The Market Size Mistake

Over the weekend, Tobi, the founder and CEO of Shopify, discussed the major reason investors passed on Shopify in the early days : market size.

I remember that financing round, & I remember having the same concern, & making the same mistake. Living in the valley & driving on 101, the billboards & logo-adorned headquarters of successful companies provide a daily infusion of all the mistakes in I’ve made in guessing how a company or a market might evolve.

Years later, I listened as Bill Gurley shared his thoughts about market size. He asked himself a question : whether the startup was increasing, decreasing, or maintaining the market size? (I can’t seem to find the link - but I have it in my notes!)

I added that question to my diligence list when meeting startups.

Now much later, having seen many companies create categories or reinvigorate aging ones, the question I ask myself has evolved.

It’s not as the market size large enough? Instead, it the question is : do we believe this company can create the market?

Market size is the output of all the players marketing, selling, building. Their efforts alter, distort, & juice the supply/demand curves of macroeconomics. It’s not a given - not an output or a steady-state CAGR.

Often it’s the startups that engender the demand, change the market dynamics, & make markets massive by taking risks with products.

When done right, these founders create category-defining businesses like Shopify (now worth $90b)!