It makes sense that entrepreneurs are drawn to fast-growing markets. If, for example, every person you talk to is gushing about their new found love for their local daily deals site and every business media outlet in the land is writing about the trend, then an ambitious young business person could be forgiven for attempting to jump on what appears to be a very fast moving bandwagon headed towards success.
But be cautious when it comes to leaping into a frenzied space, warned Brad Feld, a VC with the Foundry Group, on his often insightful blog recently. Having invested in market leaders and distant followers, Feld asserts, being "company #17 in the market… generally sucks."
While Feld acknowledges that, "existing markets are wonderful places to go play in especially if they are expanding rapidly," he cautions that businesses which aren’t among the top three companies in a given field need to be realistic and change focus.
I’ve developed a viewpoint that if you aren’t in the top three in your market segment, you should “resegment.” Step back and redefine the market segment you are going after. Change the customer, change a product focus, change the distribution channel, or change the partner dynamic. Sometimes it’s a tweak, other times it’s more radical. But change something so that you are in the top three of the "new market."
Don't bullshit yourself about this. I've been the investor in many companies who weren’t in the top three that were going to get there with the next release, or a new sales VP, or something exogenous that would happen to the existing market leaders, or a magic trick that no one had thought of yet. This is almost always a losing strategy. Don’t count on luck. Resegment.
As the thoughtful comments following Feld’s post point out, the Foundry Group invests in the type of tech companies where being the fourth best search engine or social network is of little use to anyone. If you’re the fourth biggest dog groomer, baker, or logo designer in town and still making a profit you’re happy with, by all means keep going (though an honest assessment might reveal you’re actually in the top three of your subsegment, i.e. the king of carrot cake or the go-to guy for poodles). But still, being delusional about your company’s future prospects isn’t good for any entrepreneur. So for those with dreams of market domination (or VC funding) Feld’s advice holds—define your segment so you can hope to win it.