Doriot Roundup: Assessing a Market

Happy Friday Doriot Venture Community!

High five to the 3 the new members this week! ✋ 

Whether you're a seasoned investor or just starting out, our goal is to provide valuable insights in Venture that help you make informed decisions and achieve outsized returns. Today, we’re going to focus on evaluating a startup’s market.

Table of Contents

• Venture Investing: Key Metrics

• Market versus Team?

• Differentiating opportunities based on market size

• How to assess a Market based on stage

• DVC Deal

• DVC Portfolio Updates

Venture Investing: Key Metrics

By: Gerry Hays

For the past several weeks, we’ve discussed the three pillars of successful venture investing: 1) A Fertile mindset; 2) A Sound Strategy; and 3) Disciplined Execution.

During the execution phase of building your portfolio, you will be assessing the credibility of each investing opportunity to determine whether you’re investing in a deal (or not). Specifically, we concentrate on five broad areas:

1. Business Model

2. Team

3. Competitive Advantage

4. Market

5. Alignment

Last week, we discussed the Competitive Advantage. Today, we’re looking at how to assess a market.

Market versus Team?

When Georges Doriot was pioneering organized venture eighty years ago, he once made a comment to this effect: “I would rather invest in an A-player in a B-market than in an A-market with a B-player.” By saying this, he essentially emphasized the importance of execution, suggesting that the entrepreneur would eventually figure out the market.

On the flip side, if there is no demand for a solution (i.e., a market doesn’t exist), then it doesn’t really matter how good someone is at execution, right?

Take Blackberry as an example. In the early 2000s, Blackberry dominated the smartphone market with its top-notch execution, offering unmatched email functionality and a physical keyboard. But as the smartphone market evolved with the introduction of touchscreens and app ecosystems like the iPhone and Android, Blackberry failed to adapt. Despite their superior execution, they were stuck in a shrinking market as user preferences shifted.

This shows that even the best execution can falter if the market no longer exists or has shifted, making it crucial to understand and adapt to the evolving market context. So, yes, you need great execution, but you also need to be aligned with the right market.

Differentiating opportunities based on market size

When discussing markets, it's crucial to differentiate between the types of startups that qualify for venture capital.

Essentially, there are three types of companies: 1) Marginal Firms (SLBs - “Something” Little Businesses), 2) Attractive Small Businesses (ASBs), and 3) High-Potential Ventures (HPVs). Venture capital focuses on HPVs, which involve high risks but, if successful, offer substantial rewards. By definition, HPVs are not restricted by geographic boundaries to serve a potentially large market. For example, restaurants typically do not fit this criterion, whereas a cloud-based accounting software platform would.

Additionally, it's acceptable for startups to begin in niche markets, provided there is potential for expanding to a broader audience. For example, eBay started as a marketplace for Beanie Babies before expanding into multiple categories, and Amazon began with books before broadening its offerings. Therefore, when evaluating a market, consider not only the initial niche but also the potential for credibly expanding the technology to a wider audience.

How to assess a Market based on stage

Once again, what you seek in a market as an investor depends on the company's stage. Below is the QAI criteria when assessing a market.

At the pre-seed level, you’re looking at any evidence of market traction and demand. For example, a startup launching a software product to support sales teams is seeing a growing community on Reddit cobbling together no-code applications to hack away at a solution. This is evidence that there isn’t an off-the-shelf solution for the mainstream sales managers.

At the Series A level, you’re evaluating both the size of the potential market and the timing. Here, we’re looking for the Goldilocks Scenario. AI is the Goldilocks opportunity right now, but raising capital for an AI startup even five years ago would have been challenging because the market was too early. In a few years, the situation will shift again, and if AI becomes as ubiquitous as the Internet, it will be too late to raise capital for a pure-play AI startup. New markets will emerge that have already assumed AI (like we currently assume a company will operate via the Internet), and investors need to constantly skate to where the puck is heading, not where it is today or where it will be in the far distant future.

SpaceX is a great example here. Elon Musk envisions a multi-trillion-dollar market opportunity in colonizing Mars (far distant future), but SpaceX is currently generating revenue from proprietary satellite technology and broadband (Goldilocks markets).

Next week, we’ll discuss Alignment. And, if you have questions you’d like for us to answer, feel free to email them to [email protected] or post your thoughts on the newsletter!

DVC Deal

For DVC Premium Members, we’ll be releasing our analysis of AtomBeam, currently listed on StartEngine.

DVC Portfolio Updates

No meaningful updates this week.

Have a great weekend everyone!

Sincerely, Team Doriot