” value of the traditional campus experience. And I’d rather have my kid learning this while helping underserved communities rather than playing XBox in their dorm rooms.

4. Significantly leverage the internet to deliver foundational education. One of the missing pieces in 1-3 is that some of the core liberal arts training might be lost.  Also, foundational courses should be more efficiently delivered in a much larger setting vs. a vocational school.  I think part of the solution here is to significantly improve high school education.  But in the absence of that, I think core courses could be conducted quite effectively online.  And it does not necessarily need to be an inferior education.  The advances in online media delivery means that students can have very rich interactions with teachers, students, and the material that surpass what they would get in a classroom setting.  This education could also happen in tandem with #3 depending on how demanding those programs are designed.

These are obviously huge changes, and I’m curious to hear what others think.  But if these options existed when I was graduating from high school, I think I would seriously consider a community service + online + vocation combo vs. a traditional college experience.  And I think it could be delivered more cost effectively and get students better trained for the real world as well.  What other models would you propose?

What is your strongest motivator? The fear of failure or the joy of success?

From Paul Graham:

“One of the most interesting things we’ve discovered from working on Y Combinator is that founders are more motivated by the fear of looking bad than by the hope of getting millions of dollars.”

From Jimmy Connors:

“I hate losing more than I love winning”

It’s counter-intuitive, but I think history has shown that fear is a more powerful motivator than greed and/or ambition.  I can’t find the quotes, but I think I recall reading multiple biographies of Michael Jordan that suggest that his biggest motivator is his hatred of losing. Anyone who has seen Tiger Woods in the flesh can probably vouch for the same thing.  They play for the love of the game, but they are great competitors because they are afraid to lose.

What motivates you?