Start with a market so small no one else wants it
Dominate it completely, then expand outward, the way Amazon, eBay, PayPal, and Facebook did.
YC Root Access · Lecture 5 - Competition is for Losers (Peter Thiel)Peter Thiel, who worked on PayPal in its early days, tells founders who want to build a valuable company to do something that sounds like bad advice. Start with a market so tiny that established players and business school analysts dismiss it as worthless.
The method, as he describes it, has two moves. First, pick a market small enough that you can own most of it quickly. Then expand that foothold outward in concentric circles, which I take to mean moving to the closest related customers next.
Amazon, he says, did not start as an everything store. It started as an online bookstore that claimed to "have all the books in the world," in Thiel's phrase, something a physical store could not match, and then it gradually spread to many other kinds of online retail and beyond. eBay started with Pez dispensers, later added Beanie Babies, then widened to auctions for many kinds of goods. At PayPal, the first users were about 20,000 high volume sellers on eBay, people selling what the team at first saw as junk on the internet. Thiel says PayPal had something much better for that group, and got to something like 25% to 30% of it in two or three months. That meant some customers stayed with PayPal and more people came to know the brand, which let the company build the business from there. At Facebook, the initial market was about 10,000 students at Harvard, and the site went from zero to 60% of them in 10 days.
That smallness is the point, Thiel argues. Business school analysis often treated those early markets as proof the companies were trivial, missing that the markets did not have to stay small.
The opposite version, he says, is to start with a super big market. He points to the clean tech startups of 2005 to 2008, whose pitch decks all began with the same line, that they were chasing the energy market, worth hundreds of billions if not trillions. To start as "a minnow in a vast ocean," as Thiel put it, means facing too much competition, and that leaves a startup in a weak position. So the first step is to find a small market you can dominate.
Questions people ask
How small is small enough for a starting market?
Small enough that you can win a large share of it quickly. In Thiel's examples, that meant 10,000 Harvard students or 20,000 eBay sellers, where reaching 25% to 60% was possible in days or months.
What does expanding in concentric circles actually mean?
Thiel uses the phrase without laying out a formal definition. His examples point to Amazon moving from books into other kinds of online retail, and eBay moving from Pez dispensers to Beanie Babies to other auction goods. My reading is that he means moving to the closest related customers next, rather than jumping far afield.