How to Decide which (Expansion) Market (niche) to Target (next)

This week, I gave a workshop on leadership and growth for the AI/ML Challenger Accelerator. I am again and again impressed by the many high-quality startups that this program attracts and helps.

When I give these workshops, we often talk less about product and product/market fit and more about market and go-to-market. In this week’s session, choosing the right market was an interesting topic we discussed. I shared my knowledge and experience in this regard and summarise a few of my thoughts in this post. I am curious to hear what you think.

The Starting Point - Market/founder fit

For founders who are pre-revenue and just about to start, I recommend embracing what I call market/founder fit. Do not choose a market just because it is attractive, because you believe you can build a large business in this market, or because investors tell you that the market is attractive. And – probably needless to say – do not develop a product and then look for someone who may be interested in it and a market for the product.

Rather, I suggest you choose a market that you know “more or less by heart”, a market that you have worked in, and a market in which you have identified a major pain point that you want to solve. You will be active in your market for many years and the probability you succeed (and that you get funded, if you want to go down the VC route) is just significantly higher if you know the market well.

Market Size 

The size of a market is not all that matters. But it matters a lot. If you target a small market, you will never be able to build a huge and potentially massively valuable business. As to market sizing, I see many founders make the following mistakes:

• They do not analyse the size of the market thoroughly
• They only look for publicly available sources stating how large the market is (most of the times, this public source does not match the key target market the founders want to penetrate)
• They jump too fast to the conclusion that the market is large. In fact, most markets are smaller than the founders think they are (and, in all fairness, some markets are bigger than investors think they are)

Analyse your key target market (and your potential expansion market) thoroughly.

• Do a top-down and a bottom-up market analysis and consider how much is currently being generated in this market.
• Try to get as many data points as possible and triangulate the results.
• Walk your way through from total addressable market (TAM) and serviceable addressable market (SAM) all the way to the serviceable obtainable market (SOM).

If you do not know how to analyse a market thoroughly, please take a look at the respective chapter in my book FastScaling.

Please note that what you show in your financial model in terms of revenues that you want to generate in a few years matches your market sizing, i.e. you do not want to show a hockey stick and 100m in revenue if your SOM is only 50m.

If your market sizing has been done thoroughly and matches your plans, you may well be impressing investors with your pitch deck (in the pitch deck, please do not show only the big bubbles and a source that you have used).

Time to Product/Market Fit and Product/Channel Fit

I recommend you analyse several markets in terms of their attractiveness in parallel. Do not only look at market size but also at the time you need and the investments you have to make in order to get to product/market fit sand product/channel fit in these markets. It may make sense to start targeting or expanding into a smaller – but still large - market (niche), if you can faster and better demonstrate in a smaller market your ability to create a viable business model around the pain that you want to solve. If you can create a viable business model, you will get VC funding with which you can then penetrate and expand into other – even bigger - markets.

Here are a few topics you may want to consider in this regard:

• Customer needs may differ from market to market; ask yourself which customer (need) you can satisfy best and fastest.
• What product adjustments do you have to make in order to successfully expand into other markets?
• Will language pose a problem in light of product and/or channel?
• Are you targeting regulated markets, and do you face different regulatory systems?

This article is certainly not exhaustive, but I hope it is a good starting point for your efforts to identify which (expansion) market (niche) to go after.

I am looking forward to hearing what you think!

Patrick

_{* photo by Lisheng Chang}