VC 101 – get in at the beginning of a new market

I love investments that are all about getting in at the beginning of a new market.  If you are the first player then you have got a great shot at being market leader, and provided the market is big enough if you are market leader you are going to be worth a lot of money.

Just look at YouTube, or Skype, or Salesforce.com, or LastFM, etc. etc.

An aspiration to get in at the beginning of a new market leads you to the question how will I know one when I see it?

There are a number of aspects to the answer for this question, and I am planning to come back to this in a series of posts.  The first and most important is know where the dollars are coming from.

Consider the following examples from the successes listed above:

  • YouTube – TV advertising
  • Skype – traditional telephony
  • Salesforce.com – Siebel and other CRM vendors
  • LastFM – bit trickier this one, but some combination of radio advertising, music sales and magazines I guess.  (I’d be interested in hearing from anyone who has a view on this – despite LastFM having been acquired by CBS for a lot of money they were rumoured to have been struggling a little with monetisation, which maybe illustrates my point)

New markets of size are not created out of nothing.  They take dollars from somewhere else (and markets are only ever measured in money).  Knowing where your market dollars are coming from gives confidence that the market will come and gives an idea of its size.

  • Absolutely – whenever we do a diagnostic and/or go to market plan for a consumer company we whip out the old breakdown of consumer spending (direct and subsidy) and go through it to understand where – and why – the money may come.

    It’s a useful exercise – for eg if you look at the assumed revue required for a reasonable amortisation on the UK 3G mobile licenses you can instantly see that they were (are?) totally overoptimistic.

  • Absolutely – whenever we do a diagnostic and/or go to market plan for a consumer company we whip out the old breakdown of consumer spending (direct and subsidy) and go through it to understand where – and why – the money may come.

    It’s a useful exercise – for eg if you look at the assumed revue required for a reasonable amortisation on the UK 3G mobile licenses you can instantly see that they were (are?) totally overoptimistic.