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Why do investors care about going after a huge market so much?

Posted on | April 2, 2012 | No Comments

httpv://www.youtube.com/watch?v=nKN-abRJMEw&feature=youtu.be&t=4m27s

“Target big markets”

– Don Valentine, Sequoia Capital

 

Every entrepreneur has heard this, but what’s a big market and what happens if you don’t pick one? This was illustrated to me on a recent visit to the small town of Americus, Georgia.

Americus is a small town, with a population of 17,041. There’s a quaint downtown area with a few restaurants and a hotel bar. And according to my local contacts, hot dogs are an, um, hot item. I heard multiple people talking about where to get hot dogs, which were better, and what a Georgia hot dog must absolutely include.

 

Among the hot dog vendors, a war is brewing.

 

Initially, each hot dog vendor tried to out-do each other with better hot dogs, toppings, and buns. Then one day, one of the top hot dog spots decided to cut it’s prices. First from $2.00, to $1.50. The other shops followed suit. Then one cut prices to $1.00. Now, a few places are experimenting with sub-$1 hot dogs. It’s pretty hard to justify buying a $2.50 hot dog when you can get a decent gourmet dog next door for $0.75!

 

Some of these establishments offer these high-end hot dogs in sit-down restaurants. It’s a bit of a financial disaster, though I’m sure none of the customers are complaining. It’s really hard to compete in the tough hot dog market.

 

Small market = high competition and low margins for everyone.

 

Imagine this was a city like NYC or San Francisco. In those big markets, the #1 hot dog shop would be inundated with customers and able to keep prices high. They might even be able to raise prices and margins over time. This is what places like Ike’s sandwiches, or Delfina Pizza have done in their respective food areas. They’re known as the best, and in a big market their high-end slice of the market is enough to put lines out the door 7 days a week.

 

This is why it’s important to pick large markets. It’s not as if you must capture 100% of that market to succeed. It’s because in a large market there is room for a lot of competitors to do well, generate some profits, and grow. And the top 1-2 businesses might do really, really well.

 

Before everyone runs out to create pitch decks showing multi-billion-dollar markets for their product, note that in many cases markets start small then evolve into huge markets over a few years. The trick is to start with a really juicy segment that loves your product that is likely to grow into gigantic market in the future as the world evolves.

 

 

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