Entrepreneurs have been programmed to focus on billion-dollar markets through their products. But, these markets can be attractive to people and are difficult to succeed in. Aiming for a smaller market size might be the most sensible way to grow.

Being an investment professional, I’ve witnessed many pitches — some good, others bad, Some funny, others sad. A lot of them take a turn to the negative in the course of their brief journey. Most often, this occurs around what’s known as the “competition” or the “go-to-market strategy” slide. Why do so many founders make mistakes at this critical point? One primary reason has to be related to the bias of investors that favors targeting markets worth billions of dollars.

Many investors adhere to the herd mentality, primarily controlled by influential industry figures who advocate”homerun investing” as a “homerun investing” ethos based on evidence-based research-based data required to generate money. Because only one out of 10 investments reach a homerun, investors rationally invest only in those that can yield such profits. Investors often use arguments that are not confrontational to disapprove of deals, with “the market is too small,” which is a favorite among investors. The feedback loop signals of founders drive them to assert that market opportunities aren’t accurate as per conventional wisdom. Market opportunities that do not begin with”B “B” substantially diminish their chances of securing a successful round. They’re usually right, however, only partially.

Billion-dollar Markets Are Not Underserved

The author of Zero To One, Peter Thiel, indirectly exposes the truth behind billion-dollar markets while discussing competition. Thiel claims that a lucrative market monopoly has a higher chance of getting regulators’ attention, which is why monopolists minimize their positions and “lie to protect themselves.” This is why entrepreneurs often get the wrong idea. The first step is when a multi-billion-dollar market opportunity is shown. The founders assert that their invention–and the widget can capture a significant market share, however, if investors do not buy into it. The presentation ends, and the founders go home empty-handed. What’s the reason investors don’t succumb to the lure? Because they are aware of that, Thiel says in plain language that a billion-dollar market attracts an intense, deep-pocketed rivalry with infinite resources compared to potential disruptive companies (if only you decide to invest in the Series A of their company! ).

Amazon and eBay each have multibillion-dollar markets. However, that’s not where they began. Amazon is a prime example. It started as a book retailer but slowly moved into other markets. It took nearly two decades for Amazon to reach its current position. In the same way, eBay focused on niche markets from the beginning–in 1997, for instance, Beanie Babies accounted for 10% of the listings, before expanding into different categories of hobby enthusiasts before eventually moving into large-ticket items like automobiles or industrial machines.

Beachheads Are Created in Smaller Markets

Million-dollar markets aren’t appealing for large companies competing in billion-dollar markets. The profits are not worth it and aren’t moving the needle. For startups, however, markets with market potential in the millions could lead to lavish lifestyles for the founders if utilized efficiently. In addition to the potential for a much more luxurious lifestyle, markets that are million dollars provide an additional advantage: a platform for execution. Concentrating on smaller markets lets small companies drive through their learning processes and get market knowledge without worrying about competitors. Sometimes called”the ” beachhead,” it is through this platform that a small business can launch attacks that are upmarket and target more appealing segments. Be aware it is essential to note that “upmarket” does not necessarily translate to higher costs for the company. For instance, the first focus was premium automobile enthusiasts willing to pay for a car over $100,000, but the actual value in the automotive business is in the volume. In this regard, despite the lower price, “upmarket” refers to the magnitude of the market.

A few startups — often ones whose founders are aware of the problems of competition and markets–make a compelling argument for taking on an ocean-front market. However, many fall off the path with their market-based strategies. (Startups deliberately don’t have a “go-to-market tactics” slide; however, when you get off the shreds, this is usually precisely what they’re.) The typical story goes like this (and this is entirely created):

Business Plans Often Ignore How to “Cross the Chasm”

Geoffrey Moore offers a compelling solution to this issue in his classic work, The Crossing of the Chasm. Moore segments customers based on the likelihood of adopting a new technology and provides a framework for overcoming a dire pattern common to many startups: rapid initial adoption followed by stagnation and–ultimately–failure. It’s not uncommon for an entrepreneur to enter the market with a unique product or service that initially sees explosive growth. Moore is driven by Innovators and Early Adopters, who just must have it when “it” drops. However, these segments are only a tiny fraction of the market. The actual prize lies in getting the Late and Early majority to embrace. However, here’s the problem: Innovators and Early Adopters embrace new technologies to be at the top of the latest trends and cannot establish a reference group — a customer segment that they can use to verify the purchase. The Early Majority, however, has a reference group, which is itself. People in the Early Majority reference other members to validate an investment and purchase from the established market leaders. This results in the chasm named after it, which is the space between Early Adopters and the Early Majority. Entrepreneurs fly across the deep as they pitch and throw their pitches into it while trying to pass.

There are many instances of successful implementation of this strategy to market. Tesla is a prime example. It concentrated on the market for luxury cars and differentiated itself from competitors by offering a clean, appealing electric option. Based on the cost of the premium auto industry (the Roadster base price was around $100,000 in 2008), The overall market was quite large (~$245 million, based on the 2,450 Roadsters made). Before Tesla came into the market, there were very few electric alternatives. Therefore, Tesla dominated the entire market, which was not a billion-dollar industry at the time.