82. Getting Smart on a New Market, Part 2 (Charles Hudson)

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Today we cover Part 2 of Getting Smart on a New Market with Charles Hudson of Precursor Ventures. In this segment we address:

  • New Market thesis part 2 Charles HudsonHow do you look at companies addressing industries where the incumbent product offerings are free.  Businesses like Slack that were replacing free options
  • Fresh Eyes… You’ve written about how you don’t look at decks before the first meeting w/ an entrepreneur. Can you touch on the key reasons why you take meetings without reviewing the deck?
  • If you are evaluating a startup that is pre-traction – what do you look for and why?
  • In the spirit of continuous improvement… What are your thoughts on how one can learn and improve once they have a job in VC?
  • What startup investor has inspired and influenced you most and why?

Guest Links:

Key Takeaways:

 

1- Market Structure Over Market Size:

The three things that Charles looks at w/ a new market is:1) Market Structure
2) High-level economics of the business at scale and
3) Relevance and the timing of the opportunity… what Charles summed up as “is the world bending in the direction that these founders want to go?”First, Charles attempt to pick apart a market and look for all the factors that make for a good market vs. a bad one. He asks the question “what is this market going to look like at scale?”-Is this a winner-take-all market at scale? Where the steady-state is that the market leader will get a disproportionate share of the outcome.
-Are there network effects?
-Are there structural reasons why everybody (consumers and service providers) should be on one platform
-With a majority critical mass of users are there tremendous benefits to the greater network of users?
-As more users are acquired, do the benefits increase for all users on the platform?When all are on one platform, the benefits can include things like:
-more liquidity
-the lowest search costs and the
-lowest transaction costs for both sidesHe did mention that there are cases where the constituents in a market would not like one monopolistic provider. But there are some markets where the steady-state is going to have one large winner.
 

2- Fragmented vs Consolidated Markets

Charles went on to describe markets that are really fragmented. He brought up the example of SalesForce and how many assume that they own the majority of the market when, in fact, they have about 20% share of the CRM market. In these cases it can be really hard to build a standardized product that can serve the needs of all customers. This was where we talked about the degree of homogeneity of customers. If customer needs are very heterogeneous, it is going to be very difficult to develop a solution that serves all and also to sell that solution in a scalable way.

His final point here is that he doesn’t like competing with large, majority share incumbents in their home markets. He wouldn’t want to compete w/ Google in search or back in the 90’s w/ Microsoft in productivity apps. If you compete with the biggest in their core market, you will get their best punch and their best people are working to defend the core. In these cases a startup must have a differentiated approach toward go-to-market, relative to the incumbent.

 

3- Nascent Market TAM

Charles starts w/ the question: “Are people already spending money against this problem today?” Then he looks to see how current spending habits map to new spending habits w/ the startup’s offering. And one of the watch-outs here are companies looking to radically reduce costs. If they’re playing in a billion dollar market and they plan to reduce costs by a factor of 10, then the market will shrink to 100 million.

Then he looks to see if the leading companies are healthy, good gross margin businesses. There are plenty of verticals with massive TAMs but razor-thin margins, like retail grocery.

And he also think about whether a whole new group of users will be brought into a market. Is the question one of non-consumption? If so, the TAM may not be that relevant. Or does the startup plan to reallocate surplus from one level in the value chain to another. In that case, the current TAM will be much different than the eventual market size.

And his final point here is that he’s not using TAM to calculate an exact market amount or revenue amount that will be achieved in the coming years. Rather, at a macro level, does he see a large number of customers that will be willing to pay a high price. It’s really just that simple.

 

 

Tip of the Week:   The Customer Volume Value Curve

 

FULL TRANSCRIPT