

Ask HN: How big does my target market have to be? - sedev

I have an idea for a business - a service that solves a particular pain point for a well-characterized market.  The thing is that this market is not large - I would say at most a million US citizens, at least 150,000, plus perhaps a hundred thousand more worldwide. This market is currently served by a brand that is horrendous, but which is a solidly established market leader due to network effects and a freemium business model. By offering a better service, with backwards compatibility (Spolsky 100% sold me on this point), I plan to disrupt and replace the current market leader. In addition to the matter of size, this is not a market with a potential for explosive growth - if I get it right, it'll have perhaps a year or two of fast growth, but will plateau into growth at single-digit percentage rates after it's soaked up market share from the current market leader. As well, this idea requires more lawyering up than the average "here is a website through which we provide a service" startup, because of concerns with user-generated content and the normal way that a startup that makes money becomes an appealing lawsuit target (this one more so than most). On the bright side, apart from retaining counsel, the business costs are perfect for the lean startup model; create the software, scale it up with EC2 and other on-demand cloud computing/storage services as needed. It's not like it's unusual, either, for a startup to live in a position of "if we get sniped by a lawsuit, we go out of business."<p>That's the background for my question - am I targeting a big enough market to seriously pitch this idea to angel investors? It's a tempting thought, because $100,000 would buy me two years of runway as a solo founder, three years if I did a good job of running lean - but because of the business model I'm targeting, I probably can't offer investors the classic startup upside of "if we win, you get a 20x or more payout." This is not a business idea that's headed for a big acquisition or an IPO - the reason that I'm not telling you the specific business idea, in fact, is not because I have a Winklevossian fear of my idea being stolen, but because the idea sounds like a joke, especially in the context of an IPO or a high-octane acquisition. Should I go for bootstrapping and/or friends-and-family funding? The tradeoff there is that at that level, I can't quit my job to work on this idea, and on the nights-weekends schedule, I estimate it'd take 2+ years to get the product developed, marketed, launched, and ramen-profitable. I'm a hacker: I'm greedy and impatient, and I want to be able to quit my job and work on my great idea, dammit! But I've created enough hacks in my time: I know that the ideal way to do it, sure as heck isn't the only way to do it.<p>Which, in turn leads to another way to phrase the question: is this a proper startup, or is this a lifestyle business?
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trussi
I realize that you had to preface your question with context. However, all the
context points to a lot of risk without much reward.

To answer your specific question: you have a lifestyle business. At $100k, you
are in the friends and family range, not angel range. F&F can fund a lifestyle
business. Angels won't fund a lifestyle business.

To give you some critical feedback...

$100k will not give you a 2 year runway. That's a 10-14 month runway. I don't
care if you live with mom and dad, eat top ramen for every meal and don't
shower to save on your electric bill...you can't make $100k last 2 years. And
if there is ANY chance of a lawsuit, forget it.

You described your competition as 'a solidly established market leader'. Have
you ever built a business that took market share from the single incumbent? If
not, you have no chance in hell of success. If you have done it before, then
you _might_ have a chance. Of course they are a 'horrendous' company with a
crappy UX, crappy customer service, etc. However, you're assumption that
'offering better service' is enough to take market share is simply
unrealistic.

If it takes you 2+ years to get to ramen-profitability, this is absolutely a
waste of your time. The risk-versus-reward is simply absurd.

There are SO MANY opportunities for a hacker out there, that you really
shouldn't waste your time on this opportunity. I realize this is the best idea
you have right now, but don't bite on it.

Keep looking for a better opportunity. You really don't have to look that hard
to find a much more reasonable (i.e. lower risk, higher chance of success and
bigger upside) than this.

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retroafroman
The question you'll have to figure out how to answer is then: how would you
pay back $100,000 and in what time frame? Think about the other side. As
someone with $100k, why should I chance it with you if the reward doesn't
warrant the risk? Angel investors are just that: investors. They would likely
put the money into a situation that is less risky.

Also, the number of people in the market is only an important metric when you
also include what kind of conversion rate you can get of those, and what
dollar amount would the average sale be? Take Ford and Lamborghini. One makes
a lot of different models that cover a large portion of market possibility and
sells a large number of cars at a small profit, while the other has few
models, sells a much smaller number of cars, and has a higher profit per
vehicle. If each customer nets you $100k, and you can get 0.1% of the possible
market, then of course it could be worth an investor's time. If this is a web
app you want to charge $2 one time for, then even if you could sell the whole
market it may not be worth it.

~~~
sedev
I definitely hadn't thought of the Ford vs. Lambo angle - thank you for
pointing that out. I think one could also phrase that as the Apple vs. Dell
angle. Revenue-per-customer is definitely important.

I think that I could offer an investor a _positive_ return - the revenue model
is subscription-based with strong network effects - but not an _explosively
positive_ return. So if I were developing a pitch, I think I'd want to include
something about the opportunity cost there, and like any founder, would want
to explicitly say "here's why I'm less risky than other things you might
fund."

~~~
noahc
Some Investors (many?) need HIGH risk, HIGH return. You probably have a
lifestyle business on your hands and people tend to not want to fund those.

~~~
sedev
That's what it's starting to look like, yeah. Which is reassuring, in a way -
the upside of a lifestyle business is that you're not particularly beholden to
investors.

